Glossary

Loss adjustment expense

What an insurer spends to investigate, defend and settle claims, apart from the claim payments themselves. Split into allocated and unallocated expense.

Also called: LAE, claims adjusting expense, ALAE, ULAE, allocated loss adjustment expense

Loss adjustment expense (LAE) is the cost of handling claims as opposed to paying them. It includes investigating the loss, hiring independent adjusters, engineers and appraisers, and paying defense lawyers. Insurers split it in two. Allocated LAE (ALAE) can be tied to one claim: outside defense counsel, an expert report, a court reporter. Unallocated LAE (ULAE) is overhead: the salaries, systems and offices of the in-house claims department.

LAE changes how a ratio reads. Say a carrier earns $10 million, incurs $6 million in losses and spends $1 million on LAE (a hypothetical). Its loss ratio is 60%; its loss-and-LAE ratio is 70%. Some reports show one, some the other, so check which before comparing carriers. The combined ratio adds underwriting expenses on top.

For a policyholder, the question is whether LAE erodes the limit. A commercial general liability policy pays defense costs in addition to the limit, as supplementary payments. Many professional liability, D&O and cyber policies are defense-inside, where every dollar of LAE reduces what is left for settlement. The guide on defense costs inside vs outside the limits covers the difference, and loss ratio shows where LAE enters the math.

Last reviewed October 10, 2026

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Related terms

Loss ratio Incurred claim costs divided by earned premium, shown as a percentage; the basic gauge of whether the premium collected is covering claims. Combined ratio An insurer's claims costs plus operating expenses as a share of premium; below 100% means an underwriting profit and above 100% an underwriting loss. Defense costs The attorney fees, expert fees and other expenses of fighting a claim, which some policies pay on top of the limit and others deduct from it. Incurred but not reported (IBNR) An estimate of losses that have already happened, but that the insurer or plan has not yet been told about or has not fully valued. Earned premium The share of a policy's premium that matches the coverage period already elapsed, which an insurer can book as revenue and keep if the policy ends early.

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Related tools

Loss ratio and combined ratio calculator Works out an insurer's loss, LAE, expense, dividend and combined ratios and its operating ratio from the figures in its earnings reports.