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"Shifting the Balance of Power in the insurance industry – back to the policyholders! "

The McKinsey Influence

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The Information below is based on the article “In tough hands at Allstate”. (See http://www.businessweek.com/stories/2006-04-30/in-tough-hands-at-allstate).

View from the McKinsey SF Office

View from the McKinsey SF Office (Photo credit: dwehrs)

David Berardinelli wrote “From Good Hands to Boxing Gloves”. It is the story of the key role played by management consultants McKinsey & Co. and their re-engineering of an auto insurance claims operations at Allstate Corp (USA). It was a story Allstate did not want told. It was published in 2008. Since 2004, Allstate has been defying a court order to make available public copies of some 12,500 PowerPoint slides which McKinsey had prepared for the insurer, the story about which forms the basis of the book.

Allstate characterized its actions as “respectful civil disobedience.” The insurer stated that the McKinsey material contained proprietary business secrets and presented a clear risk to the company’s reputation. The documents actually present a portrait of business strategies that are at odds with the insurer’s carefully cultivated ‘friendly’ public image. Allstate adopted a variety of systems set in place by McKinsey to make sure it pays the minimum necessary — and it plays hardball with those who seek more.
In his book, Berardinelli illuminates the largely hidden role McKinsey played as a key architect of claims practices in use across the insurance industry today. (See https://thechristchurchfiasco.wordpress.com/tag/mckinsey-report/). McKinsey has also done work for Farmers Insurance Group, USAA, State Farm, and Fireman’s Fund (AZ). While many of the cost-reduction strategies that McKinsey recommended at Allstate remain in place, some have been abandoned following legal and regulatory challenges in several states. The most damaging part of the reports involved two analogies where McKinsey said that:

1) policyholders who accepted lower settlement offers were “in good hands” (Allstate’s slogan), but those that fought the settlement offer should get Allstate’s “boxing gloves”, and

2) Allstate should take an “alligator approach” to claim payments and settlement offers – meaning that the company should just “sit and wait” in the hope of frustrating policyholders to accept less or simply go away.

Interestingly after a couple of web searches it seems our very own Australian insurer, IAG, hired ex McKinsey consultants in the late 1990s when they demutualised the NRMA business and so “gave birth” to IAG. The name change for the group to IAG came in 2000. Though NRMA insurance remains one of the businesses/brands within the group. There are also ex-McKinsey staff in senior roles including holding positions on the board at IAG and/or its subsidiaries. (See http://iag.com.au/news/shareholder/docs/20121129_Deans.pdf  and  http://whitlam.com.au/speeches/2013/3/25/the-creation-of-iag.

Such disquieting images inevitably recur in contemporary Lime Street – not because of occasional sightings of Rattus rattus; squeamishness in the face of toxic rodents would necessarily truncate any insurance career – but by the inexorable advance of another intruder, seen as deadlier, more rapacious, less forgiving: McKinsey Man[/Woman]. The market, already populated by such McKinsey alumni as Greg Case, Bronek Masojada,  Mario Greco and Ian Beaton (respectively the CEOs of Aon, Hiscox, Generali and Ark) – and rewarded by occasional sightings of another, Ajit Jain – must now contend with Dominic Casserley, newly anointed as CEO of Willis, who for the previous 29 years has scurried across the globe infecting corporations with the benedictions of McKinsey doctrine“. (From IQ Insider Quarterly, Winter 2012/2013. Retrieved from http://www.insiderquarterly.com/assets/_files/documents/dec_12/ii__1354870123_IQ_Winter_2012-13_for_web.pdf).

Berardinelli says that the McKinsey project, which lasted from 1992 until at least 1997, institutionalized aggressive practices aimed at enriching investors at the expense of customers. “When you strip away all the fancy jargon, all this is a plan for switching money from the policyholders’ pockets to the shareholders’ pockets“.  McKinsey declined to comment on the revelations. Allstate claimed that Berardinelli’s allegations are “unfounded and unproven.” Rather than trying to cheat customers, the company says, its claims revamp was just good management: an effort to “become the premier claim organization in the industry.” A major goal, it says, was to benefit policyholders by identifying “exaggerated and fraudulent claims.”

The battle over the McKinsey documents is a decades-long war between insurers and the plaintiffs’ bar over access to “one of the biggest treasure troves of cash ever created: the billions of dollars in premiums held by insurers to pay claims.”  But plaintiffs’ attorneys around the country allege that various elements of Claim Core Process Redesign (CCPR) beyond eliminating fraudulent claims – operate in a systematic way to deny policyholders legitimate benefits. Copies of Allstate’s massively thick CCPR manuals have been circulating among trial lawyers for years.  Berardinelli is convinced that the McKinsey material could turn the tide. The documents “explain why McKinsey built CCPR,” he says. In his book he compares Allstate to a vendor of canned peas and argues that the documents “show how McKinsey…deliberately designed Allstate’s claim factory to arbitrarily ‘under-fill’ every can of Allstate insurance.”

McKinsey made its initial presentations when it undertook the Allstate project. (Allstate confirms that it retained McKinsey in the early 1990s.) Berardinelli’s notes on the McKinsey slides, which he has filed in court, show that the consultants’ goals were far-reaching. The objective, according to notes on one slide, was to “radically alter our whole approach to the business of claims.” The consultants also advised the insurer on what steps were needed to achieve those ambitious goals. In Berardinelli’s view, this slide reflects what he sees as the current practice at Allstate. Claimants in the “good hands” category may get swift reimbursement, but they will always end up with less than they’re entitled to.
In mounting a counterattack, some plaintiffs’ attorneys have had success. Courts and regulators in a number of states, including New York, Pennsylvania, and Washington, have forced Allstate to halt or change its practice of handing out a controversial “Do I Need an Attorney?” form to people involved in accidents. And Colossus (a computer software program to determine the value of your claim, now widely used in the insurance industry, has come under attack on a number of fronts, with attorneys alleging it is being used to systematically ‘lowball’ claims.  (See http://voices.yahoo.com/colossus-insurance-companies-dont-want-you-7050372.html   and   http://www.clancylaw.com/Articles/Allstate-Insurance-Settles-Colossus-Claims.shtml). Recently Farmers Insurance Group, a unit of Zurich Financial Services, agreed in a nationwide settlement to stop using the McKinsey protocol for certain claims. So it is clear that the McKinsey strategies are being recognised for what they are.

Do we think such strategies and management techniques are in use in New Zealand? Personally, I believe that the presence of ex-McKinsey people involved in the direction of New Zealand/Australian insurers coupled with the experiences of the folk of Christchurch after the recent earthquakes must lead to the conclusion that they almost certainly are.

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Author: Sarah Miles

Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". https://thechristchurchfiasco.wordpress.com/

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