Insurance and Contractholder Liabilities

9 Months Ended

Sep. 30, 2019

Insurance and Contractholder Liabilities [Abstract]

Insurance and Contractholder Liabilities

Note 7 – Insurance and Contractholder Liabilities

A. Account Balances – Insurance and Contractholder Liabilities

As of September 30, 2019, December 31, 2018 and September 30, 2018, the Company’s insurance and contractholder liabilities were comprised of the following:

		September 30, 2019						December 31, 2018					September 30, 2018
(In millions)		Current		Non-current		Total		Current		Non-current		Total		Total
Contractholder deposit funds	$	611	$	7,178	$	7,789	$	641	$	7,365	$	8,006	$	8,069
Future policy benefits		646		9,162		9,808		740		8,981		9,721		9,652
Unpaid claims and claim expenses
Integrated Medical		3,051		10		3,061		2,678		19		2,697		2,720
Other segments		2,479		3,378		5,857		2,394		3,230		5,624		5,494
Unearned premiums		393		362		755		348		379		727		683
Total insurance and contractholder liabilities	$	7,180	$	20,090	$	27,270	$	6,801	$	19,974	$	26,775	$	26,618

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

B. 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 the fourth quarter of 2018. The prior year presentation has been updated to reflect this segment change.

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.8 billion at September 30, 2019 and $2.5 billion at September 30, 2018.Activity in the unpaid claims liability for the Integrated Medical segment for the nine months ended September 30 was as follows:

	Nine Months Ended
	September 30,		September 30,
(In millions)	2019		2018
Beginning balance	$	2,697	$	2,420
Less: Reinsurance and other amounts recoverable		264		262
Beginning balance, net		2,433		2,158
Incurred costs related to:
Current year		18,169		15,831
Prior years		(159)		(158)
Total incurred		18,010		15,673
Paid costs related to:
Current year		15,555		13,593
Prior years		2,160		1,754
Total paid		17,715		15,347
Ending balance, net		2,728		2,484
Add: Reinsurance and other amounts recoverable		333		236
Ending balance	$	3,061	$	2,720

Reinsurance and other amounts recoverable reflect amounts due from reinsurers and policyholders to cover incurred but not reported and pending claims for certain business for which the Company administers the plan benefits without any right of offset. 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 nine months ended September 30:

	Nine Months Ended
(Dollars in millions)	September 30, 2019			September 30, 2018
		$	%(1)			$	%(2)
Actual completion factors	$	87	0.4	%	$	79	0.4	%
Medical cost trend		72	0.3			70	0.4
Other		-	-			9	-
Total favorable variance	$	159	0.7	%	$	158	0.8	%
(1) Percentage of current year incurred costs as reported for the year ended December 31, 2018.
(2) Percentage of current year incurred costs as reported for the year ended December 31, 2017.

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 $68 million ($86 million before-tax) for the nine months ended September 30, 2019, compared with $70 million ($89 million before-tax) for the nine months ended September 30, 2018. Favorable prior year development in both periods reflects lower than expected utilization of medical services.

C. 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 as discussed in Note 1. The prior year presentation has been updated to reflect this segment change.

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

(In millions)	September 30, 2019		September 30, 2018
Group Disability and Other
Group Disability and Life	$	4,887	$	4,584
Other Operations		189		179
Total Group Disability and Other		5,076		4,763
International Markets		781		731
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	5,857	$	5,494

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.

	Nine Months Ended
(In millions)	September 30, 2019		September 30, 2018
Beginning balance	$	5,432	$	5,274
Less: Reinsurance		156		140
Beginning balance, net		5,276		5,134
Incurred claims related to:
Current year		4,205		4,046
Prior years:
Interest accretion		117		115
All other incurred		(59)		(161)
Total incurred		4,263		4,000
Paid claims related to:
Current year		2,422		2,383
Prior years		1,594		1,561
Total paid		4,016		3,944
Foreign currency		(26)		(16)
Ending balance, net		5,497		5,174
Add: Reinsurance		171		141
Ending balance	$	5,668	$	5,315

Reinsurance in the table above 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 for the nine months ended September 30, 2019 primarily reflect favorable long-term disability resolution rate experience relative to expectations reflected in the prior year reserve and favorable reserve development for life, accident and voluntary driven by lower than expected incidence. Favorable prior year incurred claims for the nine months ended September 30, 2018 primarily reflected favorable long-term disability reserve development , including favorable reserve assumption updates driven by changes to resolution rate expectations.