Loss Adjustment Expense (LAE)
The expenses associated with settling claims. LAE is divided into two components: allocated loss adjustment expenses (ALAE), and unallocated loss adjustment expenses (ULAE).
· Allocated Loss Adjustment Expense (ALAE)
ALAE, also known as Defense and Cost Containment Expense, is the specific cost of adjusting a specific claim or loss. Therefore it is allocated to a specific claim or loss. It is expressed as both actual (paid) and reserve (estimated) amounts. The components of ALAE include legal fees, court costs, expert witnesses, investigation costs, costs of records duplications, expert witnesses, trial preparations, etc.
· Unallocated Loss Adjustment Expense (ULAE)
ULAE, also known as Adjusting and Other Expense, is the cost to the insurance company of managing its claims department to adjust and resolve claims, including such expenses as overhead and staff, all external, internal, and administrative claims handling expenses, including determination of coverage. These costs are not allocated to any individual claim, but are a general expense to the insurance company as part of their operations, usually for a line of insurance like workers compensation. For the most part ULAE is combined in financial reporting as part of "underwriting" expenses.
Statistical Plan - 2008 Edition
Rule 4-D-1-a defines expenses included under Allocated Loss Adjustment Expense.
Statistical Plan Manual
Part 4—Loss and Expense Information
D. Expenses Excluded From Losses
Medical or legal expenses incurred for the benefit of the carrier must be treated as loss adjustment expense, and are to be excluded from the claims paid loss and incurred loss amounts.
1. Allocated Loss Adjustment Expense (ALAE)
a. ALAE Paid Amount
Report the whole dollar amount of Allocated Loss Adjustment Expense (ALAE) that has been allocated and paid for each claim as of the loss valuation date. ALAE encompasses the following costs to a carrier, which can be directly allocated to a particular claim:
(1) Fees of attorneys or other authorized representatives where permitted for legal services, whether by outside vendors or staff representatives.
(2) Court, Alternate Dispute Resolution, and other specific items of expense such as:
· Medical examinations of a claimant to determine the extent of the carrier’s liability, degree of permanency, or length of disability
· Expert medical or other testimony
· Witnesses and summonses
· Copies of documents such as birth and death certificates, and medical treatment records
· Arbitration fees
· Appeal bond costs and appeal filing fees
For Experience Rating – ALAE Not Used
The loss values used in a claim for an experience rating modification come from the reported medical and indemnity expenses. ALAE expenses are not included in the promulgation of the experience modification.
For instance, any legal costs associated with the dispute of the claim should be reported by the carrier as ALAE. So, if a carrier had incurred legal costs in disputing that a claim is compensable, but the WC Board ruled that the claim was compensable, those legal costs would not be included in the loss value used for the experience rating calculation.