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

This paper will discuss a methodology for establishing reserves for the portion of loss adjustment expense associated with the cost of claim adjusters. These costs are a substantial component of the expenses traditionally defined as unallocated loss adjustment expense (ULAE). The actuarial literature contains very little material on how to estimate ULAE reserves. The most common methods are variations on the calendar year paid-to-paid methodology. The literature briefly mentions "transaction-based" methods that require claim department time studies. However, these methods are dismissed as too complex to perform. Fortunately, it is no longer necessary to sit with a stopwatch at a claims adjuster's desk to perform a time study. Most claim departments of major insurance carriers and third party administrators now utilize sophisticated automated work measurement tools. Many of these automated systems capture the type of data that can be used to perform an automated time study. In her paper entitled, "A Methodology for Pricing and Reserving for Claim Expenses in Workers Compensation", Kay Rahardjo described the application of claim department workload standards in determining the indicated ULAE reserve for Workers' Compensation claims. This paper will describe in detail how these claim standards can be developed using claim department automated work measurement tools. The first section will describe a process that can be used to perform the work-study. The paper will include a discussion of the technical and practical issues in conducting such a study. The second section will show 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. Recent changes in the NAIC definition of loss adjustment expense are also discussed in the paper.