A defense attorney keeps billing long after the claim payment clears. That lag is why allocated loss adjustment expense gets its own reserve estimate, and why the ratio you develop can drift upward as an accident year matures.
Allocated loss adjustment expense is the cost of settling a specific claim: outside defense counsel, expert witnesses, court filing fees. Because it attaches to an individual claim, you can triangulate it like loss. Unallocated loss adjustment expense (ULAE) is general claim-department overhead (adjuster salaries, rent) that cannot be assigned to one claim, so it is estimated by other techniques and is out of scope here.
KEY: You either develop ALAE on its own triangle, or you develop the ratio of ALAE to loss and ride it off the loss estimate.
Development approach. Treat cumulative paid (or reported) ALAE exactly like a loss triangle. Compute age-to-age factors, select, cumulate to a CDF, apply to the latest diagonal, and subtract paid ALAE. This makes no assumption that ALAE tracks loss.
Common mistakes
- Selecting the latest diagonal ratio as ultimate. Taking 2024's 0.100 as ultimate ignores development to 0.150 and understates ALAE by a third.
- Mixing paid and reported bases in a cell. Dividing paid ALAE by reported loss makes a ratio that means nothing; keep numerator and denominator on the same basis at the same evaluation date.
- Confusing ALAE with ULAE. Adjuster salaries are ULAE and are not in the claim-specific triangle; putting them there double counts overhead.
Bottom line
- ALAE is claim-specific expense (defense counsel, expert fees, court costs); ULAE is general overhead not tied to any one claim.
- Two method families: develop ALAE directly as its own triangle, or develop the ALAE-to-loss ratio and apply it to ultimate loss.
- Ratio-to-loss development comes in two forms: multiplicative (age-to-age ratio factors) and additive (difference the ratios, cumulate by addition); the additive form is steadier when the ratios are very small at early maturities.
- Ultimate ALAE equals the selected ultimate ratio times ultimate loss; unpaid ALAE equals ultimate ALAE minus paid ALAE to date.
Exam shortcut
When a ratio triangle is given, always develop the ratios to ultimate first, then multiply by ultimate loss, then subtract paid ALAE. Three steps, in that order, every time. Read development across the row: a ratio climbing with age is your cue that ALAE outlasts loss, so the ultimate ratio sits above the latest diagonal and a flat selection is wrong.
The full lesson (about 2,705 words, 18 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B14
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