It stands for allocated loss adjustment expenses; as an item, it is part of loss adjustment expenses (LAEs). It constitutes expenses that are directly attributed and allocated to the processing of a certain insurance claim (i.e., settling and defending a specific claim). This item represents one of the main expenses for which an insurance company has to create reserves (along with contingent commissions).
These loss adjustment expenses are incurred in adjusting a specific claim or loss. Therefore, the cost is directly allocated to the claim or loss in question. It is expressed as both actual (paid) and reserve (estimated) amounts. In addition to payments made to settle specific claims, such expenses include fees paid to external attorneys, experts, and investigators engaged in defending claims. This also includes court costs, expert witnesses, costs of records duplication, trial preparations, etc.
These expenses constitute part of an insurer’s expense reserves.
It is also known as defense and cost containment expenses.
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