Assurant 2012 Annual Report Download - page 41

ASSURANT, INC.2012 Form10-K 33
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
Certain items in our consolidated  nancial statements are based on
estimates and judgment. Di erences between actual results and these
estimates could in some cases have material impacts on our consolidated
 nancial statements.
On January1, 2012, the Company adopted the amendments to existing
guidance on accounting for costs associated with acquiring or renewing
insurance contracts.  is guidance was adopted retrospectively and
has been applied to all prior period  nancial information contained
in these consolidated  nancial statements. See Note2 to the Notes to
Consolidated Financial Statements for more information.
 e following critical accounting policies require signi cant estimates.
 e actual amounts realized in these areas could ultimately be materially
di erent from the amounts currently provided for in our consolidated
 nancial statements.
Health Insurance Premium Rebate Liability
 e A ordable Care Act was signed into law in March2010. One
provision of the Act, e ective January1, 2011, established a minimum
medical loss ratio (“MLR”) designed to ensure that a minimum
percentage of premiums is paid for clinical services or health care
quality improvement activities.  e A ordable Care Act established
an MLR of 80% for individual and small group business and 85% for
large group business. If the actual loss ratios, calculated in a manner
prescribed by the Department of Health and Human Services (“HHS”),
are less than the required MLR, premium rebates are payable to the
policyholders by August1 of the subsequent year.
 e Assurant Health loss ratio reported on page46 (the “GAAP loss
ratio”) di ers from the loss ratio calculated under the MLR rules.  e
most signi cant di erences include the fact that the MLR is calculated
separately by state, legal entity and type of coverage (individual or
group); the MLR calculation includes credibility adjustments for each
state/entity/coverage cell, which are not applicable to the GAAP loss
ratio; the MLR calculation applies only to some of our health insurance
products, while the GAAP loss ratio applies to the entire portfolio,
including products not governed by the A ordable Care Act; the MLR
includes quality improvement expenses, taxes and fees; changes in
reserves are treated di erently in the MLR calculation; and the MLR
premium rebate amounts are considered adjustments to premiums for
GAAP reporting whereas they are reported as additions to incurred
claims in the MLR rebate estimate calculations.
Assurant Health has estimated the 2012 impact of this regulation
based on de nitions and calculation methodologies outlined in the
Interim Final Regulation from HHS released December1, 2010 with
Technical Corrections released December29, 2010 and the HHS
Final Regulation released December7, 2011. An estimate was based
on separate projection models for individual medical and small group
business using projections of expected premiums, claims, and enrollment
by state, legal entity and market for medical business subject to MLR
requirements for the MLR reporting year. In addition, the projection
models include quality improvement expenses, state assessments and taxes.
Reserves
Reserves are established in accordance with GAAP using generally
accepted actuarial methods and re ect judgments about expected
future claim payments. Calculations incorporate assumptions about
in ation rates, the incidence of incurred claims, the extent to which all
claims have been reported, future claims processing, lags and expenses
and future investment earnings, and numerous other factors. While
the methods of making such estimates and establishing the related
liabilities are periodically reviewed and updated, the calculation of
reserves is not an exact process.
Reserves do not represent precise calculations of expected future
claims, but instead represent our best estimates at a point in time of
the ultimate costs of settlement and administration of a claim or group
of claims, based upon actuarial assumptions and projections using facts
and circumstances known at the time of calculation.
Many of the factors a ecting reserve adequacy are not directly quanti able
and not all future events can be anticipated when reserves are established.
Reserve estimates are re ned as experience develops. Adjustments to
reserves, both positive and negative, are re ected in the consolidated
statement of operations in the period in which such estimates are updated.
Because establishment of reserves is an inherently complex process
involving signi cant judgment and estimates, there can be no certainty
that ultimate losses will not exceed existing claim reserves. Future loss
development could require reserves to be increased, which could have
a material adverse e ect on our earnings in the periods in which such
increases are made.