"Good hands or boxing gloves"
The American Association of Justice recently published a thoroughly researched article explaining the massive change that Allstate Insurance Company has initiated in the United States' insurance industry. In 1987, the Insurance Information Institute conclued in its annual report that the industry, while profitable, needed to cut costs and enhance profits in order to compete with Fortune 500 companies for investment dollars. Twenty years later, it continues to report that the industry has reported "superb", "robust" and "excellent" investment and income results, but it also continues to call for caps on recovery that it originally advocated in the 1980s--despite the fact that the industry was highly profitable (profits increased in the first nine months of 2006, alone, by 15.1 billion dollars) and that the suggested caps had lost 75 percent of their value due to inflation. By 2006, Allstate had captured returns for its investors that were double that of the Standard & Poor 500, yet it continued to seek higher profits by limiting payouts to consumer insureds. It had not cut premiums.
In 1995, Allstate initiated a program it called Claims Core Process Redesign (CCPR) at the suggestion of a corporate consulting company called McKinsey & Co. McKinsey is better known for having provided consulting services to the Enron Company. Most people will recall that Enron reported spectacular profits as a result of a novel and illegal accounting strategy, before it crashed and destroyed the lives of its workers and investors. Under the guidance of a CEO who in 1999 retired with a personal fortune of more than 150 million dollars in stocks, options and incentive buyouts, and a successor who profited by more than 50 million dollars between 1995 and 1999, Allstate secretly adopted a business paradigm that intentionally manipulated its loss payouts to insureds in order to maximize profits.
Historically, courts had required that insurers balance profits with a fiduciary duty to the persons they insured. In short, the insurer "represented" the policy holder and the relationship was not entirely "at arm's length": in many cases, citizens are even compelled to buy the insurance product in order to operate a vehicle on state roads, for example, or to bid on public contracts. In return, the insurer recieved various legislative and financial perquisites thought to be necessary to accomplish the purpose of sharing risks broadly. Thirty years ago, the California Supreme Court characterized this "quasi-public" responsibility of insurers as an obligation of "good faith and fair dealing, encompass[ing] qualitites of decency and humanity inherent in the responsibilities of a fiduciary".
Taking the Enron philosophy to its core, McKinsey and Allstate increased Allstate's pre-tax operating income [not including investment income] from a decade-long average of82 million dollars a year, to an average of 27.4 billion dollars per year from 1996-2006. McKinsey and Allstate did not accomplish this by making smarter investments or through wiser risk management. Rather, Allstate adopted a "zero-sum" approach which internal memos claimed "redefine[d] the game" and "radically alter[ed] our whole approach to the business of claims". Allstate aimed to reduce claims payments by 15 to 20 percent, and in fact it reduced payouts on auto claims from 69 cents per premium dollar collected, in 1994, to 51.7 cents per dollar in 1998 and 43.5 cents per dollar by 2006. Parenthetically, this should have resulted in some reduction in premiums but in fact it did not.
In order to achieve these spectacular results, McKinsey and Allstate devised a "Good Hands or Boxing Gloves" approach, pursuant to which Allstate would pay claims fairly, or promptly, but not both. Insureds would be offered a choice: prompt payment of an arbitrarily computed amount (actually eighty percent of similar past claims, apparently)--or incur the expense, risk and delay of bare-knuckled litigation. This strategy deliberately took advantage of the economic pressures which accompany a significant personal or property loss: many policy holders would simply be unable to withstand the delay and expense of litigation and be forced to capitulate and accept unjust settlement offers that had been calculated at about eighty percent of past payouts.
McKinsey estimated that faced with legal expenses and substantial court delays in resolution of a claim, 90 percent of policy holders would throw in the towel. The remaining ten percent of insureds willing to contest this arbitrary reduction in a claim would be forced in to what McKinsey and Allstate called the "kill box": no-holds-barred litigation designed not to determine the actual value of a claim, but rather to punish policyholders unwilling to accept less than the actual value of their loss.
As further assurance of higher profits, the industry also redoubled its assault on victims' rights under state laws. A full-scale national campaign was engaged (and then fueled with extraordinary profits) to limit payouts by all casualty and liability insurers through changes in the law and marketing to potential jurors. "Frivolous claims" became a political by-word, despite the fact that no actual proof was offered to document that such claims were a legitimate issue.
In an earlier blog we documented the enormous change in the number and size of payouts in Michigan since 1987: insurers have enjoyed particular success in reducing claims and claims payouts in Michigan and have reaped profits that are even more spectacular than nationwide averages as a result. Refer to "Record Profits..." in our weblog index.
Enormous insurers like Allstate, Safeco and Progressive have achieved such startling profits that they have embarked upon a massive stock buyback with excess premium dollars. Just two y ears ago, Allstate bought back more than 15 billion dollars in stock during the same period it was complaining about large potential weather-related losses and lobbying legislatures for insurance "reform". While insurance industry spokespeople like Mark Racicot--formerly a top Enron lobbyist and Republican National Committee Chairman, and current head of the American Insurance Association--describe the industry as "high-risk" when responding to critics, the facts show otherwise: even in 2005 when three of the ten most destructive storms in history ravaged the United States, U.S. insurers declared RECORD profits.
These record profits have not ocurred by coincidence. Even while the industry was reporting 44+ billion in profits in 2005, insurance executives were manipulating to enhance profits further. For example, Jeff Radke, CEO of a Bermuda-based reinsurer, claimed that Hurrican Katrina is a "significant event" for our company...our loss will leave us with enough capital to really thrive in the markety opportunity that's going to follow...this is one of those happy cases where if a rating agency were to insist that we raise capital...it wouldn't trouble us much at all." AIG Executive Vice President JW Greenberg expressed similar sentiments in an intra-company memo he wrote the day Hurricane Andrew hit south Florida: "We have opportunities from this and everyone must probe with brokers and clients. Begin by calling your underwriters together and explaining the significance of the hurricane. This is an opporunity to get price increases now. We must be the first and it begins by establishing the psychology with our own people. Please get it moving today. Lloyd's of London described the September 11 attacks similarly, as a "historic opportunity...where very large profits are possible".
In short, the American public has been manipulated into a cultural change of significant proportions through a campaign of deceit and greed. Led by Allstate and McKinsey, a quasi-public industry that historically balanced state-defined risks and rights in order to broadly share accident risks accross the population, has achieved an Enron-like goal of redefining and diminishing consumer rights in order to record record profits. Even more disgusting, it has cynically and deliberately profited from catastrophes such as September 11 and Hurricane Katrina, while diverting attention from its record profits to excoriate innocent victims and policyholders. One can't help but wonder just how long the middle class will allow itself to be manipulated against its own interest by wealthy Enron-like profit-mongers.