A medical malpractice case generally starts when a policyholder notifies their insurance company that they received a communication making a demand for money damages or threatening or initiating a lawsuit. A policyholder may also reach out to their insurance carrier for advice after an adverse event. After these types of policyholder contact, the insurance company’s claims department begins their claim investigation process.
Typically, the claims department will open a claim and begin the investigation process. Naturally, there are costs incurred by the insurance company for every claim they handle as well as simply maintaining a claims department. These cumulative costs are known as loss adjustment expenses (LAE).1 Calculating ALAE and ULAE Some LAE are general in nature and do not apply to any one claim, and others are specific to a single claim. To differentiate between these categories (and to comply with applicable regulations and industry standards), the insurance industry defines expenses as either allocated or unallocated.2 The essential difference between them comes down to allocation, i.e., distribution for a particular purpose.
Allocated Loss Adjustment Expenses (ALAE): costs attributable to a particular claim.
Some examples include:1,2
- Claim-specific investigation costs
- Expert witness fees
- Billable attorney fees
Unallocated Loss Adjustment Expenses (ULAE): costs expended for general claims operations.
Some examples include:1,2
- Claims personnel salaries
- General office expenses
- Maintenance costs of vehicles used in claims investigations
How LAE Impacts Our Finances
Investigating a claim is a critical element of the claims process and a significant component of LAE. An investigation will help determine the severity and defensibility of a claim as well as protect against fraudulent claims. In this sense, LAE can help limit loss expenses. LAE is also a component of the combined ratio along with these additional components:2
- Incurred losses: settlements and jury awards
- Other underwriting expenses: the cost of daily underwriting activities
- Earned premiums: the premium applicable to the portion of the policy that has expired
ALAE vs. ULAE Combined Ratio = Incurred Losses + LAE + Other Underwriting Expenses Earned Premiums The combined ratio is an important indicator of an insurance company’s profitability, showing how claim and underwriting expenses are offset by earned premiums. A combined ratio below 100% means an insurer earns more premium than it expends on claim and underwriting expenses, including LAE. That makes limiting LAE an important financial goal for an insurance company.
References
- NAIC. https://content.naic. org/sites/default/files/ inline-files/094_g.pdf
- Investopedia. https://www. investopedia.com/terms/l/lossadjustment-expense-lae.asp
The Difference
The Difference is an ongoing educational series from ProAssurance, designed to compare and contrast common items in medical professional liability insurance. The side-by-side comparisons make it easy to compare so you can easily pick up the highlights of each.