Unum 2008 Annual Report Download - page 34

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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 disability and group and individual long-term care lines of business and
our Individual Disability — Closed Block segment represent approximately 39.6 percent and 43.4 percent, respectively, of our total claim
reserves at December 31, 2008. We use a tabular reserve methodology for group and individual long-term disability 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 disability 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
3.8 percent of our total claim reserves at December 31, 2008. 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.
Claim reserves supporting our Unum UK segment represent approximately 8.5 percent of our total claim reserves at December 31, 2008,
and are calculated using generally the same methodology that we use for Unum US disability and group life reserves. The assumptions
used in calculating claim reserves for this line of business are based on standard United Kingdom industry experience, adjusted for Unum
UK’s own experience.
The majority of the Colonial Life segment lines of business have short-term benefits, which have less estimation variability than our
long-term products because of the shorter claim payout period. Our claim reserves for Colonial Life’s lines of business, which approximate
1.4 percent of our total claim reserves at December 31, 2008, are predominantly determined using the incurred loss development method
based on our own experience. The incurred loss development method uses the historical patterns of payments by loss date to predict future
claim payments for each loss date. Where the incurred loss development method may not be appropriate, we estimate the incurred claims
using an expected claim cost per policy or other measure of exposure. The key assumptions for claim reserves for the Colonial Life lines of
business are: (1) the timing, rate, and amount of estimated future claim payments; and (2) the estimated expenses associated with the
payment of claims.
The following table displays policy reserves, incurred claim reserves, and IBNR claim reserves by major product line, with the
summation of the policy reserves and claim reserves shown both gross and net of the associated reinsurance recoverable. Incurred claim
reserves represent reserves determined for each incurred claim and also include estimated amounts for litigation expenses and other
expenses associated with the payment of the claims as well as provisions for claims which we estimate will be reopened for our long-term
care products. IBNR claim reserves include provisions for incurred but not reported claims and a provision for reopened claims for our
disability products. The IBNR and reopen claim reserves for our disability products are developed and maintained in aggregate based on
historical monitoring that has only been on a combined basis.