Submitted by: Mike Spindell, guest blogger
It’s Christmastime again and since my childhood, long ago, the Frank Capra film “It’s A Wonderful Life” has been shown time and again in this season, providing a message of redemption, hope and joy that we associate with this time of year. You all know the plot about selfless George Bailey (James Stewart) a man who has sacrificed his dreams for others and because of his selflessness winds up running the Bailey Building and Loan Association, of Bedford Falls, NY. Because of George this institution has provided home loans for the poor of this rural community and serves as its bank. With the Company on the verge of bankruptcy, through duplicity, George is on the verge of suicide distraught over the losses to those he loves and worried by needs of the average people of his town. You all know this plot and if you don’t its summary is here.
. I must warn you, perhaps it’s the time of year but I choked up reading the plot, yet again, as I do every time I see this beloved movie.
This introduction has not been made because I’m about to write about banks, or the depredations of the banking industry. Others here and our host have already written extensively on the predatory nature of the banking industry and the harm it has caused to our country. My point of this opening is that we have all grown up with certain mythologies about businesses that provide financial services to the public. This film has had a place in defining that American mythology, in this instance about a bank of sorts, whose leader believes in aiding the community first and profits second. Myths shape our thinking and from my youth I still remember the ad slogan “You have a friend at Chase Manhattan”.
We’ve discovered that banks are anything but our friends. Their bottom line has surpassed service to the point that each customer is looked at as a “cash cow”, to be plundered incessantly with usurious interest and fees for what should be free services. But what about “You’re in Good Hands with Allstate”, “Nationwide Is On Your Side”, or “Like A Good Neighbor State Farm is There”? Surely the Insurance industry supplies the safety net we want for our homes and cars. Do they? Last week I was sent an article by the Independent Claims Adjuster handling my interminable case for mold damage to my home. He’s helping greatly so this isn’t about me, but the article he sent certainly puts into context all the delays in the process and how property insurance companies are maximizing their profits at the expense of their customers.
The article my claims adjuster sent was “Insurance Claim Delays Deliver Massive Profits To Industry By Shorting Customers” written by Mollie Reilly and Max Rosenthal. It appeared in the December 13th Huffington Post Business section. It describes a change in claims payment system procedures sold to Allstate and other Insurance Companies by the large consulting firm McKinsey and Company, which boosted their profits at claimants expense.
“Unlike many other businesses, the insurance industry is bound by law to act in good faith with its customers. Because of their protective role in the lives of ordinary citizens, insurers have long operated as semi-public trusts. But since the mid-1990s, a new profit-hungry model, combined with weak regulation, has upended that ancient social contract. “Claims have been converted into a money-making process,” said Russ Roberts, a New Mexico-based management consultant and former business professor at Northwestern University who has studied the insurance industry’s evolution from a service business to a profit-driven machine. The change started when consulting giant McKinsey & Company sold Allstate and other leading insurance companies on a new system to boost the bottom line: Rather than adjusting claims the traditional way, which gave claims managers wide latitude to serve customers, insurers embraced a computer-driven method that produced purposefully low offers to claimants.
We have all been led to believe that a property insurer has our interest at heart and wants to make us whole after disaster strikes. While some problems have arisen in disputes where there has been massive damage done by natural disaster, the myths and the ads tell us that these companies are more than our friends, they are our protectors. It seems, as with many myths, this is no longer the case, if it ever has been.
“McKinsey’s strategy put profits above all. One slide in the McKinsey presentation illustrated this philosophy by painting the insurance business as a zero-sum game: “Improving Allstate’s casualty economics will have a negative economic impact on some medical providers, plaintiff attorneys, and claimants. … Allstate gains — others must lose. Allstate has certainly gained: It made $4.6 billion in profits in 2007, double its earnings in the 1990s. The stunning increase, said Russ Roberts, came through “driving down loss values to an average of 30 percent below the actual market cost” — that is, paying dramatically less on claims”.
We see that through delaying payment of claims, paying minimal claim amounts and forcing people already strapped by hardship to take it or sue, “Good Hands” companies like Allstate are making record profits, while some people’s lives are collapsing around them, even though they prudently bought property insurance. While I am not surprised by this, I am outraged. Is every purchase of ours whether product, or service to be based on “caveat emptor”? Is this what those who push so hard to have regulations on businesses stripped working for? Is the complete burden of having to painstakingly investigate every entity we deal with to be laid on our shoulders? Is this the type of society we all want?
“An insurance company can make a lot of money on the small claims,” said Jay Feinman, a professor at Rutgers University School of Law, “because if you save a few dollars on a huge number of claims, it’s worth more than saving a lot of dollars on a very small number of claims.”
“Allstate is the best-known user of the McKinsey model, topping the list of the “Ten Worst Insurance Companies in America” published by the American Association for Justice. But Allstate’s rise in profits has led most of the industry to adopt the same approach. McKinsey has worked with State Farm, another insurance giant, and other companies in redesigning their claims systems. Feinman cautioned in his book “Delay, Deny, Defend” that the two major names “are just the largest players in the industry … [the ones] whose involvement with McKinsey & Company in the transformation of claims is the best documented.”
By using the tactic of “Delay, Deny, Defend” these companies are purposely avoiding paying claims, or paying much less than they should, because they in the end have the upper hand. Imagine, as a case presented in this article describes, losing your home and belongings in a claimable disaster. Most Americans would be totally at a loss about what to do next. Most of us don’t have the wherewithal to sustain a financial disaster like that. That is what this strategy counts on. People are being toyed with at a time of crisis and through that the Insurance Company reaps profits far beyond what their business should entitle them to make.
“Roberts, the management consultant, said that companies like Allstate attempt to pass off claims delays as fluke occurrences. But, he said, they are actually routine and intentional products of the McKinsey system: “The Allstate/McKinsey system for ‘lowballing’ claims payments … is driven by the claims performance management and pay systems from the top to the bottom of the organization.”
Feinman, the Rutgers law professor, also suggested the deck is stacked against individuals who make claims. “You have an accident or a fire in your house. You call up the insurance company. You describe the circumstances. Maybe they send an adjuster out, and they say it’s not covered, or it’s covered but here’s the dollar amount that we’re obligated to pay you,” he said. Most people, Feinman said, do not have the expertise “to know whether or not that’s right.”
What happens to those people with scant resources, with great damages to their home ad belongings? How have the lives of those with these companies coverage been adversely changed by this policy of greed? I think greed is the correct terminology, though to me it also verges on fraud. As a business major in college I was taught that when you supplied a service to someone, the best business practice was to make good on the service you offered. Now of course I graduated in the mid 60’s and as I understand it since Reagan and the 80’s, Business Schools are teaching a revised curriculum that makes the bottom line the only consideration of a business executive.
We have all seen insurance industry sponsored commercials telling us that “insurance fraud” is causing our rates to rise and asking us to pressure our legislators to draft even more severe legislation to combat this evil. Some I’ve seen have even suggested turning in our family and neighbors that we believe are committing insurance fraud “because insurance fraud hurts everyone”. I would submit that the real threat of insurance fraud is coming from the insurance industry itself as it searches for ways not to deliver services they have contracted to provide. Sadly, although both the Federal and the various State governments have agencies to regulate this industry, the regulators seem to have been seduced by the regulated.
“…experts like Feinman argue that insurance regulation has become little more than a fig leaf. State insurance departments are usually understaffed and overwhelmed. And even if they had the legal firepower to contend with giant insurance companies, Feinman said, “the regulators are closer to the industry than they are consumers.” Eleven of the past 15 presidents of the National Association of Insurance Commissioners (NAIC) went on to work for the insurance industry after leaving office, while a 17-year study from two Georgia State University professors found that around half of state-level insurance commissioners did so as well. When combined with penalties that Feinman described as “laughably low” in many states, this close relationship means that regulation does not provide an effective check on insurance companies. And state governments themselves have incentive to place consumers on the backburner. Because insurance taxes are a major source of revenue for the states, said Roberts, insurance oversight commissions are usually more concerned with keeping companies solvent than resolving the problems of policyholders”.
So we see also that government regulation of the Insurance Industry has been ineffective. Some of the reasons give above are a “revolving door” between regulator and industry. Also mentioned is that on State level insurance taxes provide the State with a good deal of revenue. I would also suggest though that the Insurance Industry is the source of a good deal of political campaign funds and their payback is lax oversight. This inevitably leads us to the great debate in America between the “Too Much Government” side and those like me who see a dire need for effective government regulation. I know there are more than a few who read this blog who rail against how government regulation has hurt the “free market”. I would ask them to use the link to the article I’ve posted and mull over if they think this method of doing business by the insurance industry is a fair one. If they agree with me that this is a bad, possibly fraudulent business practice, what then can we as a society do about it, or do they think that it is a matter in which government should not intervene?