Here are some highlights from this 2022 book:
* Central to the goal of reducing payouts was preventing policyholders from hiring lawyers, she said, because “represented” clients on average got payouts multiple times bigger than claimants who didn’t hire legal help.
“We were told that Allstate was going to change the way claims were handled so that claimants could not get lawyers,” Reed said. In other words, beat down the opposing counsel by fighting every motion in court, making it so time-consuming and expensive that lawyers would reconsider filing suit against Allstate. This was the “boxing gloves” part of the strategy.
“More people without representation would mean larger profits for the company,” she said. McKinsey was telling Allstate to turn its claims center into a profit center.
The words merit italics because what McKinsey did at Allstate fundamentally altered America’s insurance industry.
* Americans have had a love-hate relationship with insurance companies for decades. They love their local insurance agent, typically a pillar of the community, a coach for Little League baseball or Pop Warner football. But they hate dealing with insurance companies that bombard them with paperwork requests and sometimes deny what they see as legitimate claims. Until McKinsey appeared on the scene, the profession was dominated by experienced claims adjusters bound by law to offer fair claims. The “claims man” was an honorable and coveted profession in postwar America.
* McKinsey was focused on its traditional role of making businesses more efficient—cutting costs. For the claims department, that meant controlling the expense of handling claims, known in the industry as loss adjustment expense, or LAE. This could be anything from culling excess employees, cutting down mailing expenses, negotiating better prices for copier paper, or reducing overtime costs.
But tinkering around the edges, streamlining offices, and cutting expenses could get the company only so far. What insurance companies spend on claims processing is a small fraction of what they pay out in claims themselves. In 2018 the property and casualty industry paid out $365.9 billion in claims, spending $64.6 billion in processing fees, meaning insurers on average spent about 17 percent of what they paid out for administration expenses.
By the 1990s, with McKinsey-led financialization sweeping the economy and ever-increasing pressure from activist shareholders for companies to boost profits, the firm pushed a big new idea to its clients: reducing the amount paid out in claims. In McKinsey-speak: “ After years of squeezing the cost side, management recognized huge opportunities to rebalance and invested cautiously in LAE to capture indemnity savings.” The new approach to boosting profit was to curtail what insurance companies saw as unjustifiably high amounts paid out to some claimants. To control what it called “leakage.”
McKinsey was telling Allstate to essentially declare war on a sizable proportion of its policyholders. One slide proclaimed, “Winning will be a zero sum game.” In other words, Allstate’s gains come at the expense of its policyholders. Another featured an image of an alligator. Why? Because, like an alligator, Allstate would just “sit and wait” for its victim—the claimant—to give up. “The money came from the only place it could come from—the pockets of Allstate policyholders and claimants,” Berardinelli wrote.
Before McKinsey, there were still angry policyholders. Before McKinsey, insurance companies lowballed claims. But McKinsey systematized it.
* Following Allstate’s adoption of the McKinsey system, State Farm, the biggest property and casualty insurer, signed up for the same magic elixir. Its McKinsey-designed “Accelerating Claims Excellence” system was first introduced to its field offices in mid-1995. AAA followed a few years later. Liberty Mutual also became a McKinsey client.
“ It has been common knowledge within the casualty insurance industry since at least 1995 that McKinsey was openly selling the same redesign methodologies and claim handling processes it developed in the early 1990’s for State Farm and Allstate to their competitors,” Stephen Strzelec, a former manager for State Farm, said in a 2008 affidavit.
“They set a trend,” one former McKinsey partner said of the firm’s work with Allstate. “ The claims process was just evil, and I think what’s happened now is that more insurance companies have followed that.”
At Allstate, profit soared more than sixfold in the decade after McKinsey’s program was put in place. Its share price more than quadrupled, handily beating out the broader markets. The pay of Allstate’s top five executives, tied to the share price just as the McKinsey partner Arch Patton had envisioned half a century earlier, shot up. In 1994 their combined compensation amounted to $2.95 million. A decade later it had reached $19.3 million. In 2020 the top five executives made a combined $38.2 million, led by the CEO, Thomas Wilson. By 2021 the average salary of an Allstate worker was about $62,000, barely keeping up with inflation over twenty-five years.
Meanwhile, the percentage of premiums paid out on claims declined. Allstate executives and shareholders were becoming fabulously rich by reducing payouts, preventing many policyholders from getting all the money to which they were entitled. It was, said Russell Roberts, a former management consultant who is spending his retirement studying how McKinsey has altered the insurance industry, “reverse Robin Hood.”
* In 1987, Allstate paid out 70.9 cents in claims for every dollar it took in. By 1997, two full years into the McKinsey makeover, the ratio had fallen to 58.2. By 2006, after spiking a year earlier amid huge claims resulting from Hurricane Katrina, it was 47.6.
* …the McKinsey system resulted in the transfer of $94 billion from policyholders policyholders to Allstate coffers from 1995 to 2018. Add in State Farm and other companies that adopted the McKinsey system, and the total approaches $374 billion
* In 2007, Bloomberg Markets magazine published a searing investigation into how Allstate, State Farm, and other insurers, using the McKinsey method, were routinely lowballing offers to homeowners whose homes had been damaged or destroyed by natural disasters. The most famous irate claimant: the Mississippi Republican senator Trent Lott, who sued State Farm when the company wouldn’t pay for damage to his home from Hurricane Katrina. State Farm said the damage was from water (not covered), rather than wind (covered).
A 2003 fire in the San Diego area destroyed more than two thousand houses, but insurers, including Allstate and State Farm, refused to reimburse policyholders for the amount needed to replace their homes, sometimes hundreds of thousands of dollars below replacement value, Bloomberg reported. They were not being made whole.
Under state laws across the country, insurance companies are obligated to pay the fair value of whatever benefits their policyholders are entitled to. An insurance policy is, after all, a contract. But what makes the duty of insurance companies even more pressing is the fact that many kinds of insurance aren’t optional. Every driver is required by law to have auto insurance. Mortgage companies require people to buy homeowners insurance. An industry where the government compels people to buy their product is especially obligated to carry out its fiduciary duty.
