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.
I'm surprised you gave Bloomberg a pass on averaging multi-year growth rates, rather than compounding them, calling it unusual but allowable. Averages have their place, but they should never be allowed in interpreting a sequential time series, as happened here. If a company tried to talk about average growth over the years the way Bloomberg did, I'd hope the SEC would fine them for misleading investors. That's the type of misuse of statistics that Mark Twain complained about.
Posted by KLH
on Wed 9 Jul 2008 at 02:55 PM
I am disappointed to see that the point-by-point rebuttal by Mr. Hartwig and my own critique failed to convince Mr. Starkman about the article's shortcomings. We'll just have to agree to disagree.
Frankly, I just chalk this up to more of the same--the fact that the bulk of those in the media covering insurance (as well as those assessing the performance of reporters doing insurance stories), just don't understand how the business works, let alone appreciate how much it means to society and the economy.
Mr. Starkman raises the issue himself in his post.
He says that insurance is a "backwater in the mainstream business press," which is absolutely right, although I would dispute his conclusion that because of this, "its actors are thus unused to serious, arms-length scrutiny."
In fact, all the industry ever gets is negative press. Part of the problem is poor public relations by the industry. (Perhaps the Insurance Information Institute, beyond their useful annual "Fact Book," should offer at least an online introductory seminar for journalists covering the industry.)
But it's also the old "man bites dog" problem--no one thinks an insurance story is news if billions in claims are paid and lives, homes and businesses are rebuilt; they only send reporters when there is a dispute of some sort.
The result is that insurance news--good and bad--is under-reported or blatantly misreported. And when reporters are assigned stories, too many don't know what they are talking about, or falsely assume that all insurers, as well as their adjusters and agents, are crooked.
As for the Bloomberg letter of complaint to the Deadline Club, a couple of points.
"Bloomberg News" Editor In Chief Matthew Winkler characterized me in his letter as "a frequent defender of the insurance industry," as well as someone who "regularly appears as a speaker at industry functions..."
I knew Bloomberg and company would dismiss me as some industry shill. But as my loyal readers know--especially many of those in the industry having felt the sting of my pointed barbs--that's a bunch of hooey!
Indeed, any regular reader of my blog or NU column would probably be more likely to characterize me as "a frequent critic of the industry."
To refresh your memory, just check out my harangues against the mega-brokers after the contingency fee abuse and bid-rigging scandal, the book-cooking by AIG using bogus finite reinsurance purchases, and, yes, the industry's often poor handling of Hurricane Katrina claims. And don't get me started about the horrors of the health insurance industry.
In addition, Bloomberg might be unaware that a substantial part of the "National Underwriter" readership (15,000 subscribers) are in fact consumers--corporate insurance buyers including risk managers, CFOs and others who assess exposures and, in some cases, purchase insurance to cover them.
If this consumer audience ever believed that me or my magazine were shameless apologists for the insurance industry, they would send us packing.
Instead, we've grown tremendously among the buyer crowd in terms of name recognition, respect and influence.
As for the fact that I "regularly appear as a speaker at industry functions," I am guilty as charged.
But, frankly, who else would have me speak? As a business journalist covering the insurance industry full time, I cannot imagine a paint manufacturing conference asking me to talk about trends in their field.
Is Bloomberg suggesting I am bought and paid for by speaking fees?
Perhaps, but the fact is I have never been paid to speak to any group I've addressed. (I was offered a paid gig recently, but turned it down.)
I do speaking engagements to raise NU's profile and build on my reputation as an opinion leader, not to pad my bank account or solicit kickbacks from the industry I cover.
However, Bloomberg's letter did make one point that gave me pause: "Friedman never took the basic journalistic step of asking Bloomberg to comment on the 'Insurance Hoax' before he condemned it as a 'hatchet job' in his online column."
If I was working on a news story, I would absolutely agree--that's not fair. But in an opinion piece in an online blog, the journalistic ethic is murkier.
Still, it could not have hurt to seek out Bloomberg's opinion at the time. I was just so taken aback by the overwhelmingly one-sided attitude permeating the piece, as well as the way they presented their statistical "facts" and failed to distinguish the nuances within this vast industry, that I rendered my verdict based on the article as it stood--as any of their readers would.
Of course, Bloomberg's people and anyone else are welcome to respond to anything I say, right on my blog at www.property-casualty.com. That's what the comment section at is for.
Bottom line, I'm sorry Mr. Starkman didn't see the Bloomberg piece my way.
In my expert opinion, the Bloomberg article simply did not capture the "truth" behind this story.
A few bad actors does not an industry make, whether the field is insurance or journalism.
Posted by Sam Friedman
on Thu 17 Jul 2008 at 12:51 PM