Two Alternative Methods for Calculating the Unallocated Loss Adjustment Expense Reserve

The unallocated loss adjustment expense (ULAE) reserve has traditionally been estimated by the paid-to-paid method (PTP), which compares paid calendar year claims department expenses to paid calendar year losses and then applies the resulting ratio to claims reserves. More recently, Wendy A. Johnson proposed a method that compares paid calendar year claims department expenses to a weighted average of claim counts, and applies this ratio to the number of claims still to be settled. This paper will explore the shortcomings of these two methods, and will offer two alternative methods which attempt to address some of these shortcomings. The first alternative method uses expected paid loss in place of actual paid loss as the projection base in the PTP method. The second is claim count based like the Johnson method, but reflects the changes in average ULAE costs per claim per calendar year, as the portfolio of claims is run off. The second method does so by projecting future calendar year claim staff levels and average ULAE per claim staff member.