Liability for Unpaid Claims and Claim Adjustment Expenses

9 Months Ended

Sep. 30, 2022

Liability for Unpaid Claims and Claims Adjustment Expenses Disclosure

Changes in the liability for unpaid claims and claim adjustment expenses are as follows:


	2022		2021
	(in millions of dollars)
Balance at January 1	$	23,664.7	$	24,180.2
Less Reinsurance Recoverable	8,697.8		8,378.9
Net Balance at January 1	14,966.9		15,801.3

Incurred Related to
Current Year	5,130.1		5,471.1
Prior Years
Interest	460.5		525.3
All Other Incurred	(601.4)		(613.3)
Foreign Currency	(388.3)		(32.6)
Total Incurred	4,600.9		5,350.5

Paid Related to
Current Year	(2,118.6)		(2,225.3)
Prior Years	(3,051.2)		(3,021.8)
Total Paid	(5,169.8)		(5,247.1)

Reserves Ceded Pursuant to Reinsurance Transaction	—		(990.0)

Net Balance at September 30	14,398.0		14,914.7
Plus Reinsurance Recoverable	8,401.4		8,854.8
Balance at September 30	$	22,799.4	$	23,769.5

Certain prior year amounts were reclassified to conform to current year presentation.

The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve balance less one-half of the period's claim payments relative to prior years at our average reserve discount rate for the respective periods.

"Incurred Related to Prior Years - All Other Incurred" shown in the preceding chart reflects the current year development of the prior year unpaid claims and claim adjustment expenses. For both 2022 and 2021 this line item includes reserve assumption updates as discussed in the following paragraphs. For 2021, this amount includes the increase in benefits and change in reserves for future benefits resulting from the realization of previously unrealized investment gains and losses as a result of the Closed Block individual disability reinsurance transaction. Excluding the reserve assumption updates and impacts from the reinsurance transaction, the variability exhibited year over year is primarily caused by the level of claim resolutions in the period relative to the long-term expectations reflected in the reserves, primarily in our Unum US group long-term disability and Closed Block long-term care product lines. 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.

2022 Reserve Assumption Updates

During the third quarter of 2022, we completed our annual review of policy and claim reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the third quarter of 2022, we updated our reserve assumptions to reflect our current estimate of future benefits obligations and determined that our claim reserves in our Unum US group long-term disability product line and our waiver of premium reserves for our Unum US group life product line should be reduced by $121.0 million and $34.0 million, respectively, due primarily to sustained improvement in claim recovery trends since our last assumption update, partially offset by lower social security benefit offsets for our group long-term disability product line. As a result, a reduction of approximately $155.0 million, which can be primarily attributed to prior year incurred claims, impacts the results shown in the preceding chart.

We also increased our claim reserves for the reinsured portion of our Closed Block individual disability product line by $193.9 million resulting primarily from updates to mortality assumptions for the advanced age portion of our claimant population. This increase is entirely related to the block that was ceded as a part of the Closed Block individual disability reinsurance transaction with Commonwealth Annuity and Life Insurance Company (Commonwealth). As a result, the increase in the Closed Block individual disability claim reserves had no impact on the net activity shown in the preceding chart.

2021 Reserve Assumption Updates

During the third quarter of 2021, we completed our annual review of policy and claim reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the third quarter of 2021, we updated our reserve assumptions and determined that our claim reserves should be reduced by $215.0 million in our Unum US group long-term disability product line due primarily to sustained improvement in claim recovery trends since our last assumption update. We also increased our claim reserves for our Closed Block long-term care and individual disability product lines by $2.1 million and $6.4 million, respectively, to reflect our current estimate of future benefit obligations. As a result, a net reduction of $206.5 million, which can be primarily attributed to prior year incurred claims, impacts the results shown in the preceding chart. We increased policy reserves in our Closed Block group pension product line by $25.1 million as a result of this review which did not affect the results shown in the preceding chart.

Closed Block Individual Disability Reinsurance Transaction

In connection with the second phase of the Closed Block individual disability reinsurance transaction that closed in March 2021, we recorded a reinsurance recoverable of $990.0 million representing the ceded reserves related to the cohort of policies on claim status as of January 1, 2021 and an increase in benefits and change in reserves for future benefits of $133.1 million resulting from the realization of previously unrealized investment gains and losses recorded in accumulated other comprehensive income (loss). These impacts are reflected in the chart shown above and the reconciliation shown below. See Note 12 for further discussion regarding the total impacts of the Closed Block individual disability reinsurance transaction.

Reconciliation

A reconciliation of policy and contract benefits and reserves for future policy and contract benefits as reported in our consolidated balance sheets to the liability for unpaid claims and claim adjustment expenses is as follows:


	September 30
	2022		2021
	(in millions of dollars)
Policy and Contract Benefits	$	1,771.4	$	1,920.4
Reserves for Future Policy and Contract Benefits	42,108.7		48,475.7
Total	43,880.1		50,396.1
Less:
Life Reserves for Future Policy and Contract Benefits	8,489.8		8,465.8
Accident and Health Active Life Reserves	13,355.2		13,016.9
Adjustment Related to Unrealized Investment Gains and Losses	(764.3)		5,143.9
Liability for Unpaid Claims and Claim Adjustment Expenses	$	22,799.4	$	23,769.5

The adjustment related to unrealized investment gains and losses reflects the changes that would be necessary to policyholder liabilities if the unrealized investment gains and losses related to the corresponding available-for-sale securities had been realized. Changes in this adjustment are reported as a component of other comprehensive income (loss).