How Insurance Claims Became a Profit-Making Process
We’ve written before about insurance companies and their priority to increase profits as much as possible.
We explained how this often leaves victims of accidents to receive much less money than they are deserving of while wasting valuable time. And, in many cases, how they need to hire a personal injury attorney to recover the compensation that they deserve.
It gets worse:
Many people do not have the expertise to know whether the amount offered by the insurance company is fair. If you haven’t read the post, I recommend catching up here first.
Today, we’re digging a little deeper for you.
Specifically, we’ll touch on the history of the insurance industry’s business model. If you read our post on insurance companies, then you saw Anderson Cooper investigate the poor behavior of auto insurance companies. And, you may have been pretty surprised.
Now, we’ll recap an article from the Huffington Post, which straightforwardly reported on:
the profit-hungry model of insurance companies,
combined with weak regulation,
despite the industry’s requirement by law to act in good faith. (Read about bad faith insurance here.)
Buckle your seat belt, because you’re in for a shock.
Russ Roberts is a New Mexico-based management consultant who is well-versed in the evolution of the insurance industry. Roberts told the Huffington Post that insurance “claims have been converted into a money-making process.”
…For the insurance companies, of course.
In order to better understand what exactly is going on here, I’d like to start at the center of the story with McKinsey & Company. Does the name sound familiar to you? If not, then bear with me. This is an important piece of the story.
A 2013 article from MarketWatch states: “Over the years, McKinsey’s advice has been blamed for billions’ worth of missteps at companies from General Motors to General Electric … And some of its former top executives have committed infamous white-collar crimes.”
Here are some major examples:
Anil Kumar, former senior partner at McKinsey & Company, pleaded guilty in 2010 to releasing insider information to Raj Rajaratnam, former hedge fund billionaire.
Rajat Gupta, prior top executive at McKinsey, was convicted of insider trading charges in the same Rajaratnam scandal in 2012.
One of McKinsey’s previous partners, Jeffrey Skilling, became CEO of Enron.
Hmm…there might be a pattern here. Right?
Nonetheless, McKinsey & Company reportedly made in excess of $8 billion in profits in 2014.
Where it All Went Wrong for Consumers
So, here’s the big deal:
In the mid-1990’s, McKinsey & Company consulted with large, leading insurance players (like Allstate) to reevaluate their business model.
The consulting giant sold these big-name insurance companies a completely new system. The concept was to move the traditional claims adjusting process to a computer-driven model.
On its face, this may not seem terrible. But here’s the problem:
The real strategy was taking away the wide autonomy that claims managers had to serve clients and, instead, using the computer-driven model to output offers that are purposefully low.
You’re probably thinking:
“Well how can that align with their legal obligation to act in good faith?”
Great question! It doesn’t.
However, this was just the start of the new, profit-driven process, which created a vicious road map, leading one of two ways:
1) If claimants accepted the purposefully low offer, they would receive speedy service.
2) If claimants did not accept the purposefully low offer, they would not only receivedelayedservice, but also be required to file suit in order to fight for their rights to fair compensation.
It gets worse:
The Huffington Post included an eye-opening quote in their article from a former Allstate agent, Shannon Kmatz. Kmatz told the American Association for Justice that the insurance company’s new strategy was to make the claims process “so expensive and so time-consuming that lawyers would start refusing to help clients.”
Yes, you read that correctly.
Where are the Regulators?
If you didn’t think it was bad enough, here’s the kicker:
While consumers (yep – you and I) are left to struggle with the malicious process of insurance companies, industry giants like Allstate have gained tremendous profit advantages since shifting business models.
According to the Huffington Post, Allstate made $4.6 billion in profits in the year 2007, which was double its earnings in the 1990’s (when the business model shift occurred).
Roberts explains that this is due to the new strategy and “driving down loss values to an average of 30 percent below the actual market cost.”
Let me just repeat that last part:Their strategy involves driving down loss values (i.e., the amount that you deserve) by an average of 30% below market cost.
And, Allstate isn’t the only insurance company taking advantage of consumers in this way. The large change in profits realized by Allstate only encouraged other big-name insurance companies, like State Farm, to take on the same model.
So, where are the regulators? How can this be happening at such a large and calculated scale?
Well, this is the worst part.
Insurance regulators are closer to the issue than you think… just not in the way we’d all expect. According to the Huffington Post, 11 out of the past 15 presidents of the National Association of Insurance Commissioners became employed by the insurance industry after leaving office with the NAIC. State-level commissioners followed suit, with approximately half of insurance commissioners receiving positions by insurance companies.
See the issue?The people that should be protecting consumers through keeping insurance companies in check are often employed by those very insurance companies after their regulation gig is over. When your insurance company acts in bad faith, the solution should be to file a complaint with state regulators; however, the proof of effectiveness is lacking.
To heighten the issue even further, a large portion of state revenue comes from insurance tax.
The Sad Truth:
Our Personal Injury Law Firm Sees the Results Every Day.
Unfortunately, the profit-hungry model of insurance companies is evident in our everyday work at Baskerville Law LLC.
In large part, the malicious model of insurance companies has caused our founding attorney, Rob Baskerville, to focus exclusively on auto accident cases, holding insurance companies accountable for their duty to act in good faith. We refuse to be discouraged enough to stop helping people get the fair compensation that they deserve.
Baskerville Law LLC
Rob Baskerville, Esq. is the founding attorney of Baskerville Law LLC, an Albuquerque-based personal injury law firm. Our legal team is devoted to representing personal injury and wrongful death plaintiffs. It is our mission to provide the best representation for our clients, recovering as much compensation as possible for their losses. We refuse to be intimidated by big business insurance companies and stand ground against them by advocating for our valued clients.