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Insurers Profits Rising Based on Bad Business Practices?

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A recent article in the on-line publication Bloomberg suggests that anti-consumer insurance industry practices have led to a stark increase in insurance profits in recent years. According to Bloomberg, consumers have been bearing the burden of bad-faith insurance industry practices:

Insurers often pay 30-60 percent of the cost of rebuilding a damaged home — even when carriers assure homeowners they’re fully covered, thousands of complaints with state insurance departments and civil court cases show.

Paying out less to victims of catastrophes has helped produce record profits. In the past 12 years, insurance company net income has soared — even in the wake of Hurricane Katrina, the worst natural disaster in U.S. history.

According to Bloomberg, some insurance companies have spared no detail in their efforts to increase profitability at the expense of the policyholder. For example, in 1992 Allstate Insurance Company hired business consultants McKinsey & Company for advice on improving its efficiency and profitability. After working with McKinsey, Allstate’s loss ratios, the ratio of claims paid to premiums received dropped significantly from approximately seventy-nine percent in the 1990’s to fifty-eight percent in 2006. Such a major dip in loss ratios led to major increases in profits and stock value. How did the company increase its profits? The Bloomberg article states that Allstate adopted several McKinsey recommendations to minimize claims payouts and reduce loss ratios:

When a policyholder files a claim, first make a low offer, McKinsey advised Allstate. If a client accepts the low amount, Allstate should treat the person with good hands, McKinsey said. If the customer protests or hires a lawyer, Allstate should fight back.

According to various Powerpoint slides apparently prepared by the McKinsey group, these consultants recommended focusing cost-control efforts on minimizing or delaying coverage payouts throughout the claims process:

The slide says Allstate can discourage claimants by delaying settlements and stalling court proceedings.

By postponing payments, insurance companies can hold money longer and make more on their investments — and often wear down clients to the point of dropping a challenge.

Bloomberg even documented efforts by Allstate to encourage its claims representatives to lie about covered claims rewarding them with merchandise for representatives who denied coverage for claims without any truthful justification. This agressive approach in the claims process outlined in the news article apparently led to a 140% increase in Allstate profits. Other companies have been identified in the article as having engaged in similar conduct. For example, Farmers Insurance Company apparently awarded some type of financial bonuses to its claims representatives who paid out the smallest amounts to insured claimants. Likewise, according to Bloomberg, after State Farm hired McKinsey and engaged in similar cost-cutting moves, its profits doubled to $4.8 billion dollars last year.

Insurance companies like any other for-profit business have the absolute right to earn a profit. However, like any other business, carriers should do so responsibly. I believe carriers should be held accountable for bad-faith decisions which betray the commitments an insurance company makes to its policyholders in its insurance contract. Do you agree? Have you had a bad experience with your insurance carrier? Have you had a good experience with your carrier? If you have had a bad experience with your insurance company, you may consider filing a complaint with the Arizona Department of Insurance. The Department will not represent you but will investigate possible violations of Arizona law. Let me know about your good or bad experiences. I’d like to hear from you and what you think about the insurance industry.