Humana 2015 Annual Report Download - page 82

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Guarantees and Indemnifications
For a detailed discussion our guarantees and indemnifications, please refer to Note 16 to the consolidated financial
statements included in Item 8. – Financial Statements and Supplementary Data.
Government Contracts
For a detailed discussion of our government contracts, including our Medicare, Military, and Medicaid contracts,
please refer to Note 16 to the consolidated financial statements included in Item 8. – Financial Statements and
Supplementary Data.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated
financial statements and accompanying notes, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these financial statements and accompanying
notes requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. We continuously evaluate our estimates and those critical accounting policies
primarily related to benefits expense and revenue recognition as well as accounting for impairments related to our
investment securities, goodwill, and long-lived assets. These estimates are based on knowledge of current events and
anticipated future events and, accordingly, actual results ultimately may differ from those estimates. We believe the
following critical accounting policies involve the most significant judgments and estimates used in the preparation of
our consolidated financial statements.
Benefits Expense Recognition
Benefits expense is recognized in the period in which services are provided and includes an estimate of the cost
of services which have been incurred but not yet reported, or IBNR. IBNR represents a substantial portion of our
benefits payable as follows:
December 31,
2015
Percentage
of Total
December 31,
2014
Percentage
of Total
(dollars in millions)
IBNR $ 3,730 75.0% $ 3,254 72.7%
Reported claims in process 600 12.1% 475 10.6%
Premium deficiency reserve 176 3.5% — —%
Other benefits payable 470 9.4% 746 16.7%
Total benefits payable $ 4,976 100.0% $ 4,475 100.0%
Our reserving practice is to consistently recognize the actuarial best point estimate within a level of confidence
required by actuarial standards. Actuarial standards of practice generally require a level of confidence such that the
liabilities established for IBNR have a greater probability of being adequate versus being insufficient, or such that the
liabilities established for IBNR are sufficient to cover obligations under an assumption of moderately adverse conditions.
Adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated
value of such claims at the time of the estimate. Therefore, in many situations, the claim amounts ultimately settled
will be less than the estimate that satisfies the actuarial standards of practice.
We develop our estimate for IBNR using actuarial methodologies and assumptions, primarily based upon historical
claim experience. Depending on the period for which incurred claims are estimated, we apply a different method in
determining our estimate. For periods prior to the most recent two months, the key assumption used in estimating our
IBNR is that the completion factor pattern remains consistent over a rolling 12-month period after adjusting for known
changes in claim inventory levels and known changes in claim payment processes. Completion factors result from the
calculation of the percentage of claims incurred during a given period that have historically been adjudicated as of the
reporting period. For the most recent two months, the incurred claims are estimated primarily from a trend analysis