Unum 2009 Annual Report Download - page 27

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Unum 2009 Annual Report
interest rate is based on our expected net investment returns on the investment portfolio supporting the reserves for this segment. Under
the gross premium valuation method, we do not include an embedded provision for the risk of adverse deviation from these assumptions.
Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient.
We perform loss recognition tests on the policy reserves for this block of business quarterly.
The Corporate and Other segment includes certain products no longer actively marketed, the majority of which have been reinsured.
Policy reserves for this segment represent $5.6 billion on a gross basis, or approximately 42.7 percent, of our total policy reserves. We have
ceded $4.3 billion of the related policy reserves to reinsurers. The ceded reserve balance is reported in our consolidated balance sheets as
a reinsurance recoverable. We continue to service a block of group pension products, which we have not ceded, and the policy reserves for
these products are based on expected mortality rates and retirement rates. Expected future payments are discounted at interest rates
reflecting the anticipated investment returns for the assets supporting the liabilities.
Claim Reserves
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported (IBNR) to us and, as
prescribed by GAAP, equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment
expenses. A claim reserve is based on actual known facts regarding the claim, such as the benefits available under the applicable policy, the
covered benefit period, and the age and occupation of the claimant, as well as assumptions derived from our actual historical experience
and expected future changes in experience for factors such as the claim duration and discount rate. Reserves for IBNR claims, similar to
incurred claim reserves, include our assumptions for claim duration and discount rates but because we do not yet know the facts regarding
the specific claims, are also based on historical incidence rate assumptions, including claim reporting patterns, the average cost of claims,
and the expected volumes of incurred claims. Our incurred claim reserves and IBNR claim reserves do not include any provision for the risk
of adverse deviation from our assumptions.
Claim reserves, unlike policy reserves, are subject to revision as current claim experience and projections of future factors affecting
claim experience change. Each quarter we review our emerging experience to ensure that our claim reserves are appropriate. If we believe,
based on our actual experience and our view of future events, that our long-term assumptions need to be modified, we adjust our reserves
accordingly with a charge or credit to our current period income.
Multiple estimation methods exist to establish claim reserve liabilities, with each method having its own advantages and disadvantages.
Available reserving methods utilized to calculate claim reserves include the tabular reserve method, the paid development method, the
incurred loss development method, the count and severity method, and the expected claim cost method. No singular method is better
than the others in all situations and for all product lines. The estimation methods we have chosen are those that we believe produce the
most reliable reserves at that time.
Claim reserves supporting our Unum US group and individual disability and group and individual long-term care lines of business and
our Individual Disability — Closed Block segment represent approximately 39.4 percent and 43.2 percent, respectively, of our total claim
reserves at December 31, 2009. We use a tabular reserve methodology for group and individual long-term disability and group and
individual long-term care claims that have been reported. Under the tabular reserve methodology, reserves for reported claims are based
on certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis. We believe the tabular
reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim.
IBNR claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to
be reported and the associated claim costs. For group short-term disability products, an estimate of the value of future payments to be
made on claims already submitted, as well as IBNR claims, is determined in aggregate rather than on the individual claimant basis that we
use for our long-term products, using historical patterns of claim incidence as well as historical patterns of aggregate claim resolution rates.
The average length of time between the event triggering a claim under a policy and the final resolution of those claims is much shorter for
these products than for our long-term liabilities and results in less estimation variability.