Our story about the McKinsey documents reveals the business model still used by insurance giant Allstate, the second largest property and casualty insurer in the country. The plan urged Allstate to put boxing gloves on its "good hands" and get tougher on people trying to collect on claims. McKinsey maps out a detailed plan for lowering payouts to claimants and increasing profits.
Claimants, plaintiff's lawyers and consumer advocates blast Allstate for its tactics. Allstate defends the practice. Here's what's not debatable: the McKinsey plan worked, at least for Allstate's bottom line.
Allstate, and State Farm, which also used McKinsey as an advisor in the 1990s, reduced payouts to claimants and greatly increased profits after following practices outlined in the McKinsey documents. In fact, the property-casualty insurance industry reported a $73 billion profit last year, up 49 percent increase from 2005, according to Highline Data, a Massachusetts-based firm. Allstate's profits doubled from the mid-90s to last year. In 2006, Allstate earned $5 billion in profit.
Allstate has also been a great investment for shareholders. During the last dozen years, Allstate stock has gone from $11 a share to more than $60, performing better than Walmart. Zacks Research Digest analysts upgraded Allstate stock today partly because of "Allstate's disciplined underwriting approach, which has led to more consistent profitability than its peers on an underwriting basis." Today, Allstate stock is trading around $53.
Naturally, there's a downside to the business model used by Allstate. According to reports in the media, Allstate's own internal poll showed that the company has consistently fallen below the industry average for customer satisfaction since at least the year 2000.
In California, Consumer advocates say Allstate is trying to "bully its way to higher profits" and should cut rates $300 million to comply with new rules limiting the profits of insurance companies.
What was Allstate's response? According to the Consumer Foundation for Taxpayer and Consumer Rights, Allstate's expert wrote that a company ordered to follow rules that limited profits could: "reduce the quality of its services to a level lower than what it would have otherwise been, by having fewer offices in the state, advertising less vigorously, or reducing the quality of its claims processing. Ultimately, a company might choose to leave the state entirely if long-term prospects are sufficiently poor." The FTCR interpreted the statement as a veiled threat that Allstate would leave California if it was pushed too hard.
So, what are Missouri and Illinois doing on this issue? According to spokespersons in both states, neither Illinois nor Missouri has fined Allstate for "unfair practices," although both states have the authority to issue fines. In Missouri, Allstate's consumer complaint index is nearly double the industry average for property-casualty companies. It's unclear if Missouri or Illinois are investigating unfair practices by Allstate or other insurers, the spokespersons wouldn't comment on ongoing investigations. You can learn more about insurers in both states by using our links.
If you have a consumer complaint in Illinois you can call 1-866-445-5364. In Missouri, you should call 1-800-726-7390.
Allstate is paying a price for following the business model found in the McKinsey documents. Profits rise, but so do complaints. Payouts fall, but so does confidence in the company fighting harder to reduce costs.
Allstate has decided it's worth the price.