Loss Adjustment Expense (LAE)
Categories: Accounting
We love our job at InSure Thing, an insurance company specializing in renters and homeowners policies. We get to talk to such interesting people, like the client who just called us because her house burned down and she wants to file a claim. Everybody’s fine, but the house, she says, is a total loss.
We feel for her and all, but that doesn’t mean we’re just going to take her word for it and cut her a check. We’re going to send a few of our people out to the scene of the fire and have them take a look around first. We want to make sure that (a) we know what kind of damage we’re looking at, and (b) the fire wasn’t caused by something that would negate the policy coverage, like arson.
The money our company spends investigating and settling claims is called a “loss adjustment expense,” or LAE. LAEs come in two flavors: allocated and unallocated. Allocated LAEs, or ALAEs, are costs incurred that are specific to a policy or claim, like the travel costs we’ll pay to get our insurance adjuster and arson investigator to the site of the house fire. Unallocated LAEs, or ULAEs, are expenses that aren’t directly related to a specific policy or claim, like our adjuster and investigator’s salaries.