Insurance Transparency Project

Come now the Goode Gentlemayne of the ITPe with Heraldes of Sferiouf and Importante Wurksf:

David J. Berardinelli, a Santa Fe, N.M., plaintiffs’ lawyer, worked for the better part of a decade to uncover documents prepared by consulting giant McKinsey & Co. for Allstate Corp. to, in McKinsey’s words, “radically alter” the insurer’s approach to claims. It is fair to say McKinsey succeeded in that and much more, and the result can be found in a book I’ve referred to, From “Good Hands” to Boxing Gloves (Trial Guides, 2006).

Berardinelli, a 59-year-old wine and Porsche aficionado (much like War Eagle), was the lead lawyer in a heretofore obscure case, Pincheira et al. vs. Allstate Insurance Corp. et al. d-0101-cv-2000-2894, in Santa Fe state court, where the two sides met in October 2001 on a motion for discovery.

At stake were 12,500 PowerPoint slides presented to Allstate executives in the early 1990s describing a new claims strategy known as “Core Claims Process Redesign,” or CCPR, which Allstate implemented in 1994. Word of the so-called McKinsey slides had gotten around the plaintiffs’ bar as early as 1997, when Washington’s appeals court ordered the release of training manuals based on the slides in a case known as Tastad v. Allstate, 86 Wash. App. 1118, 1997 WL 428065 (Wash. App. 1997). They were highly coveted and fiercely defended.

How fiercely? The case filled 25 court folders, went up to the appellate courts three times and featured a default judgment against Allstate for disobeying a court order. In the end, he still didn’t get them as Allstate continues to defy the order. The book is based on his notes and memory. Allstate lost a motion to prevent Berardinelli from writing about it.

“I didn’t know what was in the McKinsey slides,” Berardinelli writes. “But I could hardly imagine that in obtaining the McKinsey slides I would uncover what may be the most explosive evidence of an insurer’s institutional plan to commit bad faith ever discovered.”

Hyperbole? After reading Berardinelli et al(1), ITP wonders. The book costs $300, but ITP, being a schnorrer of the old school, scored a copy from a source for free. The best summary was written by an old WSJ colleague, Michael Orey, in Business Week.

Allstate says it was merely trying to improve efficiency and prevent insurance fraud. McKinsey doesn’t comment.

Insurer pals, this is a partisan book that frames Allstate and McKinsey in the worst possible light. And still it’s worth a look, no matter your perspective.
There can be no doubt that CCPR radically improved Allstate’s financial performance. After 1994, the company’s surplus increased by an average of $1 billion year, a five-fold increase over the previous rate. Berardinelli puts it this way: Allstate took 63 years to build up $6.3 billion. It took 10 years raise another $10 billion. Put another way: Allstate earned $2.25 billion per year between 1995 and 2004; that’s what it earned during the entire 10 prior years.

Slide #1426 puts the equation this way:

“Zero Sum Economic Game: –Allstate Gains
–Others Must Lose.”

“Others,” the slide says, includes “claimants,” policyholders.

We’ll deal with the mechanics of CCPR in another edition, but suffice it to say, CCPR’s success did not go unnoticed. Road tested at USAA, where it was called PACE (“Professionalism and Claims Excellence), and State Farm, where it was called ACE (“Advanced Claims Excellence”), it has since been widely copied around the industry and, ITP believes, has a direct bearing on insurers’ response to Hurricane Katrina.

If Berardinelli and his team had only produced the slides, it would have been enough to earn ITP’s prestigious Data Collection Award, the “Guldener Eageleh.” But he offers key insights that put the McKinsey program in context.

He quite properly frames the premiums insurers collect annually as a “claims trust fund,” over which insurers play at least a quasi-fiduciary role. He pegs the fund at $300 billion (the roughly 70% of $420 billion in annual premiums that are set aside for losses). The McKinsey program quite explicitly pits policyholders against shareholders in competition for the fund, a dichotomy that is contrary to insurance law and tradition. It is also unkosher. As courts have ruled for more than a century, the fight between insurer and insured is by its nature not a fair one. It’s not supposed to be a fight at all.

He describes the McKinsey shift as a cultural one, from a Fiduciary/Indemnity paradigm, which requires prompt and fair settlements that make policyholders whole, to the zero-sum paradigm designed to exploit, as he puts it, “Allstate’s two biggest advantages in the claims process – policyholder vulnerability to delay and its own financial superiority.”

Second, Berardinelli traces the genesis of CCPR not to Hurricane Andrew, of Aug. 24, 1992, as ITP had believed, but two months before, when Allstate, then still a unit of Sears Roebuck & Co., first contacted McKinsey. It’s not known who drove the program, but Berardinelli infers it was Jerry D. Choate, then an Allstate senior EVP for Claims and future CEO, and Edward Liddy, then Sears’s CFO and the Allstate CEO from 1999 until last year.

The impetus, Berardinelli believes, was Sears’ then-active plans to spin off Allstate, along with its Dean Witter-Discover unit, into separate companies, deals that closed the following year. For the first time, executive compensation at Allstate would be based on the performance of the insurer alone.

Too much of a conspiracy? Maybe. Still, by year-end 1997, Choate would own shares worth $63 million; he retired the next year. By year-end 2004, Liddy would own shares worth $80 million. He retired last year.
Thanks to District Press Gremlins for the book.

(1) The book was written with Michael D. Freeman and Aaron C. DeShaw, with a foreward by the legendary Eugene R. Anderson of New York’s Anderson, Kill & Olick P.C.