Aetna 2013 Annual Report Download - page 32

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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 insurance waiver of premiums and long-term disability reserves at December 31, 2013 were consistent with the
rates used at December 31, 2012 and 2011. 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 one-half percentage point
from year to year. A one-half percentage point decrease in the discount rates selected for both our life insurance
waiver of premium and disability reserves would have increased current and future life and disability benefit costs
by approximately $39 million pretax for 2013.
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 insurance premium
waiver 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 ten percent during the course of a year. A ten 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 $58 million pretax for 2013. When establishing our reserves at December 31, 2013, we set our
estimates of recovery and mortality 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, 2013, we held
approximately $265 million in reserves for life claims incurred but not yet reported to us.
Long-term Care
We established reserves for future policy benefits for the long-term care products we issued based on the present
value of estimated future benefit payments less the present value of estimated future net premiums. In establishing
this reserve, we evaluated assumptions about mortality, morbidity, lapse rates and the rate at which new claims
would be submitted to us. We estimated the future policy benefits reserve for long-term care products using these
assumptions and actuarial principles. For long-term care insurance contracts, we use our original assumptions
throughout the life of the policy and do not subsequently modify them unless we deem the reserves to be
inadequate. A portion of our reserves for long-term care products also reflect our estimates relating to future
payments to members currently receiving benefits. These reserves are estimated primarily using recovery and
mortality rates, as described above.