What Are Allocated Loss Adjustment Expenses (ALAE)?
Allocated loss adjustment expenses (ALAE) are attributed to the processing of a specific insurance claim. ALAE is part of an insurer’s expense reserves. It is one of the largest expenses for which an insurer has to set aside funds—along with contingent commissions.
- Allocated loss adjustment expenses (ALAE) are expenses attributed to a specific insurance claim.
- ALAE, along with unallocated loss adjustment expenses (ULAE), represent an insurer’s estimate of the money it will pay out in claims and expenses.
- Expenses associated with ULAE are more general and may include overhead, investigations, and salaries.
- Small, straightforward claims are the easiest for an insurance company to settle and often require less ALAE when compared to claims that may take years to settle.
- Some commercial liability policies contain endorsements, which require the policyholder to reimburse its insurance company for loss adjustment expenses (ALAE or ULAE).
Understanding Allocated Loss Adjustment Expenses (ALAE)
Allocated loss adjustment expenses, along with unallocated loss adjustment expenses (ULAE), represent an insurer’s estimate of the money it will pay out in claims and expenses. Insurers set aside reserves for these expenses to ensure claims aren’t made fraudulently and to process legitimate claims quickly.
Allocated loss adjustment expenses link directly to the processing of a specific claim. Insurers—which use third parties to investigate the veracity of claims, to act as loss adjusters, or to act as legal counsel for the insurer—may include this expense in its allocated loss adjustment expenses. Expenses associated with ULAE are more general and may include overhead, investigations, and salaries. Insurers that use in-house employees for field adjustments would report that expense as an unallocated loss adjustment expense.
Some commercial liability policies contain endorsements, which require the policyholder to reimburse its insurance company for loss adjustment expenses (ALAE or ULAE). The expression “adjusting a loss”typically means, “the process of determining the value of a loss or negotiating a settlement.”
Therefore, loss adjustment expenses are most often those costs incurred by an insurance company in defending or settling a liability claim brought against its policyholder. These expenses can include fees charged by attorneys, investigators, experts, arbitrators, mediators, and other fees or expenses incidental to adjusting a claim.
It is important to carefully read the endorsement language, which may say that a loss adjustment expense is not intended to include the policyholder’s attorney fees and costs if an insurer denies coverage and a policyholder successfully sues the insurer. In this situation, where the insurance company has done no actual “adjusting” of the claim, it should not be entitled to apply its deductible to the expenses incurred by the policyholder in defending the claim abandoned by the insurance company.
ALAE vs. Unallocated Loss Adjustment Expenses (ULAE)
Insurers have gradually shifted from categorizing expenses as ULAE to categorizing them as ALAE. This is primarily because insurers are more sophisticated in how they treat claims and have more tools at their disposal to manage the costs associated with claims.
Small, straightforward claims are the easiest for an insurance company to settle and often require less ALAE when compared to claims that may take years to settle. Claims that could result in substantial losses are the most likely to receive extra scrutiny by insurers and may involve in-depth investigations, settlement offers, and litigation. With greater scrutiny comes greater cost.
Analysts can tell how accurate an insurance company has been at estimating its reserves by examining its loss reserve development. Loss reserve development involves an insurer adjusting estimates to its loss and loss adjustment expense reserves over a period of time.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you’re ready to enter the real market, you’ve had the practice you need. Try our Stock Simulator today >>« Back to Glossary Index