Humana 2015 Annual Report Download - page 87

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Long-term care insurance policies provide nursing home and home health coverage for which premiums are
collected many years in advance of benefits paid, if any. Therefore, our actual claims experience will emerge many
years after assumptions have been established. The risk of a deviation of the actual interest, morbidity, mortality, and
maintenance expense assumptions from those assumed in our reserves are particularly significant to our closed block
of long-term care insurance policies. A prolonged period during which interest rates remain at levels lower than those
anticipated in our reserving would result in shortfalls in investment income on assets supporting our obligation under
long term care policies because the long duration of the policy obligations exceeds the duration of the supporting
investment assets. Further, we monitor the loss experience of these long-term care insurance policies and, when
necessary, apply for premium rate increases through a regulatory filing and approval process in the jurisdictions in
which such products were sold. To the extent premium rate increases, interest rates, and/or loss experience vary from
our loss recognition date assumptions, future material adjustments to reserves could be required.
During 2013, we recorded a loss for a premium deficiency. The premium deficiency was based on current and
anticipated experience that had deteriorated from our locked-in assumptions from the previous December 31, 2010 loss
recognition date, particularly as they related to emerging experience due to an increase in life expectancies and utilization
of home health care services. Based on this deterioration, and combined with lower interest rates, we determined that
our existing future policy benefits payable, together with the present value of future gross premiums, associated with
our closed block of long-term care insurance policies were not adequate to provide for future policy benefits and
maintenance costs under these policies; therefore we unlocked and modified our assumptions based on current
expectations. Accordingly, during 2013 we recorded $243 million of additional benefits expense, with a corresponding
increase in future policy benefits payable of $350 million partially offset by a related reinsurance recoverable of $107
million included in other long-term assets.
For our closed block of long-term care policies, actuarial assumptions used to estimate reserves are inherently
uncertain due to the potential changes in trends in mortality, morbidity, persistency and interest rates as well as premium
rate increases. As a result, our long term care reserves may be subject to material increases if these trends develop
adversely to our expectations. The estimated increase in reserves and additional benefit expense from hypothetically
modeling adverse variations in our actuarial assumptions, in the aggregate, could be up to $400 million, net of
reinsurance. Although such hypothetical revisions are not currently appropriate, we believe they could occur based on
past variances in experience and our expectation of the ranges of future experience that could reasonably occur, and
any such revision could be material. Generally accepted accounting principles do not allow us to unlock our assumptions
for favorable items.
In addition, future policy benefits payable includes amounts of $205 million at December 31, 2015, $210 million
at December 31, 2014, and $215 million at December 31, 2013 which are subject to 100% coinsurance agreements as
more fully described in Note 19 to the consolidated financial statements included in Item 8. – Financial Statements and
Supplementary Data, and as such are offset by a related reinsurance recoverable included in other long-term assets.
Revenue Recognition
We generally establish one-year commercial membership contracts with employer groups, subject to cancellation
by the employer group on 30-day written notice. Our Medicare contracts with CMS renew annually. Our military
services contracts with the federal government and our contracts with various state Medicaid programs generally are
multi-year contracts subject to annual renewal provisions.
Our commercial contracts establish rates on a per employee basis for each month of coverage based on the type
of coverage purchased (single to family coverage options). Our Medicare and Medicaid contracts also establish monthly
rates per member. However, our Medicare contracts also have additional provisions as outlined in the following separate
section.
Premiums revenue and administrative services only, or ASO, fees are estimated by multiplying the membership
covered under the various contracts by the contractual rates. In addition, we adjust revenues for estimated changes in
an employer’s enrollment and individuals that ultimately may fail to pay, and for estimated rebates under the minimum
benefit ratios required under the Health Care Reform Law. Enrollment changes not yet processed or not yet reported
by an employer group or the government, also known as retroactive membership adjustments, are estimated based on