Unallocated Adjusting and other expense

[3.14]

Originally Posted by silverfox

You worry when people ask questions.

That wasn't what I said, but okay.

[Pacific Heights]

Originally Posted by MountainHawk

This. Your AOE/ULAE reserve must be an estimate to handle all open and incurred by unreported claims, regardless of any prepayments.

Interesting.

So say the TPA has a flat fee of $500 for handling a claim.

There are 10 open claims and 5 estimated IBNR claims.

The TPA has been paid $5000 for the reported claims.

So the ULAE reserve would be $2500 for the IBNR claims and some estimate of the remaining work on the open claims. Maybe assume 50% so another 2500?

Something like that?

[MountainHawk]

Originally Posted by Pacific Heights

Interesting.

So say the TPA has a flat fee of $500 for handling a claim.

There are 10 open claims and 5 estimated IBNR claims.

The TPA has been paid $5000 for the reported claims.

So the ULAE reserve would be $2500 for the IBNR claims and some estimate of the remaining work on the open claims. Maybe assume 50% so another 2500?

Something like that?

Here is how I think of it:


1) I still owe the TPA $2500. Estimate 1 = $2500.

2) There are 10 open claims and 5 unreported claims left. If the TPA vanished tomorrow, it would cost us $200/claim to close the open claims and $400/claim to open and close the unreported claims left. (These are lower than the TPA costs, presumably the TPA costs include profit).

Estimate 2 = 10 * 200 + 5 * 400 = $4000


Final Estimate = Max (Estimate 1, Estimate 2) = $4000.

[silverfox]

Based on what I've heard from ex-Kempers, whatever method you use to project ULAE reserves probably isn't enough to cover all future ULAE if the company stops writing business.

[Mary Frances]

Originally Posted by MountainHawk

Here is how I think of it:


1) I still owe the TPA $2500. Estimate 1 = $2500.

2) There are 10 open claims and 5 unreported claims left. If the TPA vanished tomorrow, it would cost us $200/claim to close the open claims and $400/claim to open and close the unreported claims left. (These are lower than the TPA costs, presumably the TPA costs include profit).

Estimate 2 = 10 * 200 + 5 * 400 = $4000


Final Estimate = Max (Estimate 1, Estimate 2) = $4000.

I don't think we ever assume that we could run off the IBNR for less than the current contract price. Especially in a shut-down situation, not likely to find a bargain contract. So I'd get 10 * 200 + 5 * 500 = $4,500. That is, assuming that $200 is really the average cost to take over and close the 10 open claims. My guess is that it's probably more than 40% of the cost of a new claim.

[MountainHawk]

Originally Posted by Mary Frances

I don't think we ever assume that we could run off the IBNR for less than the current contract price. Especially in a shut-down situation, not likely to find a bargain contract. So I'd get 10 * 200 + 5 * 500 = $4,500. That is, assuming that $200 is really the average cost to take over and close the 10 open claims. My guess is that it's probably more than 40% of the cost of a new claim.

I was told by an auditor that we shouldn't do a ULAE model on a runoff assumption. It's the cost for a going concern to runoff the current business.

[Mary Frances]

Originally Posted by MountainHawk

I was told by an auditor that we shouldn't do a ULAE model on a runoff assumption. It's the cost for a going concern to runoff the current business.

Good point. I tend to assume the worst unless I've got a pretty recent quote to take over the claims (sometimes we've got that).

[Pacific Heights]

Thanks guys