David Dietz and Darrell Preston wrote a September article for Bloomberg entitled “The Insurance Hoax“. The article discusses various property and casualty insurance tactics used to reduce payments on valid claims. A focus of the article is Allstate’s and State Farm’s use of McKinsey & Co., a New York based consulting firm, in order to determine how to increase profits. McKinsey & Co. basically came up with a method for insurance companies to handle claims: (1) sit and wait; (2) pay as little as possible; and (3) put on the boxing gloves.
What do these mean? Sit and wait refers to the delay of settlements and court proceedings. This wears down the insured so they will fold and take the low settlement. Pay as little as possible is self explanatory and goes along with the third category. The insurance carrier will make a low ball offer, and if the claimant refuses to accept, the carrier will put on the boxing gloves and fight them all the way.
The article is a good illustration of how the insurance industry is pulling the wool over people’s eyes. It goes into the low offers to insureds on their homes which have been destroyed by fires and natural disaster. The authors discuss the concept that insurers are not supposed to be maximum profit centers because they have a special relationship to their insured. Once they become focused on the bottom line, they become in conflict with their own customers. We are talking about people’s homes and lives. These customers purchase insurance for “peace of mind” not for a two year legal battle, and insurance companyies know this on the front end. So, when they put on the boxing gloves, the insurance carriers are taking advantage of people who are in a weak position.
What is happening? Mr. Dietz and Mr. Preston point out two glaring statistics in their article which show the bottom line is more important than the customer. What are those statistics? Read the article.
Just kidding! One statistic involves the profits of the insurance industry which I discussed in a previous blog. According to the article, Property- casualty insurers, which cover damage to homes and cars, reported their highest- ever profit of $73 billion last year, up 49 percent from $49 billion in 2005, according to Highline Data LLC, a Cambridge, Massachusetts-based firm that compiles insurance industry data. This includes payouts on Hurricane Katrina!!! In fact, Allstate’s profits rose from $2.08 billion in 1996 to $4.99 billion in 2006.
The other statistic: what these insurance companies are doing with a lot of our premiums. The insurance industry spent $98 million on lobbying in Washington in 2006, according to PoliticalMoneyLine, a unit of Congressional Quarterly. That’s the second-largest amount spent on lobbying by any group, behind $114.4 million by pharmaceutical companies. $98 million!! That figure doesn’t even include amounts paid for state lobbying.
When is enough enough? When juries start waking up and telling the insurance industry they have gone to far. That’s why we have courts. That’s why we have juries composed of our peers. The legal system is a method by which we can check these practices. But, if the insurance industry has its way, and $98 million seems to talk, we won’t be able to access the legal system much longer.