Unum 2006 Annual Report Download - page 62

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mortality rates and retirement rates. Expected future payments are discounted at interest rates reflecting the
anticipated investment returns for the assets supporting the liabilities.
Claim Reserves
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported
(IBNR) to us and, as prescribed by GAAP, equals our long-term best estimate of the present value of the liability for
future claim payments and claim adjustment expenses. A claim reserve is based on actual known facts regarding the
claim, such as the benefits available under the applicable policy, the covered benefit period, and the age and
occupation of the claimant, as well as assumptions derived from our actual historical experience and expected future
changes in experience for factors such as the claim duration and discount rate. Reserves for IBNR claims, similar to
incurred claim reserves, include our assumptions for claim duration and discount rates but because we do not yet
know the facts regarding the specific claims, are also based on historical incidence rate assumptions, including claim
reporting patterns, the average cost of claims, and the expected volumes of incurred claims. Our incurred claim
reserves and IBNR claim reserves do not include any provision for the risk of adverse deviation from our
assumptions.
Claim reserves, unlike policy reserves, are subject to revision as current claim experience and projections of future
factors affecting claim experience change. Each quarter we review our emerging experience to ensure that our claim
reserves are appropriate. If we believe, based on our actual experience and our view of future events, that our long-
term assumptions need to be modified, we adjust our reserves accordingly with a charge or credit to our current
period income.
Multiple estimation methods exist to establish claim reserve liabilities, with each method having its own advantages
and disadvantages. Available reserving methods utilized to calculate claim reserves include the tabular reserve
method, the paid development method, the incurred loss development method, the count and severity method, and
the expected claim cost method. No singular method is better than the others in all situations and for all product
lines. The estimation methods we have chosen are those that we believe produce the most reliable reserves at that
time.
Claim reserves supporting our Unum US group and individual income protection and group and individual long-
term care lines of business and our Individual Income Protection – Closed Block segment represent approximately
38.5 percent and 42.1 percent, respectively, of our total claim reserves at December 31, 2006. We use a tabular
reserve methodology for group and individual long-term income protection and group and individual long-term care
claims that have been reported. Under the tabular reserve methodology, reserves for reported claims are based on
certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis.
We believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the
most available known facts about each claim. IBNR claim reserves for our long-term products are calculated using
the count and severity method using historical patterns of the claims to be reported and the associated claim costs.
For group short-term income protection products, an estimate of the value of future payments to be made on claims
already submitted, as well as IBNR claims, is determined in aggregate rather than on the individual claimant basis
that we use for our long-term products, using historical patterns of claim incidence as well as historical patterns of
aggregate claim resolution rates. The average length of time between the event triggering a claim under a policy and
the final resolution of those claims is much shorter for these products than for our long-term liabilities and results in
less estimation variability.
Claim reserves supporting the Unum US group life and accidental death and dismemberment products represent
approximately 3.9 percent of our total claim reserves at December 31, 2006. Claim reserves for these products are
related primarily to death claims reported but not yet paid, IBNR death claims, and a liability for waiver of premium
benefits. The death claim reserve is based on the actual face amount to be paid, the IBNR reserve is calculated using
the count and severity method, and the waiver of premium benefits reserve is calculated using the tabular reserve
methodology.