1. 1998 Casualty Loss Reserve Seminar
Allocated Loss Adjustment Expense Reserves
Stacy Mina
September 29, 1998

2. Purpose of This Section
What is ALAE? / What is ULAE?
Analysis Options for ALAE
Considerations
Methods

3. What is ALAE? Allocated Loss Adjustment Expense
Old Definition: Those expenses which can be linked directly to a specific claim
Defense costs
Surveillance costs
Medical exams
Expert witness expense
New Definition: Those expenses where “claim defense services” have been rendered
Expenses as listed above
Medical cost containment expenses
Audit expenses of law firm billings
Expenses for voluntary & involuntary pools if reported by accident year

4. What is ULAE? Unallocated Loss Adjustment Expense
Old Definition: Those expenses which cannot be directly linked to a specific claim
Claims department salary & overhead
Audit expenses of law firm billings
New Definition: Those expenses associated with adjusting and recording policy claims
Attorney fees if incurred in determination of coverage or if attorney acts in capacity of an adjuster
Expenses for voluntary & involuntary pools if reported by calendar year

5. Analysis Options Estimate ALAE Reserves Separately
Estimate ALAE Reserves Separately for Claims that Close with Indemnity Payments and Claims that Close without Indemnity Payments
Estimate ALAE Reserves with Loss Reserves
Estimate ALAE Reserves with ULAE Reserves

6. Considerations Are Losses and ALAE Complimentary?
Do Additional ALAE Payments Reduce Losses?
Has There Been a Shift between ALAE and ULAE?
Are Case Reserves Established?
Has There Been a Change in How ALAE is Paid? (e.g. periodic versus lump sum payments to the attorneys)

7. Considerations (cont.)
Has There Been a Change in Defense Philosophy? (e.g. more settlements on minor claims)
How is ALAE Treated by Reinsurance?
Have There Been Any Law Changes Affecting an Insurer’s “Duty to Defend”?

8. Methods Standard Loss Methods Development Method
Counts and Average Method
Exposure Based Method
Bornhuetter-Ferguson Method
ALAE Specific Methods
Paid-to-Paid Development Method
Unpaid-to-Unpaid Method
Incremental Paid-to-Paid ALAE Method

10. Methods
Development
Method

13. Methods
Counts
and
Average Method

17. Methods
Exposure
Based
Method

19. Methods
Bornhuetter-
Ferguson
Method

22. Methods
Paid-to-Paid
Development
Method

25. Methods
Unpaid-to-Unpaid
Method

29. Methods
Incremental
Paid-to-Paid
ALAE Method