Estimation of Adjusting and Other Expense Reserves Utilizing Limited Historical Claim Report, Payment, and Closing Transaction Patterns

The estimation of adjusting and other expense (AOE) reserves can be constrained by the availability of historical AOE payment data, lack of uniformity of data, and lack of consensus of what AOE represents. Adjusting and other expenses are incurred when claims are first reported and opened, throughout the life of the claims when partial payments and revisions are made, and finally when claims are closed and final payments are issued by the insurer. Our paper will present a variation of the count-based methodology whereby we utilize the limited data presented to us by an insurer to estimate AOE reserves. This paper will attempt to describe how one can use historical reporting, payment (including partial payment), and closing patterns to estimate AOE reserves associated with IBNR counts and future payments on open claims. Assumptions are also made with respect to the average cost of each AOE per claim payment throughout the life of a claim using current AOE payment information and the number of claim payment and closing transactions. The cost of each transaction is developed using historical calendar year AOE amounts, and assumptions of the relative cost of each transaction type.

Keywords: Unallocated loss adjustment expense reserves, adjusting and other expense reserves