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What Are Unallocated Loss Adjustment Expenses (ULAE)?
Unallocated loss adjustment expenses (ULAE) are costs incurred by an insurance company that cannot be attributed to the processing of a specific claim. They are among the expenses for which an insurer has to set aside reserve funds, in addition to allocated loss adjustment expenses and contingent commissions.
Key Takeaways
- Unallocated loss adjustment expenses are business costs that the insurer cannot attribute to a specific claim.
- Allocated loss adjustment expenses are directly attributable to a specific claim.
- Insurers maintain reserve funds to manage both types of expenses.
Understanding ULAE
Allocated loss adjustment expenses (ALAE) are expenses linked directly to the processing of a specific claim. Insurers that use third parties to investigate the veracity of claims or to act as loss adjusters may include this expense in its allocated loss adjustment expenses. ULAE expenses are more general and may include overhead and salaries. The most common expenses fall into the categories of operations and field adjusters.Calculating ULAE
Because unallocated loss adjustment expenses do not apply to a specific claim, there's no loss date or report date for them. This makes calculations tricky. Any of several methods are available for calculating ULAE:- The transaction-based method allocates costs to each claim transaction, using an average cost for each type of transaction. This is the most accurate method, but it is also the most difficult to calculate.
- Another method is to use a percentage of an average year’s ULAE paid out. This method does not account for growth or changes to how often claims are made.
- Some insurers add a ratio of the amount of paid ULAE to paid losses, calculated from a certain number of years of data. This method does not include inflation adjustments.
Liability policies may contain a clause that allows the insurer to charge the client for some unallocated loss adjustment expenses.
The process of loss reserve development requires the insurer to adjust estimates to its loss and loss-adjustment expense reserves over a period of time. Analysts can determine how accurate an insurance company has been at estimating its reserves by examining its loss reserve development.