Insurance and Contractholder Liabilities

12 Months Ended

Dec. 31, 2019

Insurance and Contractholder Liabilities [Abstract]

Insurance and Contractholder Liabilities

Note 9 – Insurance and Contractholder Liabilities

A. Account Balances – Insurance and Contractholder Liabilities

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

		December 31, 2019						December 31, 2018
(In millions)		Current		Non-current		Total		Current		Non-current		Total
Contractholder deposit funds	$	600	$	7,139	$	7,739	$	641	$	7,365	$	8,006
Future policy benefits		553		9,281		9,834		740		8,981		9,721
Unpaid claims and claim expenses
Integrated Medical		2,875		17		2,892		2,678		19		2,697
Other segments		2,529		3,474		6,003		2,394		3,230		5,624
Unearned premiums		453		360		813		348		379		727
Total		7,010		20,271		27,281		6,801		19,974		26,775
Insurance and contractholder liabilities classified as liabilities held for sale (1)		(2,089)		(4,219)		(6,308)
Insurance and contractholder liabilities per Consolidated Balance Sheets	$	4,921	$	16,052	$	20,973	$	6,801	$	19,974	$	26,775
(1) Amounts classified as liabilities held for sale primarily include $4.9 billion of unpaid claims, $717 million of contractholder deposit funds and $653 million of future policy benefits.

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 10 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.

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.

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 trend.

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 health 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.

The total of incurred but not reported liabilities plus expected development on reported claims, including reported claims in process, was $2.7 billion at December 31, 2019 and $2.5 billion at December 31, 2018.Activity in the unpaid claims liability for the Integrated Medical segment for the years ended December 31 was as follows:

(In millions)	2019		2018		2017
Balance at January 1,	$	2,697	$	2,420	$	2,261
Less: Reinsurance and other amounts recoverable		264		262		273
Balance at January 1, net		2,433		2,158		1,988
Acquired, net		-		40		-
Incurred costs related to:
Current year		24,368		21,331		19,334
Prior years		(165)		(173)		(227)
Total incurred		24,203		21,158		19,107
Paid costs related to:
Current year		21,851		18,978		17,179
Prior years		2,196		1,945		1,758
Total paid		24,047		20,923		18,937
Balance at December 31, net		2,589		2,433		2,158
Add: Reinsurance and other amounts recoverable		303		264		262
Balance at December 31,	$	2,892	$	2,697	$	2,420

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 10 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:

	Year Ended
(Dollars in millions)	December 31, 2019			December 31, 2018
		$	%(1)			$	%(2)
Actual completion factors	$	90	0.4	%	$	92	0.5	%
Medical cost trend		75	0.4			72	0.4
Other		-	-			9	-
Total favorable variance	$	165	0.8	%	$	173	0.9	%
(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 $67 million ($85 million before-tax) for the year ended December 31, 2019, compared with $77 million ($97 million before-tax) for the year ended December 31, 2018. Favorable prior year development in both years reflects lower than expected utilization of medical services.The following table depicts the incurred and paid claims development as of December 31, 2019 (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, 2018 is presented as supplementary information and is unaudited.

	Incurred Costs
Incurral Year	2018 (Unaudited)		2019		Unpaid Claims & Claim Expenses		Claims Frequency
(In millions)
2018	$	20,458	$	20,320	$	58		2.9 million
2019				23,306	$	2,386		3.5 million
Cumulative incurred costs plus acquired for the periods presented			$	43,626
	Cumulative Costs Paid
Incurral Year	2018 (Unaudited)		2019
2018	$	18,192	$	20,262
2019				20,920
Cumulative paid costs for the periods presented			$	41,182
Outstanding liabilities for the periods presented, net of reinsurance			$	2,444
Other long-duration liabilities not included in development table above				145
Net unpaid claims and claims expenses - Integrated Medical				2,589
Reinsurance and other amounts recoverable				303
Unpaid claims and claim expenses - Integrated Medical			$	2,892

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.

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

Accounting policy. Liabilities for unpaid claims and claim expenses are established by book of business within Group Disability and Other and International Markets. Unpaid claims and claim expenses within the Group Disability and Other and International Markets segments 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.

Liabilities for unpaid claims and claim expenses within the group disability and life business reflect the following primary products: long-term and short-term disability, life insurance and accident coverages. The majority of the Company’s liability for disability claims consists of “disabled life reserves”, measured as the present value of estimated future benefit payments, including expected development, for each reported claim that is currently receiving benefit payments over the expected disability period or pending a decision on eligibility for benefits. 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 are as follows:

(In millions)	2019(1)		2018
International Markets	$	844	$	758
Group Disability and Other
Group Disability and Life		4,972		4,674
Other Operations		187		192
Total Group Disability and Other		5,159		4,866
Unpaid claims and claim expenses Group Disability and Other and International Markets	$	6,003	$	5,624
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.

The Company discounts certain liabilities, predominantly long-term disability liabilities, 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 Group Disability and Life unpaid claim discounted liability balance as of December 31 were as follows:

(In billions)		2019(1)							2018
Discounted liabilities	$				4.5		$				4.2
Aggregate amount of discount	$				1.2		$				1.1
Range of discount rates		4.0	%	-	5.2	%		4.2	%	-	5.2	%
(1) Includes unpaid claims amounts classified as Liabilities held for sale.

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)	2019(1)		2018		2017
Balance at January 1,	$	5,432	$	5,274	$	4,997
Less: Reinsurance		156		140		123
Balance at January 1, net		5,276		5,134		4,874
Incurred claims related to:
Current year		5,616		5,350		5,097
Prior years
Interest accretion		152		156		163
All other incurred		(40)		(147)		(43)
Total incurred		5,728		5,359		5,217
Paid claims related to:
Current year		3,488		3,391		3,229
Prior years		1,873		1,808		1,757
Total paid		5,361		5,199		4,986
Acquisitions		-		23		-
Foreign currency		(11)		(41)		29
Balance at December 31, net		5,632		5,276		5,134
Add: Reinsurance		184		156		140
Balance at December 31,	$	5,816	$	5,432	$	5,274
(1) Includes unpaid claims amounts classified as Liabilities held for sale.

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 10 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 and reported in medical costs and other benefit expenses in the income statement. 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 years ended December 31, 2019 and December 31, 2018 primarily reflect favorable long-term disability and life experience. The favorable experience is driven by higher resolution rate experience relative to expectations reflected in the prior year reserve and lower than expected incidence.

Long-term disability development tables. The table below presents information about incurred and paid claims development as of December 31, 2019 (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 2018 is presented as supplementary information and is unaudited. As permitted under GAAP, the Company presents 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		2019		Liabilities (1)		Frequency
2012	$	995	$	951	$	889	$	876	$	883	$	880	$	861	$	860	$	-		21,186
2013				1,063		1,037		1,062		1,072		1,057		1,032		1,030		-		23,526
2014						1,158		1,129		1,167		1,146		1,094		1,081		-		25,324
2015								1,184		1,154		1,185		1,160		1,148		-		25,781
2016										1,246		1,184		1,199		1,202		-		25,577
2017												1,226		1,193		1,207		1		23,959
2018														1,348		1,267		10		25,154
2019																1,434		533		13,061
Cumulative incurred claims for the periods presented															$	9,229
(1) Incurred but not reported amounts are included in 2019 incurred claims.
	Cumulative Paid Claims
	Unaudited
Accident Year		2012	2013		2014		2015		2016		2017		2018		2019
2012	$	81	$	288	$	429	$	504	$	571	$	621	$	661	$	693
2013				92		342		503		600		670		732		780
2014						111		379		575		667		743		803
2015								114		417		603		702		783
2016										122		411		598		709
2017												110		396		590
2018														116		434
2019																126
Cumulative paid claims for the periods presented															$	4,918
All outstanding liabilities for the periods presented, net of reinsurance															$	4,311
All outstanding liabilities prior to 2012, net of reinsurance																771
Impact of discounting																(891)
Liability for long-term disability unpaid claims and claim expenses, net of reinsurance (1)(2)															$	4,191
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.
(2) Includes approximately $3.5 billion of disabled life reserves for individuals on long-term disability.

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 assigned 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, 2019. The average annual percentage payout of incurred claims, net of reinsurance, is approximately 9% in year one, 25% in year two, 16% in year three, 9% in year four, 7% in year five, 6% in year six, 5% in year seven and 4% in year eight.

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, 2019.

(In millions)
Net outstanding liabilities – Group Disability and Life businesses
Long-term disability liabilities, net of reinsurance	$	4,191
Other short-duration insurance books of business, net of reinsurance		652
Liabilities for unpaid claims and claim expenses, net of reinsurance		4,843
Reinsurance recoverable on unpaid claims – Group Disability and Life businesses
Long-term disability		117
Other short-duration insurance books of business		12
Total reinsurance recoverable on unpaid claims		129
Total liability for unpaid claims and claim expenses – Group Disability and Life businesses		4,972
International Markets segment		844
Other Operations		187
Unpaid claims and claim expenses - Group Disability and Other and International Markets(1)	$	6,003
(1) Includes Unpaid claims amounts classified as Liabilities held for sale.

The Group Disability and Life and International Markets books of business, net of reinsurance, also 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.