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Loss adjustment expenses (LAE)

The costs of investigating, adjusting and settling claims, as distinct from the indemnity itself.

Definition

LAE (loss adjustment expenses) covers every claims cost other than the indemnity, from adjusters and defense counsel to investigation and claims handlers' time. IFRS 17, paragraph B65, places it within the contract boundary as the costs of investigating, processing and resolving claims, legal and adjuster fees included. It splits into ALAE, allocated to a specific claim, and ULAE, claims department overhead. The LAE ratio, LAE over incurred losses, measures how efficiently claims get settled. Inside a combined ratio it is usually expressed against earned premium, and the gap is real: 12% of losses comes to 7.8% of premium on a book running at a 65% loss ratio. A loss ratio always needs its label, LAE included or excluded, and the US expense ratio leaves LAE on the loss side. A high LAE ratio points to litigious claims or technically heavy adjusting, the kind where an engineer or a forensic accountant has to be sent out. It also rises mechanically when frequency drops faster than the fixed cost of the claims department.

Its 10 cross-references, woven across the glossary's 18 categories
Loss adjustment expenses (LAE): Actuarial science glossary illustration, AlgoPolis
Example

Textbook case on a motor book, in millions of euros. Earned premium 10; losses 6.5; ALAE 0.50, mostly vehicle appraisal fees; ULAE 0.28. LAE = 0.50 + 0.28 = 0.78. Against losses, the LAE ratio is 0.78 / 6.5 = 12%, or 12 cents of expenses per euro of loss. Against premium, 0.78 / 10 = 7.8%. The loss ratio is 6.5 / 10 = 65% ex LAE and (6.5 + 0.78) / 10 = 72.8% with LAE. The same book shows two loss ratios 7.8 points apart depending on the convention.

Read next
Actuarial scienceAllocated loss adjustment expenses (ALAE)The part of LAE charged to a specific claim: adjuster and expert fees, defense costs, investigation expenses.Read the entry →Actuarial scienceUnallocated loss adjustment expenses (ULAE)Claims department costs that cannot be charged to any one file (adjusters, premises, IT), reserved for every claim not yet settled, IBNR included.Read the entry →Actuarial scienceIncurred lossesTotal cost of claims attributable to a period: payments made plus reserves for claims not yet settled.Read the entry →
Related terms
Also known as

loss adjustment expenses, LAE, claims handling costs, claims expenses, LAE ratio, loss adjustment expense ratio, LAE insurance, LAE meaning, loss and LAE ratio

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