Cigna 2009 Annual Report Download - page 30

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Premiums established for retrospectively experience-rated business may be adjusted for the actual claim and, in some cases,
administrative cost experience of the account through an experience settlement process subsequent to the policy period. To the extent
that the cost experience is favorable in relation to the prospectively determined premium rates, a portion of the initial premiums may
be credited to the policyholder as an experience refund. If claim experience is adverse in relation to the initial premiums, CIGNA
HealthCare may recover the resulting experience deficit, according to contractual provisions, through future premiums and experience
settlements, provided the policy remains in force.
CIGNA HealthCare contracts on an ASO basis with customers who fund their own claims. CIGNA HealthCare charges these
customers administrative fees based on the expected cost of administering their self-funded programs. In some cases, CIGNA
HealthCare provides performance guarantees associated with meeting certain service related and other performance standards. If
these standards are not met, CIGNA HealthCare may be financially at risk up to a stated percentage of the contracted fee or a stated
dollar amount. CIGNA HealthCare establishes liabilities for estimated payouts associated with these guarantees. See Note 23 to the
Consolidated Financial Statements beginning on page 163 of this Form 10-K for details about these guarantees.
In addition to paying current benefits and expenses under HMO and health insurance policies, CIGNA HealthCare establishes
reserves for amounts estimated to fund reported claims not yet paid, as well as claims incurred, but not yet reported. Also, liabilities
are established for estimated experience refunds based on the results of retrospectively experience-rated policies and applicable
contract terms.
As of December 31, 2009, approximately $1.0 billion, or 59% of the reserves of CIGNA HealthCare’s operations comprised
liabilities that are likely to be paid within one year, primarily for medical and dental claims, as well as certain group disability and life
insurance claims. The reserve amount expected to be paid within one year includes $206 million recoverable from certain ASO
customers and from minimum premium policyholders. The remaining reserves relate primarily to contracts that are short term in
nature, but have long term payouts and include liabilities for group long-term disability insurance benefits and group life insurance
benefits for disabled and retired individuals, benefits paid in the form of both life and non-life contingent annuities to survivors and
contractholder deposit funds.
CIGNA HealthCare credits interest on experience refund balances to retrospectively experience-rated policyholders through rates
that are set by CIGNA HealthCare taking investment performance and market rates into consideration. Interest-crediting rates are set
at CIGNA HealthCare’s discretion. Higher rates are credited to funds with longer expected payout terms reflecting the fact that higher
yields are generally available on investments with longer maturities. For 2009, the rates of interest credited ranged from 2.25% to
4.0%, with a weighted average rate of approximately 2.7%.
The profitability of CIGNA HealthCare’s fully insured health care products depends on the adequacy of premiums charged
relative to claims and expenses. For medical and dental products, profitability reflects the accuracy of cost projections for health care
(unit costs and utilization), the adequacy of fees charged for administration and risk assumption and effective medical cost and
utilization management.
CIGNA HealthCare reduces its exposure to large catastrophic losses under group life, disability and accidental death contracts by
purchasing reinsurance from unaffiliated reinsurers.