Unallocated loss adjustment expenses (ULAE)

ULAE (unallocated loss adjustment expenses) are claims department costs that cannot be charged to any specific file: adjusters' salaries, the claims floor's rent. ALAE, by contrast, are the expert or attorney fees tied to a given claim, and the two together make up LAE. The ULAE reserve has to carry those costs until the last claim is settled, including claims nobody knows about yet. The classic method takes the ratio of unallocated expenses paid in the year to claims paid, and applies it to all of IBNR and to half of case reserves. So ULAE reserve = ratio × (IBNR + 50% of case reserves), on the assumption that a file uses half its handling cost when it is opened and the other half when it is closed. Kittel (1981) divides the expenses by the average of claims paid and claims incurred in the year instead, so the ratio is not overstated on a growing book. The half-and-half split is still a convention, and it breaks down in a line where most of the handling cost comes from end-of-file litigation. The ULAE reserve tracks IBNR directly. Every thousand added by chain ladder or Bornhuetter-Ferguson carries its share of expenses.