Definition: Loss adjustment expense is the cost borne by the insurer at the time of settling claims.

Description: Insurers need to prove the veracity of the event that has caused the insured to ask for claim. Insurers need to investigate and verify the event before settling claims. This is a pivotal component as the absence of such a mechanism can lead to losses of the insurer. For instance, in the case of motor insurance, the insurer appoints an outside surveyor for ascertaining the extent of damage. Based on the assessment of the surveyor, the insurer pays the claim to the insured. The costs incurred for appointment of the surveyor forms a part of the loss adjustment expense.

There are two types of loss adjustment expense:

Allocated loss adjustment expenses: These are the expenses incurred for a specific claim settlement. For instance, in the event of a surveyor assessing the extent of damage of an insured vehicle, the costs incurred for appointment of the surveyor become part of the allocated loss adjustment expense.

Unallocated loss adjustment expenses: These are the expenses that are incurred by the insurer for routine operations of the claims department like salaries, maintenance, etc. These costs are not incurred for a specific claim but are incurred for the overall operations of the department.