Unum 2006 Annual Report Download - page 61

43
calculated based on assumptions that were appropriate at the date the policy was issued and are not subsequently
modified unless the policy reserves become inadequate (i.e., loss recognition occurs).
• Persistency assumptions are based on our actual historical experience adjusted for future expectations.
• Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on
industry standards adjusted as appropriate to reflect our actual experience and future expectations.
• Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for
adverse variances in actual future experience, which results in a total policy reserve balance that has an embedded
reserve for adverse deviation. We do not, however, establish an explicit and separate reserve as a provision for
adverse deviation from our assumptions.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best
estimate assumptions as of the date of the test, without a provision for adverse deviation. We group the policy
reserves for each major product line within a segment when we perform the loss recognition tests. If the policy
reserves determined using these best estimate assumptions are higher than our existing policy reserves net of any
deferred policy acquisition cost balance, the existing policy reserves are increased or deferred policy acquisition
costs are reduced to immediately recognize the deficiency. Thereafter, the policy reserves for the product line are
calculated using the same method we used for the loss recognition testing, referred to as the gross premium
valuation method, wherein we use our best estimate as of the gross premium valuation (loss recognition) date rather
than the initial policy issue date to determine the expected future claims, commissions, and expenses we will pay
and the expected future gross premiums we will receive.
We maintain policy reserves for a policy for as long as the policy remains in force, even after a separate claim
reserve is established.
Policy reserves for Unum US, Unum UK, and Colonial products, which at December 31, 2006 represented
approximately 26.5 percent, 0.2 percent, and 8.1 percent, respectively, of our total gross policy reserves, 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, commissions, and expenses we will pay and the expected future premiums we will receive, with a
provision for profit allowed.
Policy reserves for our Individual Income Protection – Closed Block segment, which at December 31, 2006,
represented approximately 14.1 percent of our total gross policy reserves, are determined using the gross premium
valuation method based on assumptions established as of January 1, 2004, the date of loss recognition. Key
assumptions are policy persistency, claim incidence, claim resolution rates, commission rates, and maintenance
expense rates. We then 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. There is
no provision for profit. The interest rate is based on our expected net investment returns on the investment portfolio
supporting the reserves for this segment. 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 quarterly. See our discussion
entitled “Restructuring of Individual Income Protection – Closed Block Business” under “2004 Significant
Transactions and Events” contained herein for a discussion of our reserve assumption changes as of January 1, 2004.
The Other segment includes products no longer actively marketed, the majority of which have been reinsured.
Policy reserves for this segment represent $6.4 billion on a gross basis, or approximately 51.1 percent, of our total
policy reserves. We have ceded $4.8 billion of the related 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