DEFINITION of 'Unallocated Loss Adjustment Expenses (ULAE)'

Expenses that are not attributed to the processing of a specific insurance claim. Unallocated loss adjustment expenses, or ULAE, are part of an insurer’s expense reserves. It is one of the largest expenses that an insurer has to set aside funds for, behind allocated loss adjustment expenses and contingent commissions.

Unallocated loss adjustment expenses, along with allocated loss adjustment expenses, represent an insurer's estimate of the money it will pay out in claims, as well as expenses associated with processing those claims.

BREAKING DOWN 'Unallocated Loss Adjustment Expenses (ULAE)'

Allocated loss adjustment expenses, or ALAE, are those that are linked directly to the processing of a specific claim. Insurers that use third parties to investigate the veracity of claims or to act as loss adjusters may include this expense in its allocated loss adjustment expenses. Expenses associated with ULAE are more general, and may include overhead, investigations, and salaries.The most common unallocated loss adjustment expenses are for operations and field adjusters.

Because unallocated loss adjustment expenses are not allocated they do not apply to a specific claim, and thus are not associated with a specific loss date or report date. This can make calculations tricky. There are several methods available for calculating ULAE. The transaction-based method allocates costs to each claim transaction using an average cost for each type of transaction. This is the most accurate method, but is also the most difficult to calculate. Another method is to use a percentage of an average year’s ULAE that is paid out. This method does not account for growth or changes to how often claims are made. Insurers may also use a ratio of the amount of paid ULAE to paid losses, calculated from several years of data. This method does not include inflation adjustments.

Analysts can tell how accurate an insurance company has been at estimating its reserves by examining its loss reserve development. Loss reserve development involves an insurer adjusting estimates to its loss and loss-adjustment expense reserves over a period of time.

  1. Allocated Loss Adjustment Expenses ...

    Part of an insurer’s expense reserves that is attributed to the ...
  2. Loss Adjustment Expense (LAE)

    The expenses associated with investigating and settling insurance ...
  3. Loss Reserve

    An estimate of an insurer’s liability from future claims. Loss ...
  4. Adjuster

    An insurance claims agent. A claims adjuster is charged with ...
  5. Expected Loss Ratio (ELR) Method

    A technique used to determine the projected amount of claims ...
  6. Calendar Year Accounting Incurred ...

    Calendar year accounting incurred losses is a term used in the ...
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