[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Allocated Loss Adjustment Expenses (ALAE)**
## Definition
==Allocated Loss Adjustment Expenses ALAE== ALAE (Allocated Loss Adjustment Expenses) are claim adjustment costs that can be directly attributed to specific individual claims.
## Components
- Defense attorney fees
- Court costs
- Expert witness fees
- Independent adjuster fees
- Medical examinations
- Engineering reports
- Surveillance costs
- Appraisal fees
## Characteristics
### Claim-Specific
- Trackable to individual claims
- Vary by claim
- Included in case reserves
- Developed with losses
### Treatment in Reserving
```
Case Reserve = Indemnity Reserve + ALAE Reserve
Reported Losses = Paid + Case Reserves (including ALAE)
```
## Typical ALAE Ratios
By line of business (ALAE as % of losses):
```
Professional Liability: 30-50%
General Liability: 15-25%
Workers Compensation: 10-20%
Auto Liability: 10-15%
Property: 5-10%
```
## ALAE Development
### Separate Development
ALAE may develop differently than indemnity:
- Defense costs concentrated before settlement
- Can peak earlier than indemnity payments
- Different tail factors may apply
### Combined Development
Often developed with losses:
```
Development Triangle: Losses + ALAE combined
Simplifies analysis but assumes similar patterns
```
## Example
```
General Liability Claim:
Indemnity payments: $100,000
ALAE:
Defense attorney: $25,000
Expert witness: $8,000
Court costs: $2,000
Total ALAE: $35,000
Total Incurred: $135,000
ALAE Ratio: $35,000 / $100,000 = 35%
```
## Ratemaking Treatment
### Include in Loss Costs
```
Total Loss Cost = Losses + ALAE
Pure Premium = (Losses + ALAE) / Exposures
```
### Separate Loading
```
Rate = Loss Cost × (1 + ALAE%)
```
## Related Concepts
- [[Loss Adjustment Expenses (LAE)]]
- [[Unallocated Loss Adjustment Expenses (ULAE)]]
- [[Case Reserves]]
## References
- Werner & Modlin, Chapters 4-5
- Friedland, Chapter 10