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Old 01-27-2006, 12:41 PM
Gay Actuary Gay Actuary is offline
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Default ALAE vs. ULAE

I'm a relative newbie in the actuarial field, and I still have trouble distinguishing between the both of these. Could someone give me an explanation on what the difference between Allocated Loss Adjustment Expense and Unallocated Loss Adjustment Expense is, and how both are distinguished when pricing? Thanks!

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Old 01-27-2006, 12:43 PM
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The example I was always given was that ALAE were expenses that could be tied to a specific claim, like an appraisal or lawyer's fees... whereas ULAE were general expenses that weren't for a particular claim, like electricity for the entire claims office.
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Old 01-27-2006, 01:31 PM
joeorez joeorez is offline
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Default Lost?

Quote:
Originally Posted by Gay Actuary
... Could someone give me an explanation on what the difference between Allocated Lost Adjustment Expense and Unallocated Lost Adjustment Expense is... Thanks!
First, it is Loss, not Lost. Not related to the television show.

Second, like many things in our wonderful world of actuarial work, this is a more involved question than it sounds. One major item of contention is classifying independent adjusters' fees, and comparing companies that use such adjusters versus companies who don't.

Let's abbreviate the two expenses as ALAE and ULAE.

1. If you are gathering data from your company systems to use in pricing, ALAE and ULAE are whatever your company data dictionary says they are.

2. If you are using industry data from ISO or NCCI, ALAE and ULAE are supposed to be what the ISO Statistical Plan and the NCCI Statistical Plan say they are. Try to find those Stat Plan sources. Of course this assumes companies report their data to those organizations using the definitions in those statistical plans. Even so, note that ISO and NCCI do not use identical definitions.

3. If you are gathering data from your statutory annual statement, that source uses the terms Defense and Cost Containment (DCC) and Adjusting and Other (AAO). Those terms are similar to ALAE and ULAE, but not identical. They are also different than the ISO and NCCI definitions.

4. If you are gathering data from the loss reserving area of the company, that area may be either using any of the three items above, or something still different.

5. For completeness, I should add that reinsurance treaty definitions of ALAE and ULAE may also be different than any of the above.

So companies should be keeping separate sets of books for ISO, NCCI, statutory annual statements, and reinsurance treaties, right? I suspect in practice, they simply rely on item 1 above.

Why do we care anyway? For pricing, we may want to include ALAE in with the losses by class and territory, so that class and territory get a fair share of ALAE; we may be willing to assume ULAE is a fixed percentage not varying by class and territory.
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Old 01-27-2006, 01:33 PM
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Of course, the terms ALAE and ULAE are out of date now, though you still see them quite a bit. In the annual statement, the split is now between "Defense and Cost Containment Payments" and "Adjusting and Other Payments". As I understand it, the main reason for the change was that it was too inconsistent between companies whether adjusting expenses were allocated or not (external adjusters were allocated, internal adjusting staff might or might not be . . . . )
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Old 01-27-2006, 01:39 PM
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Thank you, much help!
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Old 01-27-2006, 01:47 PM
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Their treatment is quite different when reserving and pricing.

Since ALAE is attributable to specific claims, we can create loss development triangles as we do with loss (or even use combined loss and ALAE triangles).

For ULAE, we only have calendar year data (electric bills, staff salaries, etc). What can be done is to figure out how these expenses can be doled out amongst years. This is addressed on the CAS 6 syllabus to a reasonable extent. You might look at the Johnson and Kittel papers for example.
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Old 01-29-2006, 12:19 PM
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Quote:
Originally Posted by joeorez
. . .So companies should be keeping separate sets of books for ISO, NCCI, statutory annual statements, and reinsurance treaties, right? I suspect in practice, they simply rely on item 1 above. . .
Great post. One nit to pick. Companies don't need to keep separate sets of books on these items if they classify expenses at a low enough level to move the disparate bits around. That is, if I keep track of the stuff that is ALAE for my reinsurance contracts, but isn't true DCC as its own payment code (or codes) it's no big deal to roll up the numbers whichever way I need to.

Many larger companies do this. Smaller ones or ones that get a lot of their data from third parties (TPAs, etc.) may just fall back on your definition (1).
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