1. Many companies will face no significant impact from this redefinition.
The principal changes in the redefinition are the coding of independent adjusters to ULAE (from ALAE) and the coding of in-house legal counsel (staff counsel) to ALAE (from ULAE).
a. Independent adjusters are generally used for property lines. The tail on these lines is small enough that loss development issues are relatively minor. In addition, analysis of these lines using internal data commonly groups ALAE and ULAE together, due to the short tail and relatively minor impact of legal fees. The only possible distortion is for multi-peril lines such as Homeowners and CMP, but the impact should mostly be in the first year of development, if noticable.
b. in-house legal counsel is used by some companies for liability lines. There will be some distortion to ALAE patterns for these companies, but only if they were coding these costs to ULAE in the past. The ISO stat plans for liability lines generally required these expenses to be coded as ALAE, so companies using the ISO stat plan definitions for their financial reporting may see no change what-so-ever from the "new" ALAE/ULAE definitions. The principal companies impacted will probably be those big enough to have staff counsel, and not using ISO stat plans (such as those using the NAII stat plan instead, which defined staff counsel as ULAE).
Therefore only a select group of companies will see any material impact from this change (probably concentrated in those not using the ISO stat plans).
2. Some companies were using separate subsidiaries for their claim services, or were using outside vendors, resulting in almost all of their LAE costs being coded to ALAE (and negligible ULAE). These companies might have noticable changes in their Schedule P patterns, but then these companies are probably using internal data for their reserve analysis. You might say that outsiders will now face greater problems in analyzing these companies than before, but how good could the prior analysis have been based only on Schedule P?
3. Canned competitive analysis programs that used industry development to help forecast individual company reserve positions were distorted in the past, due to the inconsistent ALAE/ULAE reporting mentioned above. Therefore the proposed ALAE/ULAE definition change will affect the data, but it should make it much cleaner than in the past. As a result, the net impact will be an improvement rather than a hurt to the use of this technique (although users may have to wait a year or two for the benefit to be apparent).
Due to the continual questions and comments on this topic, I would be curious to hear of other people's reactions. How many people think this will impact their work? To a minor extent (barely material)? To a major extent? Also, what do others see as the major items impacted, besides independent adjusters and staff counsel?
From: <GregGrace@aol.com>
To: casnet@lists.casact.org
Subject: ALAE/ULAE redefinition
I've been expecting to see something on recommendations for how to handle the
reserving problems caused by the redefinitions of ALAE and ULAE beginning this
year. I haven't seen anything, but maybe I just missed it - if so, tell me
where it was.
As I see it, there is no good way to deal with this using published financial
information. I expect the new ALAE will be longer tailed than the old ALAE
and thus the historical development available from schedule P will be
unusable. Since historically ULAE was put into schedule P on a formula basis
(which, incidentally, changed last year) it makes no sense to me to combine
these amounts and do a single LAE projection. This would erroneously assume
there was some correct assignment of past ULAE payments to accident year and
development period.
I've recommended that companies try to keep track of the amounts shifted
between the two categories so that the experience could be restated the old
way until sufficient data are available to do projections using the new
definitions, but I doubt many will be willing or able to do this.
I also expect many companies have elected to do this on a calendar year basis,
thus further complicating everything.
Are there any good suggestions?
Greg Grace
Visit the CAS Web Site at http://www.casact.org
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