Cigna 2009 Annual Report Download - page 129

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L. Future Policy Benefits
Future policy benefits are liabilities for the present value of estimated future obligations under long-term life and supplemental health
insurance policies and annuity products currently in force. These obligations are estimated using actuarial methods and primarily
consist of reserves for annuity contracts, life insurance benefits, guaranteed minimum death benefit (“GMDB”) contracts and certain
life, accident and health insurance products in our International operations.
Obligations for annuities represent specified periodic benefits to be paid to an individual or groups of individuals over their remaining
lives. Obligations for life insurance policies represent benefits to be paid to policyholders, net of future premiums to be received.
Management estimates these obligations based on assumptions as to premiums, interest rates, mortality and surrenders, allowing for
adverse deviation. Mortality, morbidity, and surrender assumptions are based on either the Company’s own experience or actuarial
tables. Interest rate assumptions are based on management’s judgment considering the Company’s experience and future
expectations, and range from 1.5% to 10%. Obligations for the run-off settlement annuity business include adjustments for investment
returns consistent with requirements of GAAP when a premium deficiency exists.
Certain reinsurance contracts contain guaranteed minimum death benefits under variable annuities issued by other insurance
companies. These obligations represent the guaranteed death benefit in excess of the contractholder’s account values (based on
underlying equity and bond mutual fund investments). These obligations are estimated based on assumptions regarding lapse, partial
surrenders, mortality, interest rates (mean investment performance and discount rate), market volatility as well as investment returns
and premiums, consistent with the requirements of GAAP when a premium deficiency exists. Lapse, partial surrenders, mortality,
interest rates and volatility are based on management’s judgment considering the Company’s experience and future expectations. The
results of futures contracts used in the GMDB equity hedge program are reflected in the liability calculation as a component of
investment returns. See also Note 7 for additional information.
M. Unpaid Claims and Claims Expenses
Liabilities for unpaid claims and claim expenses are estimates of payments to be made under insurance coverages (primarily long-term
disability, workers’ compensation and life and health) for reported claims and for losses incurred but not yet reported.
The Company develops these estimates for losses incurred but not yet reported using actuarial principles and assumptions based on
historical and projected claim incidence patterns, claim size and the length of time over which payments are expected to be made. The
Company consistently applies these actuarial principles and assumptions each reporting period, with consideration given to the
variability of these factors, and recognizes the actuarial best estimate of the ultimate liability within a level of confidence, as required
by actuarial standards of practice, which require that the liabilities be adequate under moderately adverse conditions.
The Company's estimate of the liability for disability claims reported but not yet paid is primarily calculated as the present value of
expected benefit payments to be made over the estimated time period that a policyholder remains disabled. The Company estimates
the expected time period that a policyholder may be disabled by analyzing the rate at which an open claim is expected to close (claim
resolution rate). Claim resolution rates may vary based upon the length of time a policyholder is disabled, the covered benefit period,
cause of disability, benefit design and the policyholder's age, gender and income level. The Company uses historical resolution rates
combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. The reserve for
the gross monthly disability benefits due to a policyholder is reduced (offset) by the income that the policyholder receives under other
benefit programs, such as Social Security Disability Income, worker’s compensation, statutory disability or other group disability
benefit plans. For awards of such offsets that have not been finalized, the Company estimates the probability and amount of the offset
based on the Company's experience over the past three to five years.
The Company discounts certain claim liabilities related to group long-term disability and workers’ compensation because benefit
payments may be made over an extended period. Discount rate assumptions are based on projected investment returns for the asset
portfolios that support these liabilities and range from 3.5% to 7.3%. When estimates change, the Company records the adjustment in
benefits and expenses in the period in which the change in estimate is identified. Discounted liabilities associated with the long-term
disability and certain workers’ compensation businesses were $3.1 billion at December 31, 2009 and $3.2 billion at December 31,
2008.