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 (ULAE). The only method mentioned in the literature is the calendar year paid-paid method, and upon reflection it is apparent that this method will only give good results for very short-tailed, stable lines of business. This paper presents a conceptual approach to estimating ULAE liabilities which is significantly more flexible, based directly on claim reporting and closure patterns, and which allows one to take into direct consideration changes in claim department operating cost levels. The paper describes the approach using an example from medical malpractice insurance, and discusses and evaluates the sensitivity of the results to specific factors in the claim settlement environment.