Why do we need ULAE reserves?

[General Apathy]

It seems to me that ULAE reserves are useful in two circumstances:

1) If a company is sold, merged, LPTd, moved, etc...
2) If a company becomes insolvent.

In the case of #1, the increased cost due to claims handling/claims function can easily be factored into the deal for the purchasing entity.

In the case of #2, there should only be a reserve if there is a material chance of insolvency. A company with $5M of reserves and $100M of equity doesn't need a precautionary cushion of ULAE. Maybe the full ULAE reserve could be multiplied by the chance of ruin which might be 1% in this case and likely below any materiality threshold.

Amirite?

[MountainHawk]

The reserve is meant to set aside funds that will be sufficient to meet all obligations of the company already entered into via contract. Loss and LAE reserves are for claims that have been incurred already, and UEPR is for future obligations not yet incurred.

Since the company will have to spend the money to close and investigate the claims, the ULAE reserves are appropriate.

[Avi]

Originally Posted by MountainHawk

Since the company will have to spend the money to close and investigate the claims, the ULAE reserves are appropriate.

Some of those expenses may actually be included in ALAE/DCC. If I remember correctly, ULAE is the expected cost of handling incurred claims which are not directly attributable to particular claims, e.g. general overhead for the claims staff (salaries, utility costs, costs associated with overhead for data warehouses, etc.)

[MountainHawk]

Originally Posted by Avi

Some of those expenses may actually be included in ALAE/DCC. If I remember correctly, ULAE is the expected cost of handling incurred claims which are not directly attributable to particular claims, e.g. general overhead for the claims staff (salaries, utility costs, costs associated with overhead for data warehouses, etc.)

Well, ULAE is like 15 years out of date terminology as well. The new term is adjusting and other expenses, and it is based on the type of expense, not if it can be assigned to a claim.

[JasonScandopolous]

Originally Posted by MountainHawk

Well, ULAE is like 15 years out of date terminology as well. The new term is adjusting and other expenses, and it is based on the type of expense, not if it can be assigned to a claim.

Right, we now have Defense and Cost Containment to go along with Adjusting and Other. An example of an unallocated cost that is D&CC (not A&O) would be the salary/expenses of an in-house group that reviews medical bills for fraud or litigation, or, non-specific costs of hiring or retaining a lawyer or law firm for claims court battles.

To GA: your logic is correct... but, it equally applies to loss reserves as well. We don't need those either if we assume that the company will be solvent. Unfortunately, knowing whether we are solvent or not depends on the sum of loss reserves, A&O reserve, etc, and so we can't make a determination of solvency without calculating said reserves.

[jerrytuttle]

I think we need them to match future payments against the premium that generated the obligations for these payments. Ideally we would set an adequate reserve in the same year that we earn the premium.

Do other industries have similar reserves? For example, if my car dealer offers three years of free warranty work, does that dealer set a reserve for the future cost of that labor and parts, as a deduction from the revenue for the purchase?

[Vorian Atreides]

If a company decides to exit the market for a particular line (consider when State Farm began the process of exiting the Florida homeowner market as an example), it would need such a reserve since it'll have claim settlement activities without any offsetting new premium to pay for such services.

Since Statutory Accounting Principles consider the situation of a company's ability to pay it's claims in the event that it stops all operations (not necessarily as the result of insolvency), a company might very well calculate such a reserve.