Revised NAIC ALAE and ULAE Definitions (or DCC and A&O > 1/1/98) A Non-Actuarial Perspective

Revised NAIC ALAE and ULAE Definitions (or DCC and A&O > 1/1/98)

A Non-Actuarial Perspective

Revised NAIC ALAE and ULAE Definitions (or DCC and A&O > 1/1/98)

A Non-Actuarial Perspectiveby

Richard Carris, CPCU, CIPA, CLU, CFE, APA, AIC, ARM

Casualty Actuarial SocietyMeeting:Meeting: Casualty Loss Reserve SeminarCasualty Loss Reserve Seminar

Session:Session: NAIC Redefinitions ofNAIC Redefinitions ofLoss Adjustment ExpenseLoss Adjustment Expense

Venue:Venue: Arlington, VAArlington, VA

Date:Date: September 24, 2002September 24, 2002

Time:Time: 12:30 PM to 2:00 PM12:30 PM to 2:00 PM

Contact:Contact: [email protected] or [email protected] or

(212) 894-7747 (212) 894-7747

2

Keys on ALAE for the LAE PersonKeys on ALAE for the LAE Person

Traditional ALAE =

Allocated Loss Adjustment Expense =

Allocated Loss Expense (in Sch P) =

New or Revised ALAE =

Defense and Cost Containment (“DCC”) =

(in name only but not components)

Traditional ALAE =

Allocated Loss Adjustment Expense =

Allocated Loss Expense (in Sch P) =

New or Revised ALAE =

Defense and Cost Containment (“DCC”) =


CAS = Claim Adjustment Services (Interim Period)

Whereby CAS = Defense, Litigation and Medical Cost containment Services <DCC but> Traditional ALAE. Used for Discussion Purposes by NAIC.

CAS = Claim Adjustment Services (Interim Period)

Whereby CAS = Defense, Litigation and Medical Cost containment Services <DCC but> Traditional ALAE. Used for Discussion Purposes by NAIC.

Trigger = 1/1/98

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Keys on ULAE for the LAE PersonKeys on ULAE for the LAE Person

Traditional ULAE =

Unallocated Loss Adjustment Expense =

Unallocated Loss Expense(in Sch P)

New or Revised ULAE =

Adjusting and Other (“A&O”)


Traditional ULAE =

Unallocated Loss Adjustment Expense =

Unallocated Loss Expense(in Sch P)

New or Revised ULAE =

Adjusting and Other (“A&O”)


Traditional LAE = ALAE + ULAE

New or Revised LAE = DCC + A&O

Traditional LAE = ALAE + ULAE

New or Revised LAE = DCC + A&O

Trigger = 1/1/98

4

Old NAIC Definitions of ALAE and ULAE

Old NAIC Definitions of ALAE and ULAE

Old ALAE - Allocate whatever can be allocated. (Expense identified with a specific claim)

Old ULAE - Everything else.

Old ALAE - Allocate whatever can be allocated. (Expense identified with a specific claim)

Old ULAE - Everything else.

Chapter 11 - Loss Adjustment Expenses of the Accounting Practices and Procedures Manual

Defense, litigation and medical cost containment not previously specified.Defense, litigation and medical cost containment not previously specified.

5

New ALAE (DCC)* (Sch P Columns 6 & 7

2001 Annual Statement)

New ALAE (DCC)* (Sch P Columns 6 & 7


Specifically, Allocated Loss Adjustment Expense (new ALAE) includes the following items:

Surveillance expenses;

Fixed amounts for medical cost containment expenses;

Litigation management expenses;

Specifically, Allocated Loss Adjustment Expense (new ALAE) includes the following items:

Surveillance expenses;

Fixed amounts for medical cost containment expenses;

Litigation management expenses;

Per NAIC 6/24/97 Draft

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New ALAE (DCC) (Sch P Columns 6 & 7 2001 Annual Statement)


Loss adjustment expenses for participation in voluntary and involuntary market pools if reported by accident year;

Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in defense of a claim, and fees or salaries for rehabilitation nurses, if such cost is not included in losses;

Loss adjustment expenses for participation in voluntary and involuntary market pools if reported by accident year;

Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in defense of a claim, and fees or salaries for rehabilitation nurses, if such cost is not included in losses;


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Attorney fees incurred owing to a duty to defend, even when other coverage does not exist; and

The cost of engaging experts.

The foregoing list is not intended to be all inclusive.

Attorney fees incurred owing to a duty to defend, even when other coverage does not exist; and

The cost of engaging experts.



8

New ULAE (A&O)* (Sch P Columns 8 & 9 2001 Annual Statement)

New ULAE (A&O)* (Sch P Columns 8 & 9 2001 Annual Statement)

Unallocated Loss Adjustment Expenses are those expenses other than allocated expenses. New ULAE includes the following items:

Fees of adjusters and settling agents;

Loss adjustment expenses for participation in voluntary and involuntary market pools if reported by calendar year;

*Effective 1/1/98

Unallocated Loss Adjustment Expenses are those expenses other than allocated expenses. New ULAE includes the following items:

Fees of adjusters and settling agents;

Loss adjustment expenses for participation in voluntary and involuntary market pools if reported by calendar year;

*Effective 1/1/98


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New ULAE (A&O) (Sch P Columns 8 & 9


New ULAE (A&O) (Sch P Columns 8 & 9


Attorney fees incurred in the determination of coverage, including litigation between the insurer and the policyholder; and

Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in the capacity of an adjuster.


Attorney fees incurred in the determination of coverage, including litigation between the insurer and the policyholder; and

Fees or salaries for appraisers, private investigators, hearing representatives, reinspectors and fraud investigators, if working in the capacity of an adjuster.



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Who Is An Adjuster? (For ULAE)Who Is An Adjuster? (For ULAE)

And although not defined, the term adjuster is broad enough to include claim examiners, claim investigators, claim representative, claim supervisors, appraisers, reinspectors and other titles that any one company may use. It is not really the title, but the claims adjusting function.

And although not defined, the term adjuster is broad enough to include claim examiners, claim investigators, claim representative, claim supervisors, appraisers, reinspectors and other titles that any one company may use. It is not really the title, but the claims adjusting function.

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ThemeTheme

It no longer matters whether an insurer uses its own employees or independent contractors. The concept of internal adjuster or external adjuster is gone.

It no longer matters whether an insurer uses its own employees or independent contractors. The concept of internal adjuster or external adjuster is gone.

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Exhibit I NAIC Change

Exhibit I NAIC Change

MAJOR EXPENSE OLD ALAE/ULAE NEW ALAE/ULAE METHOD METHOD <1998 > 1998

Inside Legal Counsel * ULAE or ALAE ALAEbut mostly ULAE +Overhead loading

Outside Adjusters and ALAE or ULAE ULAE

Appraisers but mostly ALAE

Insider Adjuster and ULAE or ALAE and Appraisers but mostly ULAE ULAE

* For Duty to Defend

_

(Cheat Sheet)

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Exhibit I NAIC Change (cont’d)

Exhibit I NAIC Change (cont’d)

Outside Experts ALAE or ULAE ALAEbut mostly ALAE

Inside Experts ULAE or ALAE ALAE

but mostly ULAE

Attorney Engaging in ALAE or ULAE ULAE Adjusting Work

MAJOR EXPENSE OLD ALAE/ULAE NEW ALAE/ULAE METHOD METHOD <1998 > 1998

(Cheat Sheet)

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Question and Answer Session with Richard Roth, JD, FCAS


1. Dick, what was the reason for the redefinition of LAE effective January 1, 1998?

2. Was this an industry motivated redefinition or one thought about by the CATF of the NAIC?

3. How many years prior to the implementation of the new LAE definitions was the CATF considering this redefinition?

4. How were the terms DCC and A&O (post 1/1/98) ultimately determined?

1. Dick, what was the reason for the redefinition of LAE effective January 1, 1998?

2. Was this an industry motivated redefinition or one thought about by the CATF of the NAIC?

3. How many years prior to the implementation of the new LAE definitions was the CATF considering this redefinition?

4. How were the terms DCC and A&O (post 1/1/98) ultimately determined?

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5. Besides space issues (22 characters formerly for Allocated Loss Expense and 24 characters formerly for Unallocated Loss Expense) in the annual statement blank heading of Sch P, what was the rational or constraints in selecting new terms?

6. What changes, if any, have there been in the actual implementation of the redefinition from the June 24, 1997 CATF draft on the topic?

5. Besides space issues (22 characters formerly for Allocated Loss Expense and 24 characters formerly for Unallocated Loss Expense) in the annual statement blank heading of Sch P, what was the rational or constraints in selecting new terms?

6. What changes, if any, have there been in the actual implementation of the redefinition from the June 24, 1997 CATF draft on the topic?

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7. Are you aware of methods insurers have employed to adjust to the change? If so, can you explain?

8. Are you aware of changes, if any, made by ISO and NCCI regarding their definition of ALAE (ALE prior to 1/1/98 and DCC thereafter)?

9. Can you say yet if this change is expense neutral? If not, how has the ALAE/LAE (DCC/DCC + A&O) ratio changed? Would this vary by company?

7. Are you aware of methods insurers have employed to adjust to the change? If so, can you explain?

8. Are you aware of changes, if any, made by ISO and NCCI regarding their definition of ALAE (ALE prior to 1/1/98 and DCC thereafter)?

9. Can you say yet if this change is expense neutral? If not, how has the ALAE/LAE (DCC/DCC + A&O) ratio changed? Would this vary by company?

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10.Do you think the NAIC change has achieved its objective?

11.Would you ever see the NAIC going back to the pre-January 1st 1998 definitions of LAE?

12.Did anyone study the cost to the insurance industry of implementation of DCC and A&O as compared with traditional ALAE and ULAE?

10.Do you think the NAIC change has achieved its objective?

11.Would you ever see the NAIC going back to the pre-January 1st 1998 definitions of LAE?

12.Did anyone study the cost to the insurance industry of implementation of DCC and A&O as compared with traditional ALAE and ULAE?

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13.Do you know what the NAIC is doing differently with the new data vs. the old data?

14.How is the NAIC monitoring implementation of compliance with DCC and A&O?

15.By the way, has the NAIC ever determined what is a settling agent? (Source: NAIC Draft June 24, 1997).

13.Do you know what the NAIC is doing differently with the new data vs. the old data?

14.How is the NAIC monitoring implementation of compliance with DCC and A&O?

15.By the way, has the NAIC ever determined what is a settling agent? (Source: NAIC Draft June 24, 1997).

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16.Have you learned of insurers or reserving actuaries that are pleased with the change?

17.Do you have any feedback that you would like to provide to the members in attendance at the CAS?

Thanks as always for your help on our favorite topic.

16.Have you learned of insurers or reserving actuaries that are pleased with the change?

17.Do you have any feedback that you would like to provide to the members in attendance at the CAS?

Thanks as always for your help on our favorite topic.

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Exhibit IIRevised Definition of ALAE and ULAE

Exhibit IIRevised Definition of ALAE and ULAE

Salaries of fraud investigators, private investigators, appraisers, hearing representatives and reinspectors.

Yes, if working in the capacity of an adjuster. No, if working in defense of a claim.

Yes, if working in defense of a claim. No, if working in the capacity of an adjuster.

Surveillance Expenses No Yes

Fees of Professionals No Yes

Salaries and expenses of inside adjusters and fees and expenses of outside adjusters.

NoYes

Source: NAIC June 24, 1997 Draft and various conversations with Richard J. Roth, Jr. of the California Insurance Department.

EXAMPLE Coded as ULAE ? (A&O) Coded as ALAE ? (DCC)

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Exhibit II (cont’d) Revised Definition of ALAE and ULAE


All independent adjuster expenses

Yes No

All staff adjuster expenses Yes No

Attorney fees Yes, for coverage evaluation and litigation between the insurer and insured. (i.e., D.J. costs). Also, Yes, for any adjustment type of activity.

Yes, for expenses incurred under the broad duty to defend concept, even if no duty to indemnify. Does not include any adjuster type of expense. (Include an overhead loading).

Selected medical cost containment expenses

No Yes

Source: NAIC June 24, 1997 Draft and various conversations with Richard J. Roth,Jr. of the California Insurance Department.


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Litigation management expenses including legal bill review

YesNo

Loss adjustment expenses for participation in voluntary and involuntary market pools

Yes, if reported by calendar year

Outside Expert fees (accountants, physicians, engineers, architects, etc.)

Yes

Inside Expert fees No Yes

Yes, if reported by accident year

No

Claim adjuster expenses NoYes



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Internal or external defense and litigation

YesNo

Medical cost containment expenses

Usual Adjuster Expense

Yes

Unusual Adjuster Expense No Yes

YesNo

Expenses not cited above

No

Yes

Yes



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Redefinitions of Loss Adjustment ExpenseConstraints for Allocated Loss Expense Payments vs. DCC

And there is also:Allocated Loss Expenses Unpaid Measurements (Not being Discussed)

(A/K/A Defense and Cost Containment Unpaid)

Table I – Measuring LAE – ALAE – Width, Height and Character SpacingSch P Component Being Measured ALAE < 1/1/98 (Note 1) ALAE > 1/1/98 (Note 2)

Column Name Loss and Loss Expense Payments Loss and Loss Expense PaymentsWidth of Cell Row:Loss and Loss Expense Payments 4.5 Inch 4.5 InchHeight of Cell Row:Loss and Loss Expense Payments 1/8 Inch ¼ inchColumns Numbers Being Utilized forLoss and Loss Expense Payments

Columns (5) to (10) Columns (4) to (9)Acc Year is No Longer Column (1)

Pure ALAE Name Allocated Loss ExpensePayments

Defense and CostContainment Payments

Number or Alpha Characters including SpacesUtilized

30 36

Number of Character Spaces Available with utilizedColumn Width and Height

43 59

Size of Selected Columns –

Width

1 inch for total ALAE with .5 inchfor Direct and Assumed (Col. 7)

and .5 inch for Ceded (8)

1 inch for total ALAE with .5 inch forDirect and Assumed (Col. 6) and .5

inch for Ceded (7)

Size of Selected Columns –Height

¼ (2/8) inch 3/8 inch

Note (1) Source: Schedule P – Part 1 – Summary using the 8 ¾ inch x 14 inch version of the 1998 Annual Statement.Note (2) Source: Schedule P – Part 1 – Summary using the 8 ¾ inch x 14 inch version of the 1999 Annual Statement.

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Redefinitions of Loss Adjustment ExpenseConstraints for Unallocated Loss Expense Payments vs. A&O

And there is also:Unallocated Loss Expenses Unpaid Measurements (Not being Discussed)

(A/K/A Adjusting and Other Unpaid)

Table II – Measuring LAE – ULAE – Width, Height and Character SpacingSch P Component Being Measured ULAE < 1/1/98 (Note 1) ULAE > 1/1/98 (Note 2)

Column Name Loss and Loss Expense Payments Loss and Loss Expense PaymentsWidth of Cell Row:Loss and Loss Expense Payments 4.5 Inch 4.5 InchHeight of Cell Row:Loss and Loss Expense Payments 1/8 Inch ¼ inchColumns Numbers Being Utilized forLoss and Loss Expense Payments

Columns (5) to (10) Columns (4) to (9)Acc Year is No Longer Column (1)

Pure ULAE Name Unallocated Loss ExpensePayments

Adjusting and Other Payments

Number or Alpha Characters including SpacesUtilized

32 27

Number of Character Spaces Available with utilizedColumn Width and Height

42 53 (But the problem is with Adjustingand Other Unpaid – 30 spaces only)

Size of Selected Columns –

Width

1 inch for total ULAE with .5 inchfor Direct and Assumed (Col. 9)

and .5 inch for Ceded (10)

1 inch for total ULAE with .5 inch forDirect and Assumed (Col. 8) and .5

inch for Ceded (9)

Size of Selected Columns –Height

¼ (2/8) inch 3/8 inch

Note (1) Source: Schedule P – Part 1 – Summary using the 8 ¾ inch x 14 inch version of the 1998 Annual Statement.Note (2) Source: Schedule P – Part 1 – Summary using the 8 ¾ inch x 14 inch version of the 1999 Annual Statement.

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Considerations of LAEConsiderations of LAE

NAIC

ISO

NCCI

State Bureaus

GAAP

Operational - Allocating expenses to their source makes good economics and is proper cost accounting, regardless of the regulatory requirement.

NAIC

ISO

NCCI

State Bureaus

GAAP

Operational - Allocating expenses to their source makes good economics and is proper cost accounting, regardless of the regulatory requirement.

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Exhibit III-Pre/Post ObservationsExhibit III-Pre/Post Observations

ALAE

Inside Legal

ALAE

Inside Legal

ULAEOutsideAdjusters

ULAEOutsideAdjusters

ULAEInside Legal

ULAEInside Legal

ALAEOutsideAdjusters

ALAEOutsideAdjusters

ULAE ALAE

= Overlap = Overlap Other Expenses

NEW ALAE/ULAE (Practice)

NEW ALAE/ULAE (Practice)

OLD ALAE/ULAE (Practice)

OLD ALAE/ULAE (Practice)

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Exhibit IVOther Benefits of the Change: An Increase in

Demand for Casualty Actuaries

Exhibit IVOther Benefits of the Change: An Increase in

Demand for Casualty Actuaries

D2D2

D1D1

S1*S1*

Q1Q1 Q2Q2

P1P1

P2P2

Quantity Quantity DemandedDemanded

PricePrice

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Exhibit V - Net Exhibit V - Net

Inside Legal Mostly Out In + Loading + X %

Factor

Independent Mostly In Out - y % Adjuster

Net

OLD NEW NET Change toALAE ALAE ALAE as % of LAE

ONE EXAMPLE

+ if x% > y%- if x%< y%no ^ if x%=y%

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Analytic Geometry of Two DimensionsAnalytic Geometry of Two Dimensions

Year 12 24 36 48 60 72 84 96 108

x1 X X X X X X X X X

x2 X X X X X X X X

x3 X X X X X X X

x4 X X X X X X

x5 X X X X X

x6 X X X X

x7 X X X

x8 X X

x9 X

EXAMPLEMonth of Development

Month of Development

ACCYR

ACCYR

Year 12 24 48 60 72 84 96 108

x1 X X X X X X X Xx2 X X X X X X X x3 X X X X X X x4 X X X X X x5 X X X Xx6 X X X x7 X Xx8 X Xx9 X

2 Triangles =

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= 1 Claims File= 1 Claims File

If one can do triangles, with double the effort, one can do rectangles (the claims file). If one can do triangles, with double the effort, one can do rectangles (the claims file).

Year 1 24 36 48 60 72 84 96 108

x1 X X X X X X X X X

x2 X X X X X X X X

x3 X X X X X X X

x4 X X X X X X

x5 X X X X X

x6 X X X X

x7 X X X

x8 X X

x9 X

EXAMPLE

Year1 24 36 48 60 72 84 96 108

x1X X X X X X X X X

x2X X X X X X X X

x3X X X X X X X

x4X X X X X X

x5X X X X X

x6X X X X

x7X X X

x8X X

x9X

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Economic Benefits of Transforming Traditional ULAE into ALAE

Economic Benefits of Transforming Traditional ULAE into ALAE

Proper Analysis of Profitability

Reinsurance Recoverables (Per terms of Contract)

Correctly Calculate MGA’s and Agents’ Contingent Commissions

Additional Premiums for insurers and reinsurers

via Loss-Sensitive Insurance Programs

Subrogation and Salvage Actions

Proper Analysis of Profitability

Reinsurance Recoverables (Per terms of Contract)

Correctly Calculate MGA’s and Agents’ Contingent Commissions

Additional Premiums for insurers and reinsurers

via Loss-Sensitive Insurance Programs

Subrogation and Salvage Actions

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LAE TrendLAE TrendC

on

fusi

on

Co

nfu

sio

n

TimeTimeActuarial ACAS FCAS 1996 1998 2000 2002Student

X =?Sept. 24, 2002

1:30 PM

X

~~

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E-mail address:E-mail address:

For a copy of this presentation –

contact Richard Carris at:

[email protected]

For a copy of this presentation –

contact Richard Carris at:

[email protected]

35

Richard Carris, CPCU, CLU, CFE, CIPA, APA, ARM, AICQBE the Americans

Wall Street Plaza New York, New York 10005

Richard Carris, CPCU, CLU, CFE, CIPA, APA, ARM, AICQBE the Americans

Wall Street Plaza New York, New York 10005

Richard is vice president and internal audit manager for QBE the Americas consisting of QBE Reinsurance Corporation and QBE Insurance Corporation.

Richard began his insurance career in 1980. In his more than 20 years of property/casualty experience he spent 12 years with a Big 4 accounting firm in the auditing of various insurance company operations (claims, underwriting, premium auditing, finance, accounting, etc.). His experience prior to 12 years with a Big 4 firm included risk management, brokerage and positions with two primary insurance companies.

Richard is a member of the professional societies of CPCU, CLU, ChFC, CFE, NSIPA (National Society of Insurance Premium Auditors) and NASP (National Association of Subrogation Professionals). He has served for ten years as an Editorial Advisory Board Member for Risk Management magazine (the professional magazine of RIMS) reviewing risk management and other articles for publication consideration. He serves on the ISO Premium Fraud Panel.

Richard was an Adjunct Professor of Insurance Economics for several years teaching the Part 9 CPCU course at Baruch College –

City University of New York and The College of Insurance located in NYC.

Richard has published over 50 articles on a variety of insurance operational topics including underwriting, premium auditing, claims, risk management and international insurance economics for Best’s Review, CPCU Journal, National Underwriter, Insurance Executive Reports, Subrogator, Risk Management, Global Reinsurance and a variety of construction trade publications. He is the co-author of a McGraw-Hill textbook entitled Construction Insurance, Bonding and Risk Management.

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Next Speaker ...

“This new definition of ALAE/ULAE is not retroactive. However, prospectively the change could be implemented on a calendar year or an accident year basis. On a calendar year basis, the expenses in the new and older accident years have the new definition as they develop in the loss and expense triangles. On an accident year basis, the expenses in the new accident years have the new definition and the expenses in the older accident years have the old definition. It is optional to the company which way to do it. There is a split among companies as to which is easier. The actuary should be able to handle either way as long as it is known which choice was made.”

Source: NAIC

“This new definition of ALAE/ULAE is not retroactive. However, prospectively the change could be implemented on a calendar year or an accident year basis. On a calendar year basis, the expenses in the new and older accident years have the new definition as they develop in the loss and expense triangles. On an accident year basis, the expenses in the new accident years have the new definition and the expenses in the older accident years have the old definition. It is optional to the company which way to do it. There is a split among companies as to which is easier. The actuary should be able to handle either way as long as it is known which choice was made.”

Source: NAIC

Revised NAIC ALAE and ULAE Definitions (or DCC and A&O > 1/1/98) A Non-Actuarial Perspective

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