What Are Unallocated Loss Adjustment Expenses (ULAE)?
Unallocated loss adjustment expenses (ULAE) are costs incurred by an insurance company that cannot be attributed to the processing of a specific claim. They are among the expenses for which an insurer has to set aside reserve funds, in addition to allocated loss adjustment expenses and contingent commissions.
- Unallocated loss adjustment expenses are business costs that the insurer cannot attribute to a specific claim.
- Allocated loss adjustment expenses are directly attributable to a specific claim.
- Insurers maintain reserve funds to manage both types of expenses.
Unallocated loss adjustment expenses combined with allocated loss adjustment expenses represent an insurer's estimate of the money it will pay out in claims in addition to the expenses associated with processing the claims.
Allocated loss adjustment expenses (ALAE) are expenses 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.
ULAE expenses are more general and may include overhead and salaries. The most common expenses fall into the categories of operations and field adjusters.
Because unallocated loss adjustment expenses do not apply to a specific claim, there's no loss date or report date for them. This makes calculations tricky. Any of several methods are 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 it is also the most difficult to calculate.
- Another method is to use a percentage of an average year’s ULAE paid out. This method does not account for growth or changes to how often claims are made.
- Some insurers add a ratio of the amount of paid ULAE to paid losses, calculated from a certain number of years of data. This method does not include inflation adjustments.
Liability policies may contain a clause that allows the insurer to charge the client for some unallocated loss adjustment expenses.
The process of loss reserve development requires the insurer to adjust estimates to its loss and loss-adjustment expense reserves over a period of time. Analysts can determine how accurate an insurance company has been at estimating its reserves by examining its loss reserve development.
Reimbursement for ULAE
Some liability policies contain a clause, called an endorsement, that requires the policyholder to reimburse the insurance company for unallocated or allocated loss adjustment expenses. These expenses may include fees charged by attorneys, investigators, experts, arbitrators, mediators, and other costs incidental to adjusting a claim.
It is important to carefully read the endorsement language, which may say that a loss adjustment expense is not intended to include the policyholder’s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer.
In this situation, the insurance company has done no actual adjusting of the claim, and should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim denied by the insurance company.