Allocated Loss Adjustment Expenses (ALAE)

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Allocated loss adjustment expenses (ALAE) are costs that insurance companies incur when investigating and settling a specific insurance claim. 

ALAE and Unallocated Loss Adjustment Expenses (ULAE), which are more generic and may include overhead, investigations, and salaries, are both included in an insurer's expense reserves.

Why is ALAE important?

ALAE are significant because, together with contingent commissions, they are among the highest expenses for which an insurer must set aside funds. ALAE may have an impact on an insurance company's revenue, solvency, and policyholder premiums. Moreover, ALAE might affect how insurers and claimants behave and their approach to settlement.

How is ALAE calculated?

The total of all payments made to third parties for services linked to the processing of a particular claim is used to compute ALAE. Attorney, investigator, expert, arbitrator, mediator, and other fees or expenditures related to revising a claim may be included in these payments. A claimant's or beneficiary's real loss payments are typically reported independently from ALAE.

What are some examples of ALAE?

Some examples of ALAE are:

• The fee paid to a lawyer who represents the insurer in a lawsuit filed by a claimant
• The cost of hiring a private investigator to verify the facts of a claim
• The expense of hiring an expert witness to testify on behalf of the insurer in a trial
• The charge for using an alternative dispute resolution (ADR) service to resolve a claim
• The cost of obtaining medical records, police reports, or other documents related to a claim

What are some factors that affect ALAE?

Some factors that affect ALAE are:

• The type and complexity of the claim
• The duration and outcome of the claim
• The availability and quality of data and evidence
• The legal and regulatory environment
• The skill and experience of the adjuster and other parties involved
• The level of cooperation and communication between the insurer and the claimant

How can ALAE be reduced or controlled?

Some ways that ALAE can be reduced or controlled are:

• Implementing effective claims management practices and procedures
• Using data analytics and predictive modeling to identify and prioritize high-risk claims
• Leveraging technology and automation to streamline and simplify claims processes
• Negotiating reasonable and competitive fees with third-party service providers
• Encouraging early and fair settlement of claims
• Educating policyholders and claimants about their rights and responsibilities