ULAE vs. ALAE
Loss adjustment expense is the cost incurred by the insurer at the time of settling claims.
These expenses arise since insurers need to prove the truthfulness of the event that has caused the insured to ask for claim.
Insurers then need to investigate and verify the event before settling claims.
This is a pivotal component as the absence of such a mechanism can lead to losses of the insurer. Another reason, which is often forgotten, is the fairness between policyholders.
For instance, in motor insurance, the insurer appoints an outside surveyor for ascertaining the extent of damage. Based on this assessment the insurer pays the claim to the insured. The costs incurred for appointment of the surveyor forms a part of the loss adjustment expense.
There are two types of loss adjustment expenses.
+Allocated loss adjustment expenses. These are expenses incurred for a specific claim.
For instance, in the event of a surveyor assessing the extent of damage of an insured vehicle, the costs incurred for appointment of the surveyor become part of the allocated loss adjustment expense.
+Unallocated loss adjustment expenses. These are the expenses that are incurred by the insurer for routine operations of the claims department. Things like salaries, maintenance, etc. These costs are not incurred for a specific claim but for the overall operations.
Both are important and the type of business will decide which one is higher in a specific insurance company.