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.

RELATED TERMS
  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 ...
Related Articles
  1. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  2. Investing

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  3. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  4. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  5. Trading

    Trading With The Jobless Claims Report

    Introduction to the jobless claims report. This article looks at what jobless claims tell us about the economy's health and how to interpret the data contained in the release.
  6. Tech

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  7. Insurance

    Deducting Disaster: Casualty And Theft Losses

    If you've been a victim, your losses may be deductible. Find out how.
RELATED FAQS
  1. What is the expense ratio in the insurance industry?

    Learn about the expense ratio for insurance companies and the different methods of calculating it. The expense ratio is a ... Read Answer >>
  2. What are the differences between gains & losses and revenue & expenses?

    Learn how to distinguish between gains, losses, revenues and expenses. Take a look at how accountants record each category ... Read Answer >>
  3. What is the difference between an operational expense and an administrative expense?

    An operating expense covers the production and marketing of products and services, whereas an administrative expense covers ... Read Answer >>
  4. What is the main business model for insurance companies?

    Read about the most important components of an insurance company business model, such as risk pricing, float investing and ... Read Answer >>
  5. What is the average return on total revenue for the insurance sector?

    Learn about the three main segments of the insurance industry, and find out what the average return on revenues is for the ... Read Answer >>
  6. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center