Insurance is supposed to be simple at its core. Policyholders pay premiums so that when disaster strikes, the insurer shows up, evaluates the loss fairly, and pays what is owed. That is the social bargain. But an expert report by Charles Miller in a California wildfire case reads less like a claims file and more like a case study in how the insurance bargain can quietly erode when financial incentives drive claims behavior.
The report does not merely criticize one adjuster or one disputed estimate. It walks through how modern insurance companies increasingly tie compensation, bonuses, and long-term equity awards to financial performance metrics such as loss ratios and combined ratios. Those numbers matter enormously to Wall Street, analysts, and insurers’ executive compensation committees. The uncomfortable truth is that they also matter to people making claims decisions, even when insurers insist otherwise.
What makes the report compelling is how it connects executive-level incentives to front-line claims handling. If a company’s leadership is rewarded for improving the combined ratio, and if that improvement can only realistically be achieved by reducing or delaying claim payments, then claims departments inevitably feel that pressure. It may never be stated outright. It does not need to be. Culture, supervision, performance reviews, and internal messaging do the work quietly and effectively.
This is not a new phenomenon. For decades, insurers have studied one another’s claims operations, often with the help of the same consultants. One of the more striking sections of the report recounts how USAA, long praised for efficiency, invited other insurers to observe its redesigned claims operation. Those insurers, in turn, shared their own approaches. State Farm later hired the same consulting firm that had advised USAA. The result was not isolated innovation but widespread adoption of similar claims management strategies across the industry.
Absent anti-trust concerns, that kind of information sharing is not inherently improper. The danger lies in what is being shared and refined. When efficiency becomes synonymous with reduced payouts, and when success is measured by how little is paid rather than how fairly claims are resolved, the entire industry begins to drift in the same direction. The report suggests that what looks like independent claims decisions across different insurers may actually reflect a shared playbook.
Wildfire claims expose this problem more clearly than most. These are catastrophic losses involving complex damage, environmental contamination, displacement, and enormous rebuilding costs. They are also expensive claims that directly affect financial results. The report documents that, in this case, internal data showed payments that were significantly lower than what comparable wildfire losses would predict. That gap did not happen by accident.
Another troubling theme is delay. The report describes years passing without proper internal reserving for a known catastrophic loss. Reserving is not an academic accounting exercise. It reflects what an insurer believes it will ultimately owe. Failing to reserve a claim makes the company look more profitable, improves financial metrics, and conveniently reduces pressure to pay. From a policyholder’s perspective, delayed reserves often mirror delayed justice.
Perhaps most disturbing is the use of fraud allegations long after the claim was investigated, inspected, and adjusted. According to the report, trained claims professionals and special investigation units were involved early. They conducted inspections, examinations under oath, background checks, and document reviews. No fraud was identified at the time. Only years later, after disputes hardened and litigation progressed, did fraud suddenly become the insurer’s explanation for nonpayment.
Experienced claims professionals know that real fraud is identified early or not at all. Memories fade. Evidence degrades. Context is lost. Raising fraud as a late-stage defense is not about protecting the integrity of the claims process. It is about leverage. Courts are increasingly skeptical of this common tactic, and they should be.
This report ultimately shows that many claim disputes are not about disagreements over scope or valuation. They are about incentives. When insurers reward reduced payouts, they should not be surprised when policyholders feel shortchanged. When claims departments are managed like profit centers, trust evaporates.
Insurance cannot fulfill its societal purpose if the promise to policyholders is subordinated to financial engineering. Wildfire survivors, hurricane victims, and homeowners facing total loss deserve better than a system that treats their claims as variables in a spreadsheet.
The lesson here is not that every insurer acts in bad faith. It is that systems shape behavior. If the system rewards delay, denial, and underpayment, those outcomes will follow. Fixing claims handling requires more than new training manuals. It requires realigning incentives with the fundamental promise of insurance.
Miller’s report is lengthy. For those studying bad faith claims practices or who want to have a deeper understanding of concerning systemic claims management issues, I suggest taking time to read this expert report.
Thought For The Day
“The more a system is optimized for efficiency, the more fragile it becomes.”
— Nassim Nicholas Taleb
