Determination of Outstanding Liabilities for Unallocated Loss Adjustment Expenses

Little has been published to date on the determination of outstanding liabilities for unallocated loss adjustment expenses. The only method mentioned in the literature is the calendar year paid-paid method, and upon analysis it is apparent that this method will only give good results for very short-tailed, stable lines of business. This paper presents an estimation method which is significantly more flexible, based directly on claim reporting and closure patterns, and which takes into direct consideration changes in claim department operating cost levels. The paper describes the method using an example from medical malpractice insurance, and discusses and evaluates the sensitivity of the results to specific factors in the claim settlement environment.