Insurance and Contractholder Liabilities

12 Months Ended

Dec. 31, 2018

Insurance and Contractholder Liabilities [Abstract]

Insurance and Contractholder Liabilities

Note 7 – Insurance and Contractholder Liabilities

Account Balances – Insurance and Contractholder Liabilities

As of December 31, 2018 and 2017, the Company’s insurance and contractholder liabilities comprised the following:

		December 31, 2018						December 31, 2017

(In millions)		Current		Non-current		Total		Current		Non-current		Total
Contractholder deposit funds	$	641	$	7,365	$	8,006	$	713	$	7,483	$	8,196
Future policy benefits		740		8,981		9,721		706		9,334		10,040
Unpaid claims and claim expenses
Integrated Medical		2,678		19		2,697		2,401		19		2,420
Other segments		2,394		3,230		5,624		2,178		3,289		5,467
Unearned premiums		348		379		727		319		405		724
Total insurance and contractholder liabilities	$	6,801	$	19,974	$	26,775	$	6,317	$	20,530	$	26,847

Insurance and contractholder liabilities expected to be paid within one year are classified as current.

Accounting Policy - Contractholder Deposit Funds: Liabilities for contractholder deposit funds primarily include deposits received from customers for investment-related and universal life products and investment earnings on their fund balances. These liabilities are adjusted to reflect administrative charges and, for universal life fund balances, mortality charges. In addition, this caption includes: 1) premium stabilization reserves under group insurance contracts representing experience refunds left with the Company to pay future premiums; 2) deposit administration funds used to fund non-pension retiree insurance programs; 3) retained asset accounts; and 4) annuities or supplementary contracts without significant life contingencies. Interest credited on these funds is accrued ratably over the contract period.

Accounting Policy - Future Policy Benefits: Future policy benefits represent the present value of estimated future obligations under long-term life and supplemental health insurance policies and annuity products currently in force. These obligations are estimated using actuarial methods and consist primarily of reserves for annuity contracts, life insurance benefits, GMDB contracts (see Note 8 for additional information) and certain health, life and accident insurance products of our International Markets segment.

Obligations for annuities represent specified periodic benefits to be paid to an individual or groups of individuals over their remaining lives. Obligations for life insurance policies and GMDB contracts represent benefits expected to be paid to policyholders, net of future premiums expected to be received. Management estimates these obligations based on assumptions as to premiums, interest rates, mortality or morbidity, future claim adjudication expenses and surrenders, allowing for adverse deviation as appropriate. Mortality, morbidity and surrender assumptions are based on the Company’s own experience and published actuarial tables. Interest rate assumptions are based on management’s judgment considering the Company’s experience and future expectations, and range from 1% to 9%. Obligations for the run-off settlement annuity business include adjustments for realized and unrealized investment returns consistent with GAAP when a premium deficiency exists.

Unpaid Claims and Claim Expenses – Integrated Medical

This liability reflects estimates of the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily comprised of accruals for incentives and other amounts payable to health care professionals and facilities. This liability no longer includes amounts from the international health care business now reported in International Markets following our change in segment reporting in 2018. Prior year rollforwards have been updated to reflect this segment change.

Accounting policy. The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

The Company compares key assumptions used to establish the medical costs payable to actual experience for each reporting period. The unpaid claims liability is adjusted through current period shareholders’ net income when actual experience differs from these assumptions. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company’s key assumptions, specifically completion factors and medical cost trends.

The liability is primarily calculated using “completion factors” developed by comparing the claim incurral date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing; 2) provider claims submission rates; 3) membership; and 4) the mix of products. The Company uses historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.

The Company relies more heavily on medical cost trend analysis that reflects expected claim payment patterns and other relevant operational considerations for more recent months. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior.

This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.5 billion at December 31, 2018 and $2.3 billion at December 31, 2017. The remaining balance in both periods reflects amounts due for physician incentives and other medical care expenses and services payable.

Activity in the unpaid claims liability for the Integrated Medical segment for the years ended December 31 was as follows:

(In millions)	2018		2017		2016
Balance at January 1,	$	2,420	$	2,261	$	2,105
Less: Reinsurance and other amounts recoverable		262		273		237
Balance at January 1, net		2,158		1,988		1,868
Acquired, net		40		-		-
Incurred costs related to:
Current year		21,331		19,334		18,085
Prior years		(173)		(227)		(70)
Total incurred		21,158		19,107		18,015
Paid costs related to:
Current year		18,978		17,179		16,142
Prior years		1,945		1,758		1,753
Total paid		20,923		18,937		17,895
Balance at December 31, net		2,433		2,158		1,988
Add: Reinsurance and other amounts recoverable		264		262		273
Balance at December 31,	$	2,697	$	2,420	$	2,261

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business where the Company administers the plan benefits but the right of offset does not exist. See Note 8 for additional information on reinsurance.

Variances in incurred costs related to prior years’ unpaid claims and claims expenses that resulted from the differences between actual experience and the Company’s key assumptions were as follows for the years ended December 31:

	2018				2017
($ in millions)		$	%⁽¹⁾			$	%⁽²⁾
Actual completion factors	$	92	0.5	%	$	87	0.6	%
Medical cost trend		72	0.4			131	0.7
Other		9	-			9	-
Total favorable variance	$	173	0.9	%	$	227	1.3	%

(1) Percentage of current year incurred costs as reported for 2017.
(2) Percentage of current year incurred costs as reported for 2016.

Incurred costs related to prior years in the table above, although adjusted through shareholders’ net income, do not directly correspond to an increase or decrease to shareholders’ net income. The primary reason for this difference is that decreases to prior year incurred costs pertaining to the portion of the liability established for moderately adverse conditions are not considered as impacting shareholders’ net income if they are offset by increases in the current year provision for moderately adverse conditions.

Prior year development increased shareholders’ net income by $77 million ($97 million before tax) for the year ended December 31, 2018, compared with $96 million ($148 million before tax) in 2017. Favorable prior year development implies primarily lower than expected utilization of medical services while unfavorable prior year development implies higher than expected utilization of medical services. Prior year development amounts close to zero imply utilization of medical services that are consistent with expectations.

The following table depicts the incurred and paid claims development as of December 31, 2018 (net of reinsurance), claims frequency metrics and incurred but not reported liabilities reported in the Integrated Medical segment. The information about incurred and paid claims development for the year ended December 31, 2017 is presented as supplementary information and is unaudited.

	Incurred Costs
Incurral Year	2017 (Unaudited)		2018		Unpaid Claims & Claim Expenses		Claims Frequency
(in millions)
2017	$	18,692	$	18,528	$	22		2.6 million
2018				20,458	$	2,266		2.9 million
Cumulative incurred costs plus acquired for the periods presented			$	38,986

	Cumulative Costs Paid
Incurral Year	2017 (Unaudited)		2018
2017	$	16,628	$	18,506
2018				18,192
Cumulative paid costs for the periods presented			$	36,698

Outstanding liabilities for the periods presented, net of reinsurance			$	2,288
Other long-duration liabilities not included in development table above				145
Net unpaid claims and claims expenses - Integrated Medical				2,433
Reinsurance and other amounts recoverable				264
Unpaid claims and claim expenses - Integrated Medical			$	2,697

More than 95% of health claims for an accident year are paid within one year of their incurred date.

There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is the number of customers for whom an insured medical claim was paid. Customers for whom no insured medical claim was paid are excluded from the calculation. Claims that did not result in a liability are not included in the frequency metric.

Unpaid Claims and Claim Expenses – International Markets and Group Disability and Other

This liability now includes amounts from international health care following our change in segment reporting in 2018. Prior year rollforwards have been updated to reflect this segment change.

Accounting policy. Liabilities for unpaid claims and claim expenses are established by book of business within the Company’s International Markets segment and Group Disability and Other. Liabilities for unpaid claims and claim expenses within the group disability and life business consist of the following primary products: long-term and short-term disability, life insurance, and accident coverages. Unpaid claims and claim expenses consist of (1) case or claims reserves for reported claims that are unpaid as of the balance sheet date; (2) incurred but not reported reserves for claims when the insured event has occurred but has not been reported to the Company; and (3) loss adjustment expense reserves for the expected costs of settling these claims. The Company consistently estimates incurred but not yet reported losses using actuarial principles and assumptions based on historical and projected claim incidence patterns, claim size and the expected payment period. The Company recognizes the actuarial best estimate of the ultimate liability within a level of confidence, consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions. The Company immediately records an adjustment in medical costs and other benefit expenses when estimates of these liabilities change.

The majority of the Company’s liability for disability claims consists of the present value of estimated future benefit payments, including expected development, for each reported claim that is currently receiving benefit payments, or pending a decision on eligibility for benefits, over the expected disability period. The Company projects the expected disability period by using historical resolution rates combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. Expected claim resolution rates may vary based upon the Company’s experience for the anticipated disability period, the covered benefit period, the cause of disability, the benefit design and the claimant’s age, gender and income level. The gross monthly benefit is reduced (offset) by disability income received under other benefit programs, most commonly Social Security Disability Income, workers’ compensation, statutory disability or other group benefit plans. The Company estimates the probability and amount of future offset awards and lapses based on the Company’s experience for certain offsets not yet finalized.

The Company also establishes a liability for the expected present value of future benefit payments for known claims that have recently been resolved but may reopen in the future, based on Company experience. Prior to a claim becoming known, the Company establishes a liability for incurred but not reported claims, using standard actuarial techniques and calculations based on completion factors and loss ratio assumptions using the Company’s experience combined with an analysis of current trends and operational factors. Completion factors are impacted by several key items including changes in claim inventory levels, claim payment patterns, changes in business volume and other factors. Loss ratio assumptions are developed using historical Company experience, adjusted prospectively for expected changes in the underlying business including rate actions, persistency and inforce growth.

Liability balance details. The liability details for unpaid claims and claim expenses as of December 31 are as follows:

(In millions)	2018		2017
Group Disability and Other
Group Disability and Life	$	4,674	$	4,491
Other Operations		192		193
Total Group Disability and Other		4,866		4,684
International Markets		758		783
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	5,624	$	5,467

The Company discounts certain liabilities, predominantly long-term disability, because benefits payments are made over extended periods. Discount rate assumptions for these liabilities are based on projected investment returns for the supporting asset portfolios. Details of the Company’s unpaid claim discounted liability balances as of December 31 were as follows:

(In billions)		2018							2017
Discounted liabilities	$				4.2		$				4.0
Aggregate amount of discount	$				1.1		$				1.0
Range of discount rates		4.2	%	-	5.2	%		4.5	%	-	5.2	%

Interest is accreted and recognized in medical costs and other benefit expenses in the Consolidated Statements of Income.

Activity in the Company’s liabilities for unpaid claims and claim expenses, excluding Other Operations, are presented in the following table. Liabilities associated with Other Operations are excluded because they pertain to obligations for long-duration insurance contracts or, if short-duration, the liabilities have been fully reinsured.

(In millions)	2018		2017		2016
Balance at January 1,	$	5,274	$	4,997	$	4,609
Less: Reinsurance		140		123		121
Balance at January 1, net		5,134		4,874		4,488
Incurred claims related to:
Current year		5,350		5,097		5,116
Prior years
Interest accretion		156		163		161
All other incurred		(147)		(43)		85
Total incurred		5,359		5,217		5,362
Paid claims related to:
Current year		3,391		3,229		3,221
Prior years		1,808		1,757		1,739
Total paid		5,199		4,986		4,960
Acquisitions		23		-
Foreign currency		(41)		29		(16)
Balance at December 31, net		5,276		5,134		4,874
Add: Reinsurance		156		140		123
Balance at December 31,	$	5,432	$	5,274	$	4,997

Reinsurance in the previous table reflects amounts due from reinsurers related to unpaid claims liabilities. The Company’s insurance subsidiaries enter into agreements with other companies primarily to limit losses from large exposures and to permit recovery of a portion of incurred losses. See Note 8 for additional information on reinsurance.

The majority of the liability for unpaid claims and claim expenses is related to disability claims with long-tailed payouts. Interest earned on assets backing these liabilities is an integral part of pricing and reserving. Therefore, interest accreted on prior year balances is shown as a separate component of prior year incurred claims. This interest is calculated by applying the average discount rate used in determining the liability balance to the average liability balance over the period. The remaining prior year incurred claims amount primarily reflects updates to the Company’s liability estimates and variances between actual experience during the period relative to the assumptions and expectations reflected in determining the liability. Assumptions reflect the Company’s expectations over the life of the book of business and will vary from actual experience in any period, both favorably and unfavorably, with variation in resolution rates being the most significant driver for the long-term disability business. Favorable prior year incurred claims reported in 2018 largely reflect favorable loss ratio experience for long-term disability and life relative to expectations. Favorable prior year incurred claims reported in 2017 largely reflect improved resolution rate experience for long-term disability relative to expectations. Prior year incurred claims reported in 2016 included the impact of changes made to our disability claims management process and a period of elevated life claims.

Long-term disability development tables. The table below presents information about incurred and paid claims development as of December 31, 2018 (net of reinsurance), total incurred but not reported liabilities, and cumulative claims frequency for the Company’s long-term disability book of business. The information about incurred and paid claims development for the years ended 2012 through 2017 is presented as supplementary information and is unaudited. As permitted under GAAP, the Company presented development table information beginning in 2012 because obtaining information beyond this period was impracticable as historical data was not maintained in such detail.

(In millions, except for claims frequency)
															Incurred
	Incurred Claims (undiscounted)														But Not
	Unaudited														Reported		Claims
Accident Year	2012		2013		2014		2015		2016		2017		2018		Liabilities ⁽¹⁾		Frequency
2012	$	995	$	951	$	889	$	876	$	883	$	880	$	861	$	-		21,183
2013				1,063		1,037		1,062		1,072		1,057		1,032		-		23,526
2014						1,158		1,129		1,167		1,146		1,094		-		25,314
2015								1,184		1,154		1,185		1,160		-		25,737
2016										1,246		1,184		1,199		3		25,349
2017												1,226		1,193		10		23,382
2018														1,348		515		12,025
Cumulative incurred claims for the periods presented													$	7,887
⁽¹⁾ Incurred but not reported amounts are included in 2018 incurred claims.

	Cumulative Paid Claims
	Unaudited
Accident Year	2012		2013		2014		2015		2016		2017		2018
2012	$	81	$	288	$	429	$	504	$	571	$	621	$	661
2013				92		342		503		600		670		732
2014						111		379		575		667		743
2015								114		417		603		702
2016										122		411		598
2017												110		396
2018														116
Cumulative paid claims for the periods presented													$	3,948

All outstanding liabilities for the periods presented, net of reinsurance													$	3,939
All outstanding liabilities prior to 2012, net of reinsurance														921
Impact of discounting														(885)
Liability for long-term disability unpaid claims and claim expenses, net of reinsurance													$	3,975

The claims frequency metric used for the Company’s long-term disability line of business represents the number of unique claim events for which benefits have been approved and payments made. Claim events are identified using a unique claimant identifier and incurral date. Thus, if an individual has multiple claims for different disabling events (and therefore different incurral dates), each will be determined to be a unique claim event. However, if an individual receives multiple benefits under more than one policy (for example for supplemental disability benefits such as pension contribution benefits or survivor benefits), the Company treats this as a single claim occurrence because they related to the same claim event. Claims frequency metrics for the most recent year are expected to be low reflecting the long-term disability product features including waiting and elimination periods that result in delayed eligibility for contract benefits. Claims that did not result in a liability are not included in the frequency metric.

The following is supplementary and unaudited information about average historical claims payout patterns for the long-term disability business for the years presented in the development table as of December 31, 2018. The average annual percentage payout of incurred claims, net of reinsurance, is approximately 9% in year one, 24% in year two, 16% in year three, 9% in year four, 7% in year five, 6% in year six and 5% in year seven.

The following table reconciles the long-term disability net incurred and paid claims development table to the liability for unpaid claims and claim expenses in the Company’s Consolidated Balance Sheets as of December 31, 2018.

(In millions)
Net outstanding liabilities – Group Disability and Life businesses
Long-term disability liabilities, net of reinsurance	$	3,975
Other short-duration insurance books of business, net of reinsurance		594
Liabilities for unpaid claims and claim expenses, net of reinsurance		4,569
Reinsurance recoverable on unpaid claims – Group Disability and Life businesses
Long-term disability		94
Other short-duration insurance books of business		11
Total reinsurance recoverable on unpaid claims		105
Total liability for unpaid claims and claim expenses – Group Disability and Life businesses		4,674
International Markets segment		758
Other Operations		192
Unpaid claims and claim expenses - Group Disability and Other and International Markets	$	5,624

The other short-duration insurance books of business, net of reinsurance, primarily include liabilities for life, accident and short-term disability insurance products. Liabilities for these products are typically complete within one year. Claim development on these liabilities is largely driven by completion factors and loss ratio assumptions.