The backdrop for all this is a bitter struggle over the public image of the insurance industry and growing (though still isolated) calls on Capitol Hill for its reform. Critics charge the industry with exploiting a dysfunctional regulatory system to cheat policyholders at every turn. The industry says it is in fact suffocating under regulatory burdens and is unfairly vilified by critics who either don’t understand the business or have agendas of their own.
These competing black-and-white portrayals of the industry has only grown starker since Hurricane Katrina, in August 2005, an event that triggered a torrent of lawsuits alleging wholesale abuse of policyholders even as insurers reaped (then) record profits.
Outsiders are often taken aback at the vitriolic nature of insurance debates. There are a few reasons for this.
First, as insurers know well, an allegation of claims-handling misconduct represents more than a simple contract dispute. It’s illegal. To knowingly deny or underpay a legitimate claim is the equivalent of a bank refusing a withdrawal: it better have a good reason. Hence, even a single allegation is a problem.
Second, insurance is a backwater in the mainstream business press, and its actors are thus unused to serious, arms-length scrutiny. The reasons for this are many, but as this post reminds me, insurance is a difficult beat that requires immersion in an ocean of obscure ratios and facts and long, grinding arguments over their meaning with an adroit research operation headed by Hartwig, a Ph.D. Suffice it to say that from a career point of view, most business reporters find the beat unrewarding.
Third, despite this seeming surfeit of information, insurance lacks a useful metric for—of all things—claims-handling performance. While deeply ironic to anyone who has ever hoisted a phonebook-sized volume of, say, Best’s Aggregates and Averages, the industry fact bible, it is nonetheless true that no aggregate figures exist to document the amount policyholders actually demanded from insurers, a key figure that could then be compared to how much insurers chose to pay. There is no “insurer payout ratio,” which I like to call the “Starkman ratio.” Imagine a discussion about a mutual fund without knowing its past performance.
As a result, arguments over insurer claims performance tend to take on almost a theological tone. News organizations point to harrowing individual cases, statistics that show insurers pay little in claims as percentage of premiums, (as low as 55 percent or 65 percent depending on who’s counting) and the industry’s wild profitability as proof that insurers routinely take advantage of policyholders in their moment of need.
Insurers say the sob-story anecdotes are either anomalous or bogus altogether, that the use of certain ratios out of context is irresponsible and misleading, that policyholders are more likely to game the system than insurers, and that critics do not understand or fail to note the industry’s (supposedly) wildly cyclical nature.
Into this howling maw dropped “The Insurance Hoax.” The two-part, 11,000-word series, written by David Dietz and Darrell Preston, compiles court records, whistleblower accounts, internal documents won in discovery, and financial figures to describe profiteering on a vast scale, driven in part by a claims-handling system engineered by consultants to lowball legitimate claims or deny them outright.
The series (I refer to a series but the main disputes center around the first day’s story on insurer claims conduct; the second day deals with regulatory failings) won recognition in other journalism awards contests as well as high praise from me).
The series’s strength, in my view, is precisely its remorseless assembly of a factual record. It includes testimony from former adjusters (“It’s tough to look at people and know you’re lying”) engineers (“we were working for insurance companies and they wanted certain results”), policyholders (“If they defrauded me, how many more are they going to defraud”), and cases in which juries found insurers had acted in deliberate bad faith. The series makes use of blockbuster discovery material, particularly a sequence of slides prepared by McKinsey & Co. for Allstate Insurance Co. in the early 1990s that characterized claims as a “zero-sum game” and recommended insurers adopt a combative posture toward customers who wanted more than insurers offered.