H.2 Estimating ALAE

Question 1

Some ways ALAE data availability can vary by

insurer

Answer 1

-Some insurers maintain data for different types of expenses, others combine all expenses into a single ALAE category. When data for legal expenses can be isolated from the rest of ALAE, it is often preferable to develop this piece separately.
-Some insurers estimate case outstanding amounts for
ALAE, while other insurers do not.

Question 2

Three ways to estimate unpaid ALAE

Answer 2

1. ALAE can be combined with claims to estimate claims and ALAE together. However, this may not be a good idea if ALAE has a very different development pattern than claims.
2. Use the development technique (or one of the other
   previously discussed techniques) on an ALAE triangle
   directly.
3. Use a ratio approach that develops ratios of paid
   ALAE-to-paid claims (or reported ALAE-to-reported
   claims), and use those ratios along with ultimate claim
   estimates to project ultimate ALAE.

Question 3

Assumption of using the ratio approach to estimate

unpaid ALAE

Answer 3

The relationship between ALAE and claims is stable over the experience period.

Question 4

Advantages of using the ratio approach to estimate

unpaid ALAE

Answer 4

1. It recognizes the inherent relationship between claims and ALAE.
2. The development factors for the ratio approach tend to be less leveraged than the development factors based on ALAE dollars.
3. The ratio approach produces ratios of ultimate ALAE to
   ultimate claims, which can be used as a diagnostic. If a ratio for a particular year seems unreasonable, a more reasonable ALAE ratio can be selected for that year.

Question 5

Disadvantages of using the ratio approach to estimate

unpaid ALAE

Answer 5

-For some lines of business, there may be claims with no
claim payment but have substantial ALAE.
-An error in the estimation of ultimate claims will lead to an error in the estimation of ultimate ALAE.

Question 6

Advantage of using additive development instead of
multiplicative development when developing the
paid-to-paid ratios

Answer 6

The advantage of the additive approach is that it is more

stable if the ratios are very small at early maturities.