Loss Adjustment Expense (LAE)
Definition of 'Loss Adjustment Expense (LAE)'
There are two main types of LAE: incurred LAE and paid LAE. Incurred LAE is the estimated cost of all claims that have been reported but not yet settled. Paid LAE is the actual cost of all claims that have been settled. The difference between incurred LAE and paid LAE is called the LAE reserve.
The LAE reserve is an important part of the insurance company's financial statements. It represents the company's best estimate of the cost of all claims that will be filed in the future. The LAE reserve is calculated by using a variety of factors, including historical claim data, current claim trends, and economic conditions.
The LAE reserve can have a significant impact on the insurance company's financial statements. If the LAE reserve is too high, it can reduce the company's profitability. If the LAE reserve is too low, it can increase the company's risk of insolvency.
Insurance companies are required to maintain adequate LAE reserves in order to protect policyholders and ensure the financial stability of the insurance industry. The amount of LAE reserve that an insurance company is required to maintain is determined by regulators.
Loss adjustment expense is an important concept for anyone who is interested in the insurance industry. It is a significant cost for insurance companies, and it can have a major impact on the company's financial statements.
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