INSURANCE LIABILITIES AND ANNUITY BENEFITS

9 Months Ended

Sep. 30, 2020

INSURANCE LIABILITIES AND ANNUITY BENEFITS

NOTE 12. INSURANCE LIABILITIES AND ANNUITY BENEFITS. Insurance liabilities and annuity benefits comprise mainly obligations to annuitants and insureds in our run-off insurance activities.


September 30, 2020 (In millions)	Long-term care insurance contracts		Structured settlement annuities & life insurance contracts		Other contracts		Other adjustments(a)		Total
Future policy benefit reserves	$	16,866	$	9,294	$	178	$	7,404	$	33,742
Claim reserves	4,364		270		1,079		—		5,713
Investment contracts	—		1,060		1,034		—		2,094
Unearned premiums and other	20		189		118		—		327
	21,250		10,813		2,409		7,404		41,876
Eliminations	—		—		(424)		—		(424)
Total	$	21,250	$	10,813	$	1,985	$	7,404	$	41,452


December 31, 2019 (In millions)
Future policy benefit reserves	$	16,755	$	9,511	$	183	$	5,655	$	32,104
Claim reserves	4,238		252		1,125		—		5,615
Investment contracts	—		1,136		1,055		—		2,191
Unearned premiums and other	30		196		96		—		322
	21,023		11,095		2,459		5,655		40,232
Eliminations	—		—		(406)		—		(406)
Total	$	21,023	$	11,095	$	2,053	$	5,655	$	39,826

(a) To the extent that unrealized gains on specific investment securities supporting our insurance contracts would result in a premium deficiency should those gains be realized, an increase in future policy benefit reserves is recorded, with an after-tax reduction of net unrealized gains recognized through Accumulated other comprehensive income (loss) (AOCI) in our consolidated Statement of Earnings (Loss).

The increase in insurance liabilities and annuity benefits of $1,626 million from December 31, 2019 to September 30, 2020 is primarily due to an adjustment of $1,749 million resulting from an increase in unrealized gains on investment securities that would result in a premium deficiency should those gains be realized.

Claim reserves included incurred claims of $1,390 million and $1,410 million, of which insignificant amounts related to the recognition of adjustments to prior year claim reserves arising from our periodic reserve evaluation for the nine months ended September 30, 2020 and 2019, respectively. Paid claims were $1,328 million and $1,237 million in the nine months ended September 30, 2020 and 2019, respectively.

Reinsurance recoverables are recorded when we cede insurance risk to third parties but are not relieved from our primary obligation to policyholders and cedents. These amounts, net of allowances of $1,485 million and $1,355 million, are included in Other GE Capital receivables in our consolidated Statement of Financial Position and amounted to $2,486 million and $2,416 million at September 30, 2020 and December 31, 2019, respectively.

2020 Premium Deficiency Testing. We completed our annual premium deficiency testing in the aggregate across our run-off insurance portfolio in the third quarter of 2020. These procedures included updating experience studies since our last test completed in the third quarter of 2019, independent actuarial analysis and review of industry benchmarks. As we experienced a premium deficiency in 2019, our 2020 premium deficiency testing started with a zero margin and, accordingly, any net adverse development would result in a future premium deficiency. Using our most recent future policy benefit reserve assumptions, including changes to our assumptions related to morbidity, future premium rate increases and discount rate, the 2020 premium deficiency testing results indicated there was a positive margin of less than 2% of the recorded future policy benefit reserves, excluding Other adjustments, at September 30, 2020. As a result, the assumptions updated in connection with the premium deficiency recognized in 2019 remain locked-in and will remain so unless another premium deficiency occurs in the future.

The increase in the premium deficiency testing margin from our 2019 testing was primarily attributable to modestly favorable emerging morbidity experience in our long-term care insurance portfolio, primarily at the older attained ages, in the period since the 2017 reconstruction of our future claim cost projections ($412 million) and higher projected future premium rate increase approvals ($199 million), partially offset by a decline in the overall discount rate to a weighted average rate of 5.70% compared to 5.74% in 2019 ($218 million). This decline in the discount rate from 2019 to 2020 reflects a lower expected reinvestment rate, due to lower benchmark interest rates in the U.S, increasing to a lower expected long-term average investment yield over a longer period and slightly lower actual yields on our investment security portfolio, partially offset by increased allocations to higher yielding asset classes introduced with our 2018 strategic initiatives, which included a modest decline in expected yield compared to 2019 assumptions.

When results of the premium deficiency testing indicate overall reserves are sufficient, we are also required to assess whether additional future policy benefit reserves are required to be accrued over time in the future. Such an accrual would be required if profits are projected in earlier future periods followed by losses projected in later future years (i.e., profits followed by losses). When this pattern of profits followed by losses is projected, we would be required to accrue a liability in the expected profitable years by the amount necessary to offset projected losses in later future years. We noted our projections as of third quarter 2020 indicate the present value of projected earnings in each future year to be positive, and therefore, no further adjustments to our future policy benefit reserves were required at this time.