Unum 2011 Annual Report Download - page 24

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum 2011 Annual Report
22
policy reserve while a policyholder is disabled. As a result, the funding mechanisms and the cost of claims are aligned and require a policy
reserve to be held while on claim. In addition, most policies allow for multiple occurrences of claims, and a policy reserve is consequently
still maintained at the time of claim to fund any potential future claims. The policy reserves build up and release over time based on
assumptions made at the time of policy issuance such that the reserve is eliminated as policyholders reach the terminal age for coverage,
die, or voluntarily lapse the policy. Policy reserves for Unum US, Unum UK, and Colonial Life products, which at December 31, 2011
represented approximately 11.9 percent, 0.2 percent, and 9.5 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 and claim expenses we will pay and the expected future premiums we will receive, with a
provision for profit allowed.
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term
care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group
long-term care, which represented approximately 39.7 percent of our total gross policy reserves at December 31, 2011, are determined
using the gross premium valuation method. Reserves for individual disability are based on assumptions established as of January 1, 2004,
the date of loss recognition. Reserves for long-term care are based on assumptions established as of December 31, 2011, the date of loss
recognition. Key assumptions are persistency, mortality, claim incidence, claim resolution rates, commission rates, and maintenance
expense rates. We 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, with no provision for future profit. The interest rate is based
on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. 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 annually, or more frequently if appropriate.
Policy reserves for certain other products no longer actively marketed and reported in our Closed Block segment represent $5.7 billion
on a gross basis, or approximately 38.7 percent of our total policy reserves. We have ceded $4.4 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 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.