Humana 2015 Annual Report Download - page 86

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Benefits expense excluded from the previous table was as follows for the years ended December 31, 2015, 2014
and 2013:
2015 2014 2013
(in millions)
Premium deficiency reserve for short-duration policies $ 176 $ — $ —
Military services 12 11 (27)
Future policy benefits (80) 32 354
Total $ 108 $ 43 $ 327
In the fourth quarter of 2015, we recognized a premium deficiency reserve for our individual commercial medical
business compliant with the Health Care Reform Law associated with the 2016 coverage year as discussed in more
detail in Note 7 to the consolidated financial statements included in Item 8. – Financial Statements and Supplementary
Data.
Military services benefits expense for 2015 and 2014 reflect expenses associated with our contracts with the
Veterans Administration. Military services benefits expense for 2013 reflects the beneficial effect of a favorable
settlement of contract claims with the DoD partially offset by expenses associated with our contracts with the Veterans
Administration.
Certain health policies sold to individuals prior to 2014 (the first year plans compliant with the Health Care Reform
Law were effective) are accounted for as long-duration as more fully described below. The reduction in future policy
benefits in 2015 reflects the release of reserves as individual commercial medical members transition to plans compliant
with the Health Care Reform Law.
Future policy benefits payable of $2.2 billion and $2.3 billion at December 31, 2015 and 2014, respectively,
represent liabilities for long-duration insurance policies including long-term care insurance, life insurance, annuities,
and certain health and other supplemental policies sold to individuals for which some of the premium received in the
earlier years is intended to pay anticipated benefits to be incurred in future years. At policy issuance, these reserves are
recognized on a net level premium method based on premium rate increase, interest rate, mortality, morbidity, persistency
(the percentage of policies remaining in-force), and maintenance expense assumptions. Interest rates are based on our
expected net investment returns on the investment portfolio supporting the reserves for these blocks of business.
Mortality, a measure of expected death, and morbidity, a measure of health status, assumptions are based on published
actuarial tables, modified based upon actual experience. The assumptions used to determine the liability for future
policy benefits are established and locked in at the time each contract is issued and only change if our expected future
experience deteriorates to the point that the level of the liability, together with the present value of future gross premiums,
are not adequate to provide for future expected policy benefits and maintenance costs (i.e. the loss recognition date).
Because these policies have long-term claim payout periods, there is a greater risk of significant variability in claims
costs, either positive or negative. We perform loss recognition tests at least annually in the fourth quarter, and more
frequently if adverse events or changes in circumstances indicate that the level of the liability, together with the present
value of future gross premiums, may not be adequate to provide for future expected policy benefits and maintenance
costs.
Future policy benefits payable include $1.5 billion at December 31, 2015 and 2014 associated with a non-strategic
closed block of long-term care insurance policies acquired in connection with the 2007 acquisition of KMG.
Approximately 31,800 policies remain in force as of December 31, 2015. No new policies have been written since 2005
under this closed block. Future policy benefits payable includes amounts charged to accumulated other comprehensive
income for an additional liability that would exist on our closed-block of long-term care insurance policies if unrealized
gains on the sale of the investments backing such products had been realized and the proceeds reinvested at then current
yields. There was no additional liability at December 31, 2015 and $123 million of additional liability at December 31,
2014. Amounts charged to accumulated other comprehensive income are net of applicable deferred taxes.