The defense cost ratio divides allocated loss adjustment expense by indemnity paid within a segment. It is tracked by claim type, firm, and venue.
Ratios vary substantially by claim category and by whether cases are litigated or resolved early.
Alternative Names:
Expense Ratio, ALAE Ratio
Why it Matters?
A ratio approaching or exceeding one signals that defending a class of claims costs as much as paying them, which is an economic argument for early resolution independent of the merits. It also identifies firms and venues where spending diverges from peers on comparable work. The metric misleads without segmentation, since low-severity claims naturally show higher ratios than catastrophic ones where indemnity dominates.
Frequently Confused with
Related terms
Frequently asked questions
What does a high defense cost ratio indicate?
Why segment the metric?
