New data on institutional claim handling techniques of insurance companies show there are widely recognized programs with the insurance companies that give money to insurance company representatives as rewards or bonuses for reduced claim payments.
Charles Miller, an insurance claims handing expert and attorney, has recently published an article, Behind the scenes in the insurance claims industry: How insurance companies have revolutionized insurance claim handling, an update. This update article was published in the January/February 2016 issue of Forum for Consumer Attorneys of California, and serves as a follow-up to Miller’s original 2007 Behind the Scenes articles that outline company-wide practices among various carriers to impact the amount spent by an insurer for indemnity and claims related expenses which have the “tendency to wrongfully deny policyholders the full benefits of their insurance policies.
Mr. Miller has given our law firm permission to share all of his articles on this blog.
In the first two articles, Miller makes a bold statement; he states, “the insurance industry has sought to turn their claims department into profit centers.”
Miller backed up his statement by looking at State Farm, Nationwide, American Family, Farmers, Travelers, Fireman’s Fund, and Safeco. These insurance companies are doing large volumes of business and have been in business for decades, and some for generations.
Miller’s analysis shows how high-end consulting firms like McKinsey and Company and Accenture evaluated claims operations with goals of institutional increased profitability. The institutional aspect is important because this is a series or a combination of insurance company-wide practices that Miller says were “aimed at impacting the amount spent by an insurance company for indemnity or claims related expenses."
McKinsey & Company has been explained in prior posts:
Some key words you will see if you study McKinsey and these other consulting firms are “short fall” and “leakage”. The companies wanted to measure and reduce the leakage and short fall and increase profits which translates a detriment for the policyholder. Miller calls it “re-engineering the claim operations”.
It is worth devoting separate posts for each insurance company that Miller has studied and before we look at the new data, it is important to look back at which company wanted to be the leader in profitable claims.
Miller shows research from Behind the Scenes (2007) that State Farm boasted its goal to be the most profitable claims service in the industry and used a program in claims to improve company profits called FIRE ACE (Achieving Claims Excellence) for property damage claims. In addition, State Farm also used employee evaluations and bonus programs to give an incentive to increase State Farms profits and decrease the money tendered to its claimants company wide.
As support for his research, Miller relies upon a case, Plateros v. State Farm, where the director of Quality Assurance of Fire-Auto Claims gave testimony that “quality assurance audits” were used since 1993 to track what State Farm called overpayments. Director Francis Comella testified that communicating overpayments might have been encouraged underpayments.
FIRE ACE may be gone in name but the initiatives that were set out to improve the company’s profits through claim underpayments is still alive.
Miller also dives into State Farm’s PP&R program that sets out one corporate objective during these periodic performance reviews to reduce average paid claims. Miller broke it down by explaining that this artificial goal is a big problem because it doesn’t correlate to the actual value of a claim. So—you guessed it—the claim payments might not be the full value of the claim because your adjuster had a goal to meet that was going to be discussed in his or her PP&R.
Is your adjuster giving you a lowball amount on a claim because he or she is seeking a better bonus this year? Well, Miller cites to the 1998 Performance Cash Program. Now, this giant company doesn’t label the bonus with a name that would instantly allow you conclude that the cash is paid based on a claim underpayments. Instead, the bonus was based on your own “merit rating”.
Policyholders and public adjusters should read Miller’s articles and be familiar with this documentation and the footnote references so that they understand that these programs exist and see the big picture as to what may be influencing claim payments. The companies will change the names of the programs and when pressed may deny that that the claims process is a profit center, but if you ask the right questions to the right people you may find out that instead of properly paying a claim, a goal or a bonus was standing in the way of proper payment.
1 Plateros v. State Farm, NV Case No. CV98-07605.