Loss Adjustment Expense (LAE) Explained: 2025 Insurance Insights

Rising insurance costs have become a major talking point across Australia, but behind the scenes, one of the least understood drivers is the Loss Adjustment Expense (LAE). As 2025 brings new regulatory changes and claims trends, understanding LAE is crucial—whether you’re an insurer, broker, or everyday policyholder looking to make sense of your premium hikes.

What is Loss Adjustment Expense (LAE)?

Loss Adjustment Expense refers to the costs insurers incur to investigate, process, and settle claims. These are not the actual claim payouts, but the additional outlays required to determine liability and the amount payable. LAE is typically split into two types:

• Allocated LAE (ALAE): Expenses directly tied to a specific claim, such as legal fees, expert witness costs, and private investigations.

• Unallocated LAE (ULAE): General claim handling expenses not linked to a specific claim, like salaries of claims staff, overheads, and IT systems.

For example, if a bushfire claim requires independent assessors and legal review, those costs are considered ALAE. The insurer’s ongoing claims department salaries fall under ULAE.

Why LAE Matters More in 2025

This year, several factors are causing LAE to spike and reshaping the insurance landscape in Australia:

• Regulatory shifts: APRA’s 2025 guidelines now require more transparent reporting of LAE, pushing insurers to track and allocate these expenses more precisely.

• Natural disaster frequency: With climate-related events on the rise, complex claims (like flood and cyclone damage) demand more investigation and expert input, driving up ALAE.

• Litigation uptick: Policyholders are more likely to dispute claim outcomes, leading to higher legal costs and a growing share of LAE in overall loss ratios.

• Technological investment: Insurers are investing in digital claims platforms and AI-based fraud detection. While these can eventually reduce ULAE, in the short term, they add to overall LAE.

Recent APRA data shows that LAE as a percentage of gross written premiums has climbed to an average of 7% in the general insurance sector for 2025—up from 5.2% in 2023.

How LAE Impacts Your Premiums and Claims

For policyholders, LAE is a hidden driver of premium increases. Here’s how it plays out in practice:

• Premium pricing: Insurers factor expected LAE into their premium calculations. If LAE rises, so does the cost of insurance for everyone.

• Claims experience: More complex or disputed claims mean higher LAE, which can lead insurers to be more stringent in assessing new claims or to modify coverage terms.

• Industry examples: After the 2024 Queensland storms, insurers reported a 30% increase in average ALAE per claim due to the need for specialist engineering assessments and legal mediation.

Some insurers are now piloting digital claims lodgement and video assessments to streamline ULAE, but the transition phase means costs remain elevated in 2025.

Industry Strategies for Managing LAE

With LAE under the microscope, insurers are getting creative in managing these costs. Here are a few approaches we’re seeing in 2025:

• AI triage: Automating the initial assessment of claims to reduce manual processing and ULAE.

• Panel expert agreements: Bulk contracting with legal and forensic experts to lock in lower fees for ALAE-heavy claims.

• Customer education: Helping policyholders understand documentation and evidence requirements to reduce disputes and costly investigations.

• Regulatory compliance tech: Leveraging new RegTech platforms to improve LAE tracking and satisfy APRA’s 2025 transparency mandates.

Some of these innovations will take time to translate into lower LAE, but they signal a shift in how insurers and policyholders interact.

Conclusion: The Road Ahead for LAE and Your Insurance Costs

As insurance claims become more complex and regulatory scrutiny intensifies, LAE will remain a key factor in premium setting and claims handling in Australia. For policyholders, being aware of LAE can help explain premium movements and highlight the value of accurate, prompt claim submissions. For insurers, 2025 is a year for investing in technology and processes that manage LAE without compromising customer service.