Friedland16.ALAE

Chapter 16: Estimating ALAE (Allocated Claim Adjustment Expenses)

Reading: Friedland, J.F., Estimating Unpaid Claims Using Basic Techniques, Casualty Actuarial Society, Third Version, July 2010. The Appendices are excluded.

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• multiplicative method - a ratio method for calculating ultimate ALAE
• additive method - a ratio method for calculating ultimate ALAE
• advantage/disadvantage - of ALAE ratio methods
• ALAE ratio methods - additive versus multiplicative method

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #24)	multiplicative method: - ultimate	ALAE ratio methods: - additive vs multiplicative	advantage/disadvantage: - of ALAE ratio methods
E (2018.Spring #25)	paid ALAE development: - ultimate	additive method: - ultimate	justify final selection: - ultimate
E (2017.Spring #25)	paid ALAE development: - ultimate (with large loss)	multiplicative method: - ultimate (with large loss)
E (2016.Spring #23)	additive or multiplicative: - ultimate	advantage/disadvantage: - of ALAE ratio methods
E (2015.Fall #24)	multiplicative method: - ultimate	additive method: - ultimate	justify final selection: - ultimate
E (2014.Spring #21)	paid ALAE development: - challenges	ALAE ratio methods: - challenges	frequency-severity: - for legal expenses

In Plain English!

Question: identify 2 common method used to estimate ultimate ALAE

• development of paid ALAE triangle
• ratio methods: uses triangle of (paid ALAE $) / (paid claim $s)

Question: describe advantages & disadvantages of using ratio methods to estimate ultimate ALAE

advantages of ratio methods:

• ratios recognize the relationship between loss & ALAE
• ratios provide diagnostics (individual AYs can be excluded if unreasonable)
• ratios are more stable than developing ALAE directly (ALAE can be small & highly leveraged, especially at early maturities)

disadvantages of ratio methods:

• inaccurate ultimate loss estimates may cause inaccurate ALAE estimates
• timing of ALAE payments may differ from timing of loss payments (causes distortions in ratio triangle)
• trend for ALAE payments may differ from trend for loss payments