Unum 2014 Annual Report Download - page 28

26 UNUM • 2014 ANNUAL REPORT
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Because the key policy reserve assumptions for policy persistency, mortality and morbidity, and discount rates are all locked in at
policy issuance based on assumptions appropriate at that time, policy reserve assumptions are generally not changed due to a change in
claim status from active to disabled subsequent to policy issuance. Depending on the funding mechanism, a full policy reserve is held
during disability reflecting continued funding of the full policy reserve during a disability claim, or a fractional policy reserve is held reflecting
that the individual policyholder would need to recover before he or she can again generate future claims for a separate occurrence. The
policy reserves build up and release over time based on assumptions made at the time of policy issuance such that the reserve is eliminated
as policyholders either reach the terminal age for coverage, die, or voluntarily lapse the policy. Policy reserves for Unum US, Unum UK, and
Colonial Life products are determined using the net level premium method as prescribed by GAAP. In applying this method, we use, as
applicable by product type, morbidity and mortality incidence rate assumptions, claim resolution rate assumptions, and policy persistency
assumptions, among others, to determine our expected future claim payments and expected future premium income. We then apply an
interest, or discount, rate to determine the present value of the expected future claims and claim expenses we will pay and the expected
future premiums we will receive, with a provision for profit allowed.
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term
care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group
long-term care are determined using the gross premium valuation method. Key assumptions are persistency, mortality and morbidity, claim
incidence, claim resolution rates, commission rates, and maintenance expense rates. For long-term care, premium rate increases are also a
key assumption. We apply an interest, or discount, rate to determine the present value of the expected future claims, commissions, and
expenses we will pay as well as the expected future premiums we will receive, with no provision for future profit. The interest rate is based
on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. 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 annually, or more frequently if appropriate.
Policy reserves for certain other products, excluding individual disability and individual and group long-term care, which are no longer
actively marketed and are reported in our Closed Block segment represent $5.8 billion on a gross basis. We have ceded $4.7 billion of these
other products’ 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, the age, and, as appropriate, the occupation and cause of disability 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, discount
rate, and policy benefit offsets, including those for social security and other government-based welfare benefits. 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, these reserves are also established 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.