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Unum 2007 Annual Report 109
Note 7. Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
(in millions of dollars) 2007 2006 2005
Balance at January 1 $ 24,324.4 $ 23,047.7 $ 22,285.1
Less Reinsurance Recoverable 2,257.3 2,267.3 3,096.2
Net Balance at January 1
22,067.1 20,780.4 19,188.9
Recapture of Business — Note 13 204.3 — 934.8
Incurred Related to
Current Year 4,836.9 5,204.4 5,188.3
Prior Years
Interest 1,199.9 1,149.5 1,066.9
Incurred for Claim Reassessment Process 65.8 396.4 52.7
All Other Incurred 174.3 228.5 390.2
Foreign Currency 33.7 292.2 (224.2)
Total Incurred 6,310.6 7,271.0 6,473.9
Paid Related to
Current Year (1,460.5) (1,597.5) (1,692.1)
Prior Years (4,581.3) (4,386.8) (4,125.1)
Total Paid (6,041.8) (5,984.3) (5,817.2)
Net Balance at December 31 22,540.2 22,067.1 20,780.4
Plus Reinsurance Recoverable 2,249.8 2,257.3 2,267.3
Balance at December 31 $ 24,790.0 $ 24,324.4 $ 23,047.7
The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing
liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve
balance less one-half year’s cash payments at our average reserve discount rate used during 2007, 2006, and 2005.
Our “Incurred Related to Prior Years” includes adjustments to reserves for our claim reassessment process. We entered into settlement
agreements with various state insurance regulators in the fourth quarter of 2004 and with the California Department of Insurance (DOI)
in the third quarter of 2005. In connection with these settlement agreements, we increased our disability claim reserves $52.7 million in
2005. During 2006 and 2007, we further increased our disability claim reserves $396.4 million and $65.8 million, respectively, to reflect
our revised estimate for costs associated with the claim reassessment process. “Paid Related to Prior Years” includes $248.0 million,
$154.9 million, and $16.1 million in 2007, 2006, and 2005, respectively, for these reserve charges. See Note 15 for further discussion of
the settlement agreements and the claim reassessment process.
“Incurred Related to Prior Years — All Other Incurred” for 2007, 2006, and 2005 relates primarily to the recent variability in our claim
resolution rate experience. Claim resolution rates are very sensitive to operational and environmental changes and can be volatile over
short periods of time. During 2005 and 2006, we experienced quarter to quarter variability in our claim resolution rates. We believe this
variability was primarily the result of a short-term reduction in the operating effectiveness of our Unum US and Individual
Disability — Closed Block segment claims management performance. During 2007, we gained more stability in our claims management
performance, and our claim resolution rates were more consistent with our long-term assumptions. Our claim resolution rate assumption
used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will
vary from actual experience in any one period, both favorably and unfavorably.