Paying the claim is not the only cost of settling it. Loss adjustment expense, or LAE, is the cost an insurer incurs to investigate and resolve claims. It includes adjuster salaries, independent adjuster fees, legal defense costs, appraisals, and related overhead.

LAE is often split into allocated expenses that can be assigned to specific claims and unallocated expenses that are general claims-department costs. In liability lines, defense costs can be substantial and may be included inside the policy limit or paid in addition, depending on the form.

Controlling LAE while still handling claims properly is a permanent management challenge. Under-spending can lead to poor investigations and larger indemnity payments; over-spending erodes underwriting margins. LAE is included in the numerator of the combined ratio and affects reported profitability.

• Costs of investigating and settling claims
• Includes adjusters, lawyers, and experts
• Allocated or unallocated to specific claims
• Component of the combined ratio