Humana 2014 Annual Report Download - page 132

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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our existing future policy benefits payable, together with the present value of future gross premiums, associated with
our closed block of long-term care insurance policies were not adequate to provide for future policy benefits and
maintenance costs under these policies; therefore we unlocked and modified our assumptions based on current
expectations. Accordingly, during 2013 we recorded $243 million of additional benefits expense, with a corresponding
increase in future policy benefits payable of $350 million partially offset by a related reinsurance recoverable of $107
million included in other long-term assets.
During 2012, we recorded a change in estimate associated with future policy benefits payable for our closed-block
of long-term care insurance policies resulting in additional benefits expense of $29 million. This change in estimate
was based on current claim experience demonstrating an increase in the length of the time policyholders already in
payment status remained in such status. Future policy benefits payable was increased to cover future payments to
policyholders currently in payment status.
Deferred acquisition costs included $59 million and $66 million associated with our individual commercial medical
policies at December 31, 2014 and December 31, 2013, respectively. Future policy benefits payable associated with
our individual commercial medical policies were $297 million at December 31, 2014 and $327 million at December 31,
2013.
19. REINSURANCE
Certain blocks of insurance assumed in acquisitions, primarily life, long-term care, and annuities in run-off status,
are subject to reinsurance where some or all of the underwriting risk related to these policies has been ceded to a third
party. In addition, a large portion of our reinsurance takes the form of 100% coinsurance agreements where, in addition
to all of the underwriting risk, all administrative responsibilities, including premium collections and claim payment,
have also been ceded to a third party. We acquired these policies and related reinsurance agreements with the purchase
of stock of companies in which the policies were originally written. We acquired these companies for business reasons
unrelated to these particular policies, including the companies’ other products and licenses necessary to fulfill strategic
plans.
A reinsurance agreement between two entities transfers the underwriting risk of policyholder liabilities to a reinsurer
while the primary insurer retains the contractual relationship with the ultimate insured. As such, these reinsurance
agreements do not completely relieve us of our potential liability to the ultimate insured. However, given the transfer
of underwriting risk, our potential liability is limited to the credit exposure which exists should the reinsurer be unable
to meet its obligations assumed under these reinsurance agreements.
Reinsurance recoverables represent the portion of future policy benefits payable and benefits payable that are
covered by reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the methods
used to determine future policy benefits payable as detailed in Note 2. Excluding reinsurance associated with the Health
Care Reform Law discussed in Note 2, reinsurance recoverables, included in other current and long-term assets, were
$646 million at December 31, 2014 and $578 million at December 31, 2013. The percentage of these reinsurance
recoverables resulting from 100% coinsurance agreements was approximately 45% at December 31, 2014 and
approximately 37% at December 31, 2013. Premiums ceded were $357 million in 2014, $33 million in 2013 and $34
million in 2012. Benefits ceded were $272 million in 2014, $70 million in 2013, and $86 million in 2012. Ceded
premium and benefits in 2014 reflect a July 1, 2014 amendment ceding all risk under a Medicaid contract to a third
party reinsurer.