Using Claim Department Work Measurement Systems to Determine Claim Adjustment Expemse Reserves

This paper discusses a methodology for establishing reserves for the portion of loss adjustment expense associated with the cost of claim adjusters. The actuarial literature contains very little material on how to estimate unallocated loss adjustment expense (ULAE) reserves. The literature briefly mentions “transactionbased” methods that require claim department time studies. However, many feel that the improvement in estimating ULAE reserves does not justify the high cost of performing such a study. Fortunately, most claim departments of major insurance carriers and third party administrators now utilize sophisticated automated work measurement tools that may capture the type of data that can be used to perform an automated time study. The first section describes a process that can be used to perform the work-study, including a discussion of the technical and practical issues in conducting such a study. The second section shows how the results of the study can be utilized to determine claim adjuster expense reserves. Other potential applications of the claim standards will be discussed, including pricing unbundled claim service, allocating claim department expense to line of business for statutory and management reporting purposes, and monitoring claim department expenses. Changes in the NAIC definition of loss adjustment expense are also discussed in the paper.