Aetna 2009 Annual Report Download - page 25

Annual Report – Page 19
Life and Disability
The liabilities for our life and disability products reflect benefit claims that have been reported to us but not yet paid,
estimates of claims that have been incurred but not yet reported to us, and future policy benefits earned under
insurance contracts. We develop these reserves and the related benefit expenses using actuarial principles and
assumptions that consider, among other things, discount, resolution and mortality rates (each discussed below).
Completion factors are also evaluated when estimating our reserves for claims incurred but not yet reported for life
products. We also consider the benefit payments from the U.S. Social Security Administration for which our disability
members may be eligible and which may offset our liability for disability claims (this is known as the Social Security
offset). Each period, we estimate these factors, to the extent relevant, based primarily on historical data, and use these
estimates to determine the assumptions underlying our reserve calculations. Given the extensive degree of judgment
and uncertainty used in developing these estimates, it is possible that our estimates could develop either favorably or
unfavorably.
The discount rate is the interest rate at which future benefit cash flows are discounted to determine the present value of
those cash flows. The discount rate we select is a critical estimate, because higher discount rates result in lower
reserves. We determine the discount rate based on the current and estimated future yield of the asset portfolio
supporting our life and disability reserves. If the discount rate we select in estimating our reserves is lower (higher)
than our actual future portfolio returns, our reserves may be higher (lower) than necessary. Our discount rates for life
and disability reserves at December 31, 2009 both decreased .5% when compared to the rates used at December 31,
2008. Our discount rates for life and disability reserves at December 31, 2008 increased by .17% and .04%,
respectively, when compared to the rates used at December 31, 2007. The discount rates we selected for disability and
life reserves at December 31, 2009 were lower than 2008 due to lower projected future yields on the investment
portfolio supporting these reserves. The discount rates for 2008 were higher than the rates we selected in the previous
year as a result of increasing investment yields on the portfolio of assets supporting these reserves. Based on our
historical experience, it is reasonably possible that the assumed discount rates for our life and disability reserves may
vary by plus or minus .25% from year to year. A .25% decrease in the discount rates selected for both our life and
disability reserves would have increased current and future life and disability benefit costs by approximately $17
million pretax for 2009.
For disability claims and a portion of our life claims, we must estimate the timing of benefit payments, which takes into
consideration the maximum benefit period and the probabilities of recovery (i.e., recovery rate) or death (i.e., mortality
rate) of the member. Benefit payments may also be affected by a change in employment status of a disabled member,
for example, if the member returns to work on a part-time basis. Estimating the recovery and mortality rates of our
members is complex. Our actuaries evaluate our current and historical claim patterns, the timing and amount of any
Social Security offset (for disability only), as well as other factors including the relative ages of covered members and
the duration of each member’ s disability when developing these assumptions. For disability reserves, if our actual
recovery and mortality rates are lower (higher) than our estimates, our reserves will be lower (higher) than required to
cover future disability benefit payments. For certain life reserves, if the actual recovery rates are lower (higher) than
our estimates or the actual mortality rates are higher (lower) than our estimates, our reserves will be lower (higher) than
required to cover future life benefit payments. We use standard industry tables and our historical claim experience to
develop our estimated recovery and mortality rates. Claim reserves for our disability and life products are sensitive to
these assumptions. Our historical experience has been that our recovery or mortality rates for our life and disability
reserves vary by less than one percent during the course of a year. A one percent less (more) favorable assumption for
our recovery or mortality rates would have increased (decreased) current and future life and disability benefit costs by
approximately $6 million pretax for 2009. When establishing our reserves at December 31, 2009, we have adjusted our
estimates of these rates based on recent experience.
We estimate our reserve for claims incurred but not yet reported to us for life products largely based on completion
factors. The completion factors we use are based on our historical experience and reflect judgments and possible
adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and
other factors. If claims are submitted or processed on a faster (slower) pace than historical periods, the actual claims
may be more (less) complete than originally estimated using our completion factors, which may result in reserves that
are higher (lower) than required to cover future life benefit payments. At December 31, 2009, we held approximately
$189 million in reserves for life claims incurred but not yet reported to us.