Schweser Notes explain that
'The underwriting loss ratio measures the relative efficiency of the company’s underwriting standards (whether the policies are priced appropriately relative to the risks borne).
‘The loss and loss adjustment expense ratio measures the relative success in estimation of risks insured.’
This is quite vague to me. Looking at the formulas, it seems like the former is based on cash flows + loss reserve while the latter approaches from the income statement expense items, so theoretically they should be the same? Anyone can explain the difference?
the Loss Adjustment Expense Ratio (LAE) is the ratio of expenses for settling the claim (e.g. legal costs as well and salaries of the claims department personnel) to the total losses. some companies use paid losses for the total losses, while others use reported losses as the total instead. in other words,
LAE = direct and indirect costs of settling the claim / total losses
Underwriting Expense Ratio (UW) is the ratio of the underwriting expense (such as commissions, taxes, brokerage fees, etc) to the premium charged
that is,
UW expense = ( commissions, taxes, brokerage fees, etc) / premium
source: CAS