Fellow Surplus Lines, Casualties, Excess Liabilities, Catastrophic Risks, Lloyd’s Names, Bermudans and Other Income-Smoothing Devices:

First, my heartfelt apologies for the long paws (honk) between this post and the last one. Also, my heartfelt apologies for writing again so soon.

A little housekeeping: a hearty ITP welcome to my Dad’s pal, Esteemed Southside Psychology Colleague — a speedy and full recovery to one and all — as well as to another Bad-Faith maven.(1)

Also, if you just aren’t getting enough, I am now up on the journalism site of the major Ivy League institution. Finally, look for the upcoming tour for my new memoire: “Mir Yiddische Insuransche Bubbeh; or Seiche! That Was Some Storm!”

Ok, now installment two of ITP’s book report on Berardinelli et al (2).

Last time, we introduced the landmark book that brought to light consulting giant McKinsey & Co.’s project to, in McKinsey’s words, “radically alter” (3) Allstate Corp.’s approach to claims through a re-engineering project known as “Core Claims Process Redesign,” or CCPR, which was reproduced at other insurers. At State Farm it was called “Advanced Claims Excellence,” or ACE, at USAA, PACE, etc.

We saw that it was dramatically effective from Allstate’s shareholders’ perspective. A five-fold improvement in yearly earnings is dramatic by any standard. We should have added that Berardinelli calculates CCPR had resulted in $6 billion to $15 billion in additional net income by fighting minor claims, which is make up the bulk of payouts.

The slides are mostly about auto claims. The strategy involved “managing the components of severity” — that is, how much Allstate paid in auto cases involving bodily injury, uninsured or underinsured motorists (BI, UM/UIM) claims — and to “significantly alter representation rates,” (3) that is, to adopt a “boxing gloves” (McKinsey’s word) strategy for policyholders who hire lawyers.

McKinsey promised a 5% to 15% reduction in claims payouts, and delivered far more. The language in Slide 30 gives a clue as to the culture shift: “Claims is not one homogeneous portfolio where one winning formula can be applied across the board.” Heretofore, claims per say were not considered an adversarial part of insurance.

Slide 2360 says “capturing the opportunity” would require “reducing the number of represented claimants and more aggressively managing the claims that do become represented.” Remember, the criteria is not rooting out insurance cheats, but going after policyholders who hire lawyers.

Why? Slide 6038: “According to Field Survey, weighted average loss payout by injury for BI and UM/UIM (uninsured/underinsured motorists) is at least 50% higher for attorney represented claims compared to nonrepresented claims.” That’s because policyholders are amateurs in handling their own claim; but then, according to insurance law, they’re supposed to be. You don’t need to be a banking lawyer to make a withdrawal.

I won’t go into the tactics for “aggressively managing” represented claims because it just annoys War Eagle to read about abuses of legal process.

Below, if you prop your computer up on its left side and get out a magnifying glass, you will see how McKinsey sees how to change the “current game” to the “new game.” The graph shows how fairly uneven rates of settling claims — because claims do involve different people, different injuries, different circumstances — suddenly will become uniform. Why? Because policyholders will be presented with a single offer to take or leave. The choice becomes accepting it or fighting for years.

A particularly regrettable feature of CCPR was to accept — indeed to provoke — higher litigation rates. Slide 6325: “A key part of this process will be development of market-wide strategies to strengthen negotiation and litigation approaches. These strategies will include significantly higher levels of litigation to establish more consistent values.” The emphasis is mine.
(There is irony in the “consistent values” thing, which we’ll get to next time.)

As Berardinelli writes:

“Allstate would pay casualty claims ‘promptly,’ within about six months, if the policyholder were willing to give Allstate shareholders a ‘cut’ from their fair share of the claim fund. McKinsey was betting around 90% of policyholders would do just that — willingly give Allstate shareholders a cut from their share of the claim fund without a fight.”
And:

“…McKinsey’s ‘no negotiating,’ Enron-style settlement strategy was deliberately designed to drive unwitting policyholders and claimants headlong into the ‘kill box’ (Berardinelli’s word) of McKinsey’s Zero Sum Economic Game — the American judicial system.”

Next time: Berardinelli and the McKinsey Slides (III) — Comes “Colossus.”

Private Note to the Stout-Heart-Princess-of-Ward-8: I recycle jokes, you see.

1. All opinions expressed herein are The War Eagle’s alone and may or may not reflect the views of Dean Starkman, Insurance Notes!(TM), The Insurance Transparency Project, its directors, officers, assignees, vendors, subscribers, joint-venture partners, shareholders, bondholders, trading desk, floor brokers, telephone clerks, specialists, agents, underwriters, alumni, mohel, shochet, beadle, medical staff or coffee-cart personnel. Void where prohibited. Must be over 47 years old or show written permission from Cool Texan. Post no bills. Do not take with alcohol. Not valid in the event of hail, tidal wave, seiche, frogs, volcanic eruption, Act of War, avian flu, storm surge, locusts, slaying of the first born, rising water, falling water (”rain”), horizontal water, heavy water, sparking water, mineral water or Fresca(TM). Use only as directed. See “Rider” for details.

2. From “Good Hands” to Boxing Gloves: How Allstate Changed Casualty Insurance in America, Berardinelli, Freeman and DeShaw (Trial Guides LLC 2006)

3. “Our change goal is to redefine the game…to…radically alter our whole approach to the business of claims,” (McKinsey Slide 5166.)

I-Pods,

You will have to bear with ITP as he settles into his new position at a major Ivy League institution that shall not be named but which lies somewhere between 110th and 125th Street in the Morningside Heights section of Manhattan, between Broadway and Morningside Avenue, across from
Barnard and down the street from the Jewish Theological Seminary. More on that later. For those of you wondering, War Eagle has a desk and water dish in the next cubicle.

I can’t add much value to the above NYTimes piece about Conseco and other longterm disability insurers. If you live on the Gulf, some of this may seem familiar.

I will pull a few quotes and then go find where they put the gym.

The lede paragraph starts with a lady from Montana who set aside grocery money to avoid burdening her family when she got old, then got old.
“But when she filed a claim with her insurer, Conseco, it said she had waited too long. Then it said Beehive Homes (her nursing home) was not an approved facility, despite its state license. Eventually, Conseco argued that Mrs. Derks was not sufficiently infirm, despite her early-stage dementia and the 37 pills she takes each day.”

The Times pulls a dirty trick and actually reads the lady’s policy:

“Yet a copy of Mrs. Derks’s policy, sent to the Wheelers (her daughter and husband) by Conseco in 2004 and reviewed by The Times, mentions no requirement for proof of illness. The policy requires only that the confinement be ordered by a physician, and it allows for a notice of claim to be sent “as soon as reasonably possible.”

What did her doctor say?

“This is medically necessary!!!” reads a form signed by Mrs. Derks’s physician in 2004. “This has been filled out three times! This person needs assistance!”

Check your calendars: it’s now 2007.

And remember what ITP said about Yale’s Jacob Hacker and “The Great Risk Shift.”

“Eventually, the Wheelers sold part of their John Deere dealership to raise money to pay for her mother’s care.”

It’s a familiar story. In the early 1990s, apparently insurers underpriced these policies. Conseco filed and re-emerged from bankruptcy.

“As insurers began realizing their miscalculations, they persuaded insurance commissioners in California, Pennsylvania, Florida and other states to approve price increases of as much as 40 percent a year. “

Isolated case? Uh, no.

“Yet thousands of policyholders say they have received only excuses about why insurers will not pay. Interviews by The New York Times and confidential depositions indicate that some long-term-care insurers have developed procedures that make it difficult — if not impossible — for policyholders to get paid. A review of more than 400 of the thousands of grievances and lawsuits filed in recent years shows elderly policyholders confronting unnecessary delays and overwhelming bureaucracies. In California alone, nearly one in every four long-term-care claims was denied in 2005, according to the state. “

Insurer pals, the reporter, Charles Duhigg, went through 400 cases. This story must have taken months.

Then there’s the reporting from inside Conseco:

“Some employees describe vast mailrooms where documents appear and disappear. One call-center representative said he was afforded an average of only four minutes to handle each policyholder’s call, no matter how complicated the questions. Employees said they were instructed not to say when the company was behind in processing paperwork, even when the backlog extended to 45 days.”

And I like this one:

“Workers were prohibited from contacting each other by phone, although such calls might have quickly resolved obstacles, according to depositions.”

War Eagle says: “Oy.”

And now a word from state regulators:

“Ron Gallagher, a deputy commissioner with the Pennsylvania Insurance Department (Conseco’s and other’s prime regulator), said, “I don’t know that we have a real problem with improper claim denials.”

And yet…

“Yet data from the National Association of Insurance Commissioners show that from 2003 to 2005, Pennsylvania received more complaints regarding Conseco, Bankers Life and Penn Treaty than any other state. Mr. Gallagher said he might begin a new review of those companies.”

And note, these are complaints filed with his own office. State regulators do not take into account — and this drives ITP crazy — lawsuits (a form of complaint, right?) or even published opinions regarding insurers under their jurisdiction. Sometimes these cases play out in courthouses just steps away from DOI offices. This was most outrageous during the UnumProvident scandal. Do not get ITP started about Unum.

Oh, and stay tuned for ITP’s next installment of “Berardinelli and the McKinsey Slides” about Allstate, homeowners and auto claims.
Unrelated? ITP isn’t so sure.

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.

I-Fans,I kid around a lot, but do not miss the Tampa Tribune series by reporter Kevin Begos et al on Risk Management Solutions, the closely held Newark, Calif., consultant whose scientific models for predicting hurricanes are used by 400 insurers, including State Farm, Lloyds of London and, for the moment, the state-owned Florida Citizens Property Corp. The
Tampa series (published in January and afterward) is on ITP’s Key Katrina/Insurance Documents. Look for “Tampa.”

A year ago, RMS announced a dramatic change to the hurricane-modeling software it sells to the industry, abandoning a formula developed after Hurricane Andrew in 1992 that uses 100 years of storm data, in favor of a “medium-term” five-year model that abruptly predicted hurricane losses would rise 40 percent on the Gulf and 25 to 30 percent in other regions. Based on those models, insurance prices would have to rise accordingly.

Trouble is, the new model is based on a consensus of experts who are now disavowing RMS’s conclusions and the use of their input.

“The leading computer model used by the insurance industry to justify huge rate increases in coastal areas nationwide relies on faulty science, says an expert credited with helping develop it.

‘I think it points to a problem with the way these modeling groups are operating,‘ said Jim Elsner, a professor of geography at Florida State University.”

A NOAA scientist and another RMS panelist says the same thing

“Thomas R. Knutson, a research meteorologist with the National Oceanic and Atmospheric Administration in Princeton, N.J., and another RMS expert panelist, said the five-year timeline didn’t come from the experts.

‘I think that question was driven more by the needs of the insurance industry as opposed to the science,’ he said.”

RMS’s March 2006 press release announcing the change said the five-year model was developed in cooperation with the expert panel that included Elsner and Knutson, and that based on their perspective: “Increases in hurricane frequency should be expected along the entire U.S. coast, but will be highest in the Gulf, Florida, and the Southeast, while lower in the Mid-Atlantic and the Northeast.”
” ‘I didn’t make any such statement of that type,’ Knutson said Friday.”

And:

“Elsner said he warned RMS about flaws in the model. ‘I said that’s not a good way of doing it,’ he recalled, and said RMS exaggerated the basic science ‘well beyond what we expected.’ “
Plus:

“Though RMS said in March that the expert panel ‘agreed unanimously that a forward-looking view of risk should reflect a higher probability of landfalling hurricanes,’ Elsner said there was no consensus.”

RMS spokeswoman Shannon McKay says Elsner was not part of a second panel of experts convened later in 2006.
” ‘All of these folks were well aware of what we were ultimately going to do with the data,’ she said. The experts were paid for travel expenses for the discussion in Bermuda but received no other compensation.”

In a letter to the editor, Robert Muir-Wood, RMS’s chief research officer (and yes, that’s his name) said he was “stunned by the inaccuracies and one-sidedness” of the Tribune story.

” ‘ All four scientists, including Professor Jim Elsner, gave their sign-off on the outcome of this process. RMS then took the results of this forecast and implemented them in its hurricane catastrophe model.’ “(1)

He added the Elsner declined to attend the second conference, saying that he was “under contact with a company affiliated with our main competitor,” and that the second panel went into “greater depth than the first meeting.” Read it on Key Documents.

But remember, the criticism of RMS’s methods is coming from RMS’s own panel. Outside scientists have even more to say, particularly about RMS’s statement that its methods “are in the process of being published” by Tellus, a peer-reviewed journal of the Swedish Geophysical Society.

First, it “doesn’t count” until it’s published, according to Sarah Rockwell, director of scientific research at the Yale Medical School.

And, it’s wrong to apply science before publication, the Trib quotes a modeling specialist, Charles Watson.

” ‘You publish; then you apply it,’ Watson said. ‘Especially for something with trillions of dollars in property value, and people’s lives and livelihood are literally at stake in these decisions. It is irresponsible to implement before peer review. There are tremendous policy implications.’ “

There’s more, but War Eagle is concerned that such an important group of people spending so much time reading Insurance Notes!(TM) will cause U.S. productivity to slip.

Suffice it to say that RMS’s main competitor, AIR (Applied Insurance Research) Worldwide Corp., Oakville, Ont., is off the reservation.

“We continue to believe, given the current state of the science, that the standard model based on over 100 years of historical data and 20 years of research and development remains the most credible model,” writes David A. LaLonde, AIR’s senior vice president, in the latest issue of Contingencies, the American Academy of Actuaries answer to US Weekly. AIR is a unit of ISO, which, ah, the heck with it. Look it up on ITP.

And, also on Key Documents, is a letter to the National Association of Insurance Commissioners (sigh, we’ll get to them later) by the Consumer Federation’s Bob Hunter and the Center for Economic Justice’s Birny Birnbaum that says RMS reneged on a promise to use long-term models after the big price hikes that followed Andrew. The two advocates use the old were-you-lying-then-or-are-you-lying-now device:

“One might ask, given the fact that RMS initially developed its model in the wake of Hurricane Andrew, why its prior projections were so far off the mark? Did insurers and modelers not know what they were doing then? Do they not know what they are doing now? If we assume the best — that the insurers and modelers were incompetent — there is clearly a need for regulatory oversight to improve the quality of the decision-making. If we assume the worst — that the changes are driven by politics and not science — the same need for regulatory oversight exists.”

It’s all up on Key Documents.

(1) A big problem here is that RMS considers its hurricane CAT model a trade secret, so it is not subject to scientific review.
Thanks to Hunter, King of Hungarian Folk Dance and Amy Bach, and Stout-Heart-Princess-of-Ward-8, for pointing out flaws in ITP’s links.

I-sters,

Robert Hunter, the former Texas insurance commissioner, head of the Consumer Federation’s insurance section and well-known
“King of the Nepi Tanc,” testified before the Senate Judiciary Committee on March 7, and if you have any interest in understanding post-Katrina insurance issues, ITP strongly suggests you take a look at it. It’s in the Key Documents section.

War Eagle and I had to fight over who got online to read it first. I won, and War Eagle was stuck with a hard copy Rep. Bobby Jindal’s 2/28/07 testimony before the House Financial Services Committee, which is kind of like wanting the SunTimes sports section and getting the Chicago phone book instead.

But here in 30 pages is as good an explanation as you’ll need on why the U.S. insurance system looks the way it does — a big part of the problem, to ITP’s mind, rooted in what turns out is a 62-year-old accident: the industry’s anti-trust exemption. What was supposed to be a temporary moratorium on anti-trust enforcement popped out of a conference committee in 1945 as a permanent, anomalous feature of the American economy.

Where to begin?

How about the section on Insurance Services Offices Ltd., the closely held Jersey City, N.J., “rate bureau” that helps the industry set prices, industrywide, by collecting loss and expense figures — which are up to 70% of what goes into the industry’s price — and projecting them into the future:

“Legal experts testifying before the House Judiciary Committee in 1993 concluded that, absent McCarran-Ferguson’s antitrust exemption, manipulation of historic loss data to project losses into the future would be illegal…This is why there are no similar rate bureaus in other industries.”

To get the final rate, insurers need only plug in one of ISO’s “multipliers,” which calculates the loss costs times whatever expense and profit figure the insurer provides. LC x M= R.  An oversimplification? Sure, but by how much?
And, as Hunter correctly points out, ISO and other rate bureaus “must bias their projections to the high side to be sure the resulting rates and loss costs are high enough to cover the needs of the least efficient, worst underwriting insurer-member or subscriber to the service.”

Need proof? Check out Attachment B, which lists industry expense ratios from 2004. The average homeowners insurer spent 38% of each premium dollar on loss adjustment (lawyers, etc.) and underwriting (sales commissions, etc.).  Put another way: Spread that over the $420 billion in annual property/casualty (non-life and health) premiums and you get $160 billion, or enough to pay for three maybe four Katrinas.(0)
War Eagle says:  “Dis iz tue mush.”
An unfair comparison?  Ok, but the point is, the money goes to neither policyholders or industry earnings.  And I won’t even tell you what Hunter’s group of below-average efficiency insurers spends. The mutual fund that spent 5% of investors’ capital on expenses would be laughed out of the industry.

ISO also writes policy language for the industry, including, according to Hunter, the now-infamous anti-concurrent causation clause, which was approved by Mississippi Insurance Commissioner Dale (and, to ITP’s knowledge, the rest of the nation’s insurance commissioners), but, in an embarrassment to Dale, voided by Judge Senter (1).

And what about “Colossus?” That’s the name of the software program that has transformed claims-handling in the personal lines (homeowners, auto) industry since it was developed in the mid-1990s for Allstate by Computer Services Corp., the El Segundo, Calif., contracting giant and insurance industry vendor (which, incidentally, has administered the National Flood Insurance Program since 1983).

Hunter quotes Berardinelli et. al(2): “…Any insurer who buys a license to use Colossus is able to calibrate the amount of ‘savings’ it wants Colossus to generate…If Colossus does not generate sufficient ‘savings’ to meet the insurer’s needs or goals, the insurer simply goes back and ‘adjusts’ the benchmark values until Colossus produces the desired results.”

The idea of finding savings in claims — – whether you like it or not — represents a radical departure from insurance industry tradition.

Hunter quotes James Greer, President of the Property/Casualty Claims Professionals, clearly a member of the old school:

“As a member of an old Aetna family that has been widely dispersed since its demise in the ’90’s, I remember the day when leaders of that fine company routinely cited, and tried to honor, the social/moral contract the insurance industry had with society. It is clear that, in today’s business environment, the soul of the insurance industry is missing, and despite the rhetoric of its PR machine, the industry no longer recognizes such a social/moral obligation.”

Everyone’s starting to sound like Amy Bach(3).
Ok, last thing, then I promised to take War Eagle for a bath at the Szechenyi:

Payouts Graph

The above links to Hunter’s graph of insurance-industry payouts for actual losses as a percentage of premiums, which in 1993, before Colossus, approached 77 cents, was just 62 or so in the worst-ever Katrina year and hit just above 50 cents last year.

Here’s where Hunter flies off the handle:

“It is truly inappropriate for property/casualty insurers to be delivering only half of their premium back to policyholders as benefits.”

Hey, watch that language. This is a family insurance site.

Let’s go, War Eagle, and don’t forget your flipflops. That new Speedo makes him look so Hungarian!

0. Private note to Amy Bach:  How much do you like your agent now?
1. Much more on the meaning of ACCC later.

2. From “Good Hands” to Boxing Gloves (Trial Guides, 2006).

3. Executive director of United Policyholders, former towel maiden at the Szechenyi.

I-Friends,

This above quote comes from a handwritten Post-It stuck to a claims file in the State Farm Catastrophe Team’s office containing a report from an independent engineering firm dated Oct. 12, 2005, that found that wind caused roof, interior structural and other damage to the totaled Biloxi home of Thomas and Pamela McIntosh, who had $1.07 million in coverage.

On Oct. 20, the engineer, Forensic Analysis & Engineering Corp., Raleigh, N.C., did a second report that found no wind damage. When Mr. McIntosh asked for a copy of his engineering report, he was told none had ever been finished, then was sent a copy of the second one, without being told of the first. Total payout: $36,000.

That’s only one of many gems to be found on ITP’s Key Documents site, which now contains all four parts of Mississippi Attorney General Jim Hood’s testimony on Feb. 28 before Barney Frank’s House Financial Services Committee.

War Eagle and I differ over which is the best part. How to choose?

I like the bit about E.A. Renfroe, the Birmingham, Ala., adjusting firm that receives 75% of its revenue from State Farm, according to Hood. Renfroe convinced a Birmingham federal judge, William M. Acker Jr., to order the return of 15,000 documents delivered to Hood by two Renfroe executives, Kerri Rigsby and sister Corri Rigsby Moran, who had become “concerned by the apparently fraudulent nature of the conduct they observed” while working in State Farm’s CAT office. Judge Acker agreed that the sisters’ conduct violated the Alabama Trade Secrets Act and the terms of their employment conduct, which required that any concerns of unethical or illegal conduct be brought to Mr. Renfroe himself, one of the company’s two shareholders, the other being his wife.  Hood had argued that the records should be for the grand jury’s eyes alone.
Thus, Hood concludes: “…an employment contract in a neighboring state (Alabama) may be interpreted in a way that guts the investigative powers of a grand jury in a sister state.”

But War Eagle’s eyebrows were raised by this passage:

“As our criminal investigation progressed, we realized that some of the documented conduct may not constitute a violation of Mississippi state law, but that federal criminal charges may be appropriate.”

“Business practices observable in the handling of Hurricane Katrina claims that have caused problems for State Farm reaching as far back as the Northridge Earthquakes in California in 1994 and the rash of tornadoes in 1999 raised our concerns that State Farm’s response to disasters was part of a disturbing business model that could be applied in other states in future disasters.

Hood also opens the Pandora’s Box of “ACE,” State Farm’s “Advancing Claims Excellence” program designed by consulting powerhouse and Enron figure, McKinsey & Co., based on 52d Street, which a 1995 State Farm newsletter said would take “a billion dollars of costs out of our system every year!” A 1997 memo asked State Farm branch offices to return all ACE-related documents to Bloomington because “we anticipate Advancing Claims Excellence may be an issue in future lawsuits.”ACE is the progeny of Allstate’s “Claims Core Process Redesign,” designed by McKinsey in 1992 and revealed in last year’s landmark book, From “Good Hands” to Boxing Gloves; How Allstate Changed Casualty Insurance in America,” by David J. Berardinelli et al.

More on all this later, of course, in ITP: Catastrophe Modeling Among the Magyar Peoples.

Thanks to Bela Kun, Imre Nagy, Franz Liszt, George Soros, Frank Lowy and the good folks at the Eklektika on the Nagymezu.

Insureds,

This Times-Picayune story says that the contractor running the state-owned insurance company in Louisiana lost financial records for the last two years, 2005 and 2006, making it impossible, among other things, to detect whether the company had been defrauded.

News of the problem: “…shocked many of those at the auditor’s meeting because of the implications for customers, bondholders and the state insurance market’s ability to cope with future catastrophes. At least several Citizens board members were unaware of the problem until this week….

The state officials began to come to grips Tuesday with the possibility that Citizens’ financial activities for the past two years might have to be reworked page by page for every transaction conducted in those two years, a daunting task that by one estimate could take 18 months. It was not clear Tuesday whether Citizens even has the paperwork available to reconstruct the full records.”

The problem came to light last month when a Metairie accounting firm auditing Citizen’s books quit, saying it couldn’t get access to the company’s financial records. Legislative Auditor Steve Theriot looked into the matter and told the board about the software debacle last week.

Citizen’s had hired a local trade group, Louisiana Property Insurance Association, to provide back-office services, and PIAL had in turn hired the software contractor.

Now, get this: PIAL had fired the (unnamed) software contractor in October, but didn’t tell the board why, leading the Times-Pic quite properly to make this observation:
“The software trouble might have been evident to the insurance association for months.

Then there’s the furniture thing:“Theriot also said that Citizens had paid for $1 million in furniture that the insurance association was supposed to have acquired, but no title transfer of ownership has been made to Citizens.”

What kind of gold-plated neo-Baroque furniture costs $1 million in New Orleans?

PIAL’s site is down.

The board only found out about the software snafu last week, when Theriot told them.

What about Citizen’s management?

“It was not known Tuesday how long the managers of Citizens had known about the problem, and why they hadn’t informed the full board of Citizens. “

Who runs Citizens? Don’t look on its website.

You can find the board on ITP, however, at the bottom of this item.

The chairman is someone named Chad Brown, whom the Times-Pic identifies as an insurance department official, meaning he reports to Insurance Commissioner Jim Donelon, who attended the meeting with auditors.

And as the story tells us: “One of the regular complaints about Citizens among some legislators is that the insurer’s board is too heavily weighed toward insurance industry representatives.”

ITP would only add that it was this same board of directors that hired A.I.G.’s Audubon unit to administer the program — a decision that led to chaos when the Audubon contractor expired on Sept. 16 — hurricane season — when Katrina hit.

As ITP and Al Crenshaw reported for my favorite newspaper before there was an ITP:

“Charles R. Schader, AIG’s senior vice president for claims, said that before Katrina hit, the AIG unit had halved its staff in anticipation of the contract’s end. He said the unit agreed to stay on, bringing in additional staff members and housing them in recreational vehicles. The unit is processing 60,000 new claims, following 15,000 to resolution and referring the rest to new vendors taking over the contract. The new vendors may have mishandled some claims, he said.

“Everyone is scrambling to throw all the resources we can at it,” he said.

Read the whole story in the Key Documents section of ITP. But I can’t resist this:

“Louisiana’s insurance commissioner, J. Robert Wooley, said the company was working to solve the problems and urged homeowners to have patience. ‘This is a marathon, not a sprint,’ he said.”

Wooley, it must be said, bonked before the finish line, resigning the February after Katrina to take a job with a law-lobbying firm, Adams and Reese, with insurance industry clients and personally represents a group of insurers known as ProtectingAmerica.org.

As the Times-Pic wrote: “Former Louisiana Insurance Commissioner Robert Wooley has come in for criticism for his work with ProtectingAmerica.org, an organization of insurance companies and other groups advocating the creation of federal and state catastrophe funds.”

The consumer Federations’s Bob Hunter described ProtectingAmerica.org as a “fronting organization for Allstate.”

Wooley defends himself here:

Wooley has responded by noting that his lobbying work is for ProtectingAmerica.org, not for the member insurance companies, and that most of that work has not been done in Louisiana.”

Thanks, I think, to The Cool Texan.

LOUISIANA CITIZENS BOARD OF DIRECTORS:

Flood-Plain Dwellers and Others On and Off the FEMA Map,
War Eagle, Stout-Heart-Princess-of-the-Marigny and I were headed to the West Bank on Thursday to see the flying bass in the swamp out by Jesuit Bend, when we decided to drop off Stout Heart’s application to join class action litigation against the Army Corps of Engineers, alleging its navigational projects weakened New Orleans’ defenses against storm surge. We had gotten a bit of a late start and were concerned that the low ceiling would limit our time on the swamp, but the corp’s office in New Orleans is on Leake Avenue on the way to the bridge, hardly even out of our way. Besides, the deadline for filing was that day, and Stout Heart felt that, if nothing else, a gesture was in order.

Easing the ITP/Chrysler 300(1) onto St. Charles Avenue, we had become absorbed in a lively discussion of Swiss Re’s superb ‘06 earnings (kudos, guys; I don’t know how you do it)(2) and first didn’t noticed the traffic slowing to a crawl as a long line of cars headed uptown (west) and only a few cars headed the other way. So slow was the traffic that even a St. Charles Avenue Trolley could have passed us, had one actually been running. Prytania was just as bad. We started to wonder if the president’s recovery czar was experimenting with a new market-based traffic model. Finally, I ordered War Eagle aloft to assess the situation, but he bonked his head on the door frame of The 300 and had to lie down for a while.

Eventually, it dawned on us that everyone on the road was also heading to Leake Avenue to file notice – a hunch reinforced when we saw men in reflector vests in the middle of the road collecting the forms out of car windows and placing them in clear plastic bags the size of trashcan liners. In fact, we had been part of this:

“Submitting a claim for a staggering $77 billion, the city of New Orleans joined tens of thousands of would-be plaintiffs who rushed to beat a Thursday deadline to alert the Army Corps of Engineers that they may sue for losses resulting from the levee breaches after Hurricane Katrina….

The three claims (including Entergy’s and the sewer board’s) became part of an avalanche of paperwork that poured into the corps’ Leake Avenue headquarters as Thursday’s 11:59 p.m. deadline approached, corps personnel said.

By the time of the morning commute, cars already had clogged the two-lane River Road and miles of connecting arteries. The miles-long traffic jam got so thick that the federal agency established satellite pick-up points on Carrollton Avenue and Magazine Street.

“We took people out of offices to help out: engineers, lawyers, secretaries, you name it,” spokesman Chris Accardo said. “At one time, we might have had 50 people out there.”

The suits were made possible by U.S. District Judge Stanford R. Duval’s ruling last month in the Eastern District of Louisiana that the corp’s immunity from litigation applies only to its flood control, but not its navigational projects, such as, potentially, the 17th Street Canal and the Mississippi River Gulf Outlet, which, plaintiffs allege, according to the Times Picayune, “destroyed protective wetlands and turned the shipping channel into a speedway for Katrina storm surges that destroyed their homes.”

ITP, of course, has no opinion on the merits of the case; nor does it have an opinion on whether insurers should be stepping into policyholders’ shoes under a utility-pole-falling-on-insured’s-property theory. ITP wants it known, however, that it remains firmly opposed to “judicial hellholes.”

But here’s the point:

Just when you think Louisiana’s recovery had completely collapsed – and it has – comes now this spontaneous, orderly and massive manifestation of ordinary flood-plain dwellers exercising their legal rights.

I’ll have more from the Gulf over the next week or so, but from the federal courthouse in Gulfport — where serious legal talent engaged in a highly accented battle over whether insurance plaintiffs can be consolidated into a class – to the Leake Avenue Motorcade to the halls of Congress and K Street, what ITP calls the Insurance Reformation has begun. I give it seven years.

Our irritation transformed into amazement, we gunned The 300’s 6.1 liter HEMI(R) SRT1 V8 and sped off to the Swamp, where Stout Heart conducted her free weekly Spanish-language insurance tutorial for War Eagle and a couple of Snowy Herons.

(1) As the ad copy says: “Quiet. Sophisticated. Refined. But make no mistake, when pushed, it will respond.”

(2) ITP’s congratulations are also in order for A.I.G, State Farm and Berkshire Hathaway. What a year! Way to go, one and all, especially State Farm. (Before clicking, please see CAUTION on the site.)

Thanks to Ida and New York Senior Business Writer.

CAUTION:  Naked earnings figures. Must be over 47 years old or have written permission from The Cool Texan.  May cause heart palpitations, heavy breathing, dizziness, giddiness, hair-curling, eye-bulging, nausea, hysteria, nose bleeds and cramping. If you develop an erection lasting more than four hours, call 718 852 0534 and ask for “Candy.”

From an Undisclosed Location,
I won’t say where we are right now, but to give you a hint, ITP’s attorney, Buck, could not order a beer last night, Sunday, at the local Chili’s. War Eagle says he hasn’t looked better in years.

And to give you an idea of how widespread insurance disputes are down here, this Insurance Journal story says that State Farm is asking Judge L.T. Senter of the Southern District of Mississippi to recuse himself from hearing a motion on whether to certify a class action against the company because one of his clerks and a federal magistrate could be plaintiffs.

State Farm is also asking that a second clerk not be allowed to work on its case because that clerk is suing Allstate.

I will spare ITP readers that corny old joke about the definition of chutzpah. It’s on the site.

Private note to woman with the 615 area code who called about the public-service announcement: I lost your number. Call again: 646 226 1141.
Definition of chutzpah: the guy who murders his parents and asks for mercy because he’s an orphan.

Uncover’d Periles and Casualties of Uncertaine Liabilitie,

We’ll be brief today. ITP and War Eagle are checked into the Omni here in Le Vieux Carre’. Eagle has already eaten the smoked almonds out of the mini-bar.

This Insurance Journal story reports that insurers are applauding the recent U.S. Supreme Court decision in which the court, 5-4, found that a $79.5-million punitive award against Philip Morris USA unconstitutionally punished the company for alleged injuries to non-parties, people other than the plaintiffs. Oregon’s courts had previously upheld plaintiffs’ arguments that the company had spent 40 years denying the link between smoking and cancer even though it knew smoking was deadly. The defendant argued that the damages amounted to a back-door class action.

David Synder, assistant general counsel for the American Insurance Association, weighs in:

“It’s important to lay down clear rules,” Snyder stated. “The Supreme Court has turned back efforts to muddy that clarity. We think this decision maintains fairness, protects competitiveness and should help to hold down costs.”

I’ve asked ITP’s attorney, Buck, to review the Williams decision; he hasn’t returned ITP’s email.

However, I will use this occasion to announce yet another addition to the Key Documents section of the site: The 2001 Utah Supreme Court decision in Campbell vs. State Farm (find it under “Utah”), which led to the last big SCOTUS case restricting punitive damages.

Advanced ITP scholars will remember that in 2003 the U.S. Supreme Court overturned their Utah brothers and sisters at the bar, throwing out a $145-million punitive award against State Farm for “dishonest and illicit conduct over the course of many years” stemming from a State Farm claims-handling system known as “Performance, Planning & Review,” or PP&R.

The 2001 decision makes interesting reading because the not-particularly-liberal Utah court here sounds like Amy Bach(1).

The Utah high court noted that the trial court “made nearly twenty-eight pages of extensive findings concerning State Farm’s reprehensible conduct” and goes on to summarize “State Farm’s most egregious and malicious behavior.”

“First, State Farm repeatedly and deliberately deceived and cheated its customers via the PP&R scheme… For over two decades, State Farm set monthly payment caps and individually rewarded those insurance adjusters who paid less than the market value for claims…Agents changed the contents of files, lied to customers, and committed other dishonest and fraudulent acts in order to meet financial goals.”

Again, this was company policy, not an accident, according to Utah. ITP likes this bit especially:

“For example, a State Farm official in the underlying lawsuit … instructed the claim adjuster to change the report in State Farm’s file by writing that Ospital (a driver not at fault in an accident) was “speeding to visit his pregnant girlfriend.” There was no evidence at all to support that assertion. Ospital was not speeding, nor did he have a pregnant girlfriend.“

Ospital died in the wreck.

The court continues:

“As the trial court found, State Farm’s fraudulent practices were consistently directed to persons–poor racial or ethnic minorities, women, and elderly individuals–who State Farm believed would be less likely to object or take legal action….”

As an ethnic minority himself, this makes War Eagle angry, but nothing so much as this:

“Second, State Farm engaged in deliberate concealment and destruction of all documents related to this profit scheme…State Farm’s own witnesses testified that documents were routinely destroyed so as to avoid their potential disclosure through discovery requests… Additionally, State Farm, as a matter of policy, keeps no corporate records related to lawsuits against it, thus shielding itself from having to disclose information related to the number and scope of bad faith actions in which it has been involved.”

State Farm keeps no corporate records of lawsuits against it? War Eagle says: “dat’s reedickerus!”

“Third, State Farm has systematically harassed and intimidated opposing claimants, witnesses, and attorneys,” etc., etc.

You get the gist. The Utah high court however made the important points that State Farm “corrupted” its own employees by forcing them to “engage in deceptive practices or lose their jobs” and, more importantly, “distorted” the insurance market by forcing other insurers to “adopt similar fraudulent tactics” or go out of business.”

The Utah high court – get this – reinstated the $145 million punitive damages awarded by the jury after the trial judge had reduced it to $25 million. If you’re wondering, Utah is not on the list of “judicial hellholes” published by the American Tort Reform Association. I don’t think they even allow the word “hell” in Utah.

In its 2003 Campbell decision, the U.S. Supreme Court reversed Utah and said punitive damages greater than 10 times the actual damages were probably unconstitutional. The ratio strikes some of us as arbitrary, but we’re not legal scholars.

Personally, I think State Farm should get credit for harassing attorneys.

A big foot business columnist called ITP yesterday and asked if I felt State Farm was deliberately doing the wrong thing after Katrina or was the company itself getting screwed. I told him there’s not enough data to know yet, but the Broussard case points toward the former and the Campbell and the recent Oklahoma decisions provide important context. Go to the site and search under “Broussard” and “Oklahoma.”

Ok, War Eagle and I are heading out for some beignets. Tonight, we’re going to Coop’s for some fried chick…some jambalaya!

(1) Amy Bach, executive director of United Policyholders, who still hasn’t met ITP’s sister in S.F.