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1998 Casualty Loss Reserve Seminar
Allocated Loss Adjustment Expense Reserves
Stacy Mina
September 29, 1998
Purpose of This Section
 What is ALAE? / What is ULAE?
 Analysis Options for ALAE
 Considerations
 Methods
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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
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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
 Claims department salary & overhead
 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
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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
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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)
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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”?
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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
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Methods
Development
Method
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Methods
Counts
and
Average Method
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Methods
Exposure
Based
Method
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Methods
BornhuetterFerguson
Method
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Methods
Paid-to-Paid
Development
Method
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Methods
Unpaid-to-Unpaid
Method
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Methods
Incremental
Paid-to-Paid
ALAE Method
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