Unum 2014 Annual Report Download - page 32

30 UNUM • 2014 ANNUAL REPORT
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Trends in Key Assumptions
Generally, we do not expect our mortality and morbidity claim incidence trends or our persistency trends to change significantly in
the short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time. We have
historically experienced an increase in our group long-term disability morbidity claim incidence trends during and following a recessionary
period, particularly in our Unum US operations. During 2014, claim incidence rates for Unum US group long-term disability were stable
relative to the prior year, continuing to benefit from the gradual improvement in the economy. During 2013, claim incidence rates for Unum
US group long-term disability improved slightly compared to the slightly elevated level of incidence rates in 2012. We expect that claim
incidence trends for Unum US group long-term disability may continue to somewhat follow general economic conditions and demographics
of the general U.S. workforce.
During 2014, our claim incidence rates for our Closed Block long-term care line of business improved slightly relative to the levels
of 2013 and 2012, when we experienced claim incidence rates higher than the long-term assumptions we established at the time of loss
recognition in 2011. We undertook a thorough review of our reserve assumptions related to our long-term care line of business during
2014 and updated our reserves using best estimate assumptions as of the date of the review. See “2014 Long-term Care Reserve Increase”
contained herein.
Interest rates improved somewhat during 2013 and early 2014 before returning to levels well below historical norms in the latter part
of 2014, and the assumptions we used to discount our reserves during these periods generally trended downward slightly for all segments
and product lines. Reserve discount rate assumptions for new policies and new claims are adjusted to reflect our current and expected net
investment returns. Changes in our average discount rate assumptions tend to occur gradually over a longer period of time because of the
long-duration investment portfolios which support the reserves for the majority of our lines of business.
Claim resolution rates have a greater chance of significant variability in a shorter period of time than our other reserve assumptions.
These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US
group and individual long-term disability product lines and our Closed Block individual disability product line have over the last several
years exhibited some variability. Relative to the resolution rate we expect to experience over the life of the block of business, actual
quarterly rates during 2013 and 2014 have varied by +3 and -2 percent in our Unum US group long-term disability line of business, between
+10 and -13 percent in our Unum US individual disability line of business, and between +7 and -6 percent in our Closed Block individual
disability line of business. Claim resolution rates are very sensitive to operational and environmental changes and can be volatile over short
periods of time. Throughout the period 2012 to 2014, our claim resolution rates were fairly consistent with or slightly favorable to 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.
Regarding experience for our older age, longer duration disabled claimants in our Closed Block individual disability line of business,
the claim resolution rates, primarily as pertaining to life expectancy of the insured, showed a reduction in the number of deaths at these
older ages during 2014, which we believe is temporary in nature. During 2013 and 2012, mortality assumptions remained relatively
consistent with the assumptions that we updated in 2011 for this particular claim block.
We monitor and test our reserves for adequacy relative to all of our assumptions in the aggregate. In our estimation, scenarios based
on reasonably possible variations in each of our reserve assumptions, when modeled together in aggregate, could produce potential results
as illustrated in the chart below. The major contributor to the variance for both the Unum US group long-term disability line of business and
the Closed Block individual disability line of business is the claim resolution rate.