There is another side to the ULAE / ALAE discussion that may be of
interest.
The change that has been discussed to date relates to annual statement
accounting. At the NAIC, that topic was debated for a long time and an
action has been taken and implemented. As the posts on this thread have
already indicated, it may take a few years before things get sorted
out. I think that it is hard to argue that things won't be better once
the transition is complete. The argument could be whether it is worth
the transition cost to achieve what may be a relatively small level of
improvement. But that argument is over with - the transition costs are
being incurred and it would certainly make no sense to go backwards.
The debate (a low key, low profile discussion, really) now going on
at the NAIC is whether to change statistical reporting requirements
regarding two items:
(1) Whether to mandate that outside adjusting expense be ULAE. (Right
now, there is no "generally accepted" regulatory stance on this.)
A poll of private passenger insurers indicated that about half were
reporting it one way, while the other half was reporting it the other
way. In my mind, this should be the easy call because it should be
relatively cheap for insurers to stop reporting something that they
are already reporting. This would make statistical reporting
consistent with financial reporting, which is nice for several
different reasons.
(2) The tougher call is what to do with in-house counsel used for
defense work. Some insurers (as Ralph Blanchard noted, probably those
reporting to ISO) keep track of this on a transaction basis already.
For them, the statement reporting change is not a problem and they
report stat data consistent with financial data. But what about other
insurers? The feedback that I seem to get is that other insurers, in
spite of statement reporting requirements, are still not keeping track
of in-house legal expenses on a transactional basis. In other words,
for financial reporting, they will take the total of all in-house legal
defense costs and divvy it up to the various years and states necessary
for financial reporting, but they don't have it in their systems to
report for statistical purposes. If someone knows that to be incorrect,
then I'd like to know.
I see no easy decision here. If we told insurers to NOT report this as
ALAE for stat purposes, then we'd be inconsistent with financial
reporting. Also, while it might be a relatively cheap way to at least
achieve consistency between insurers for stat reporting, it would be
like having everyone be incorrect instead of having some insurers be
correct and some be incorrect. If we told all insurers to report this
as ALAE for stat purposes, then I fear that we'd be causing expenses
disproportionate to the good we were doing IF, in fact, what I had heard
before was true that insurers were not changing their systems to keep track
of these expenses on a transactional basis. I suspect that the NAIC's
course of action may be to draft requirements that all insurers that keep
track of this transactionally to report it as ALAE. For others, the draft
would state that ALAE reporting is the preferred method and that it would
rather see them shift, but to stop short of making it a requirement.
As an active participant in this NAIC process, I would appreciate any
wisdom that my fellow actuaries care to share with me. Thank you.
Alan Wickman, ACAS
Administrator, Actuarial Division
Nebraska Department of Insurance Fax: (402) 471-6559
941 "O" Street, Suite 400 Phone: (402) 471-4646
Lincoln, NE 68508 Internet: ins1008@vmhost.cdp.state.ne.us
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