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Reduced Payouts, Increased Profits: How the Insurance Industry Has Shifted Away From People, Towards Profits

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Before the early 1990s, insurance was a human endeavor. After an incident—whether it was a car accident or a major storm—insurance adjusters came out to your home. They sat in your kitchen. You’d, perhaps, offer them a glass of water. Face-to-face, you’d show the adjuster your injuries or the damages to your home. They would prepare a reasonable estimate and satisfy your claims. The industry was run, as it should be, to the benefit of policyholders.

During the 1990s, there were also a number of damaging storms, which began to fundamentally shift how insurance companies conducted business. In 1989, Hurricane Hugo ripped through South Carolina, leaving in its wake $4.2 billion of insured, yet damaged property. In 1992, Hurricane Andrew stormed through, creating $15.5 billion in claim payments and resulting in the bankruptcy of 11 separate insurance companies.

When the payout is greater than the insurance premiums customers pay, there is no profit.

For the insurance companies that survived, and who depended on insurance premiums and investments for income, they believed something had to be done. Storms were gaining magnitude. Catastrophe models weren’t as predictable and face-to-face assessments were dubbed as being useless, time-consuming, old-fashioned, and inefficient.

Now, computer programs and software are calling the shots, like “Colossus,” which determines claim payments based on statistics, technical data, and mathematical probabilities all designed to pay out less in settlements. But, are these computations fair and non-discriminatory to injured parties? Or, are the probabilities rigged in favor of insurance companies?

Around the same time as those destructive storms, Allstate, an American insurance company, hired McKinsey & Company, a New York consulting firm, to show them how they could increase their bottom line. McKinsey & Co.’s PowerPoint presentation, complete with more than 12,500 slides, was a fundamental shift in the insurance business model – the industry quickly went from being “For the benefit of policyholders” to “For the benefit of shareholders.” It boiled down to this: avoid paying claims, and when you do pay—pay less. After heeding McKinsey’s advice, Allstate saved $700 million and their stock price rose dramatically. (Note: Allstate ended up paying $2.4 million in fines to the U.S. courts for not initially handing over this documentation.)

Allstate raked in the profits. In the first few years of the Colossus implementation, average payouts for bodily injuries dropped more than 20 percent. Mark Romano, a former Allstate senior executive and top expert in Colossus described his work utilizing the program as “turning the knobs.” In fact, the 1996 McKinsey team even noted initial resistance from Allstate claim agents, stating there was a “lack of buy-in.”

After any major accident, urgency matters for the injured insurance policyholder. The first 180 days hold tremendous financial pressure. Claims, fees, payments, and medical bills immediately start piling up. If an individual can no longer work, who pays the mortgage? Companies, like Allstate, understand this predicament, which is why they drag their feet on paying insurance claims.

David Berardinelli, author of From Good Hands to Boxing Gloves: The Dark Side of Insurance, details this courtroom power-play. Berardinelli turns Allstate’s motto on its head when notes that the policyholders who accept initial, but much smaller, claim settlement amounts are “in good hands.” But for those policyholders who choose to fight and seek legal representation, they receive Allstate’s “boxing gloves.”

Companies, like Allstate, pressure policyholders to settle quickly and to accept some money (even though it’s a fraction of what a policyholder is due). Or, they deny and diminish claims, so that policyholders have to use their own resources and seek legal representation to fight for a fair settlement. If resources are already scarce, where will the money come from to cover legal fees? Policyholders, concerned they could spend years in court while their bills go unpaid, often feel forced to take what is initially offered. In fact, one McKinsey & Co. slide for Allstate simply read, “Win by exploiting the economics of the practice of law.”

Berardinelli added:

“All this is a plan for switching money from the policyholders’ pockets to the shareholders’ pockets.”

The “Alligator Approach” to “sit and wait” is done deliberately to frustrate policyholders, so they’ll accept less and walk away. Legal and medical funding, like what Cherokee Funding provides, offers an opportunity to gain access to critical funds in a timely manner and allows attorneys the necessary time to fight for a fair settlement or go to trial. Nobody should have to choose between taking a lesser settlement and waiting for a fair settlement or trial because they need money to pay for essentials and their medical care. Legal and medical funding also isn’t a loan, so if plaintiffs don’t win, or if the amount they’re awarded is less than the bills owed, they only pay what they have recovered. Repayment is contingent on the success of the lawsuit or the settlement of the case.

After the fundamental shift in the ‘90s, plaintiffs need to be their own advocates. Insurance is a business model and it’s one that is weighted heavily to tip the scale in favor of the insurance company, not the policyholder.

To navigate the maze of the insurance world as it stands today, this Consumer Federation of America’s guide and checklist are useful tools.

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