The “Good Hands” insurance company just received a swift kick from the Consumer Federation of America (CFA) with the release of a report concluding that Allstate, one of the largest insurers of auto and homeowners in the U.S., is also a leader in anti-consumer insurance practices. The report finds, “The Allstate Corporation has been at the forefront of the insurance industry in unjustifiably raising home and automobile insurance rates relative to the amount paid out in claims, in using questionable practices to settle claims and in attempting to shift costs to taxpayers.”
Bob Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner and Federal Insurance Administrator, who prepared the report said, “Allstate is certainly not the only insurer pursuing these anti-consumer practices, but it has been in the vanguard in developing and implementing them.” The report issues a six-count indictment:
EXCESSIVE RATES AND PROFITS BUT ANEMIC PAYOUTS TO POLICYHOLDERS. The report notes that Allstate paid out only 59 percent of the premium dollar on claims to policyholders from 1997 to 2006. The industry average is 65 percent. In other words, CFA argues Allstate should have cut its premiums or perhaps paid out more in claims. But in CFA’s view, Allstate is now charging too much for the benefits delivered to its policyholders.
HIGH CONSUMER COMPLAINTS. The complaints filed against Allstate, many relating to claims practices, are more numerous than almost all of its major competitors. Of 13 major auto insurers, Allstate had the second highest complaint ratio in two recent years. This is based on data collected by the National Association of Insurance Commissioners.
QUESTIONABLE CLAIMS SETTLEMENT PRACTICES. CFA says Allstate has adopted an automated claims settlement procedure designed to cut claims payments to policyholders, without regard to the validity of the claim and without an examination of the claim. As a result, CFA says it can document a systematic underpayment of claims based on aggregate data. The data show that Allstate reduced its payouts by about 20 percent relative to the industry for the year 1996 through 2006.
UNFAIR RATING AND UNDERWRITING PRACTICES. CFA says Allstate has developed complex and difficult to understand pricing systems, using credit scores and other variables not related to the risk of their customers. This, it is argued, makes it difficult to do comparison-shopping and results in higher rates for poor and minority customers.
The use of credit reports for rating has long been a controversial issue. The CFA would argue that a credit report might be unfair as an underwriting tool. For example, a policyholder may have a sick child whose medical costs overwhelm his ability to pay and thus create a bad credit report. The man is not a bad driver and does not suddenly become one because he has a bad credit report under these circumstances. Nonetheless, that credit report may lead to higher insurance rates, if credit reports are used in the underwriting and pricing process. Years ago, I did an investigation of credit reports and their use in insurance. At the time, I interviewed an Allstate spokesman who promised to provide me with substantiation of the Allstate position that credit reports can be used to measure auto insurance risk. I’m still waiting for that substantiation.
MISTREATMENT OF HURRICANE KATRINA VICTIMS. CFA hits Allstate for dropping coverage of many of its policyholders in coastal areas around the country. For example, in 2005 and the first half of 2006, Allstate dropped about 30 percent of its book of business in Florida. It should be noted other companies, including the largest writer of auto and homeowners policies in the U.S., State Farm, also dropped many coastal area policyholders.
SHIFTING COSTS TO TAXPAYERS. Allstate is one of the leaders in seeking taxpayer subsidies for what it views as its high-risk coverage, such as that written in coastal areas. CFA claims that Allstate, while seeking government subsidies, was also underpaying claims for wind damage and trying to shift the cost to the flood insurance program.
What is Allstate’s response? That is a worth a whole column in itself. When a major national consumer organization such as CFA puts out a 37-page report authored by a recognized expert, I would have thought Allstate would immediately have issued a detailed, written response. Instead it issued a puff of hot air and tried to hide under generalities amounting to smoke and mirrors. But I called its public relations people at the home office, which is generously stocked with six people to respond to media calls. I thought I’d get an immediate response, with that detailed, written statement I assumed Allstate had prepared. I was referred to the Malvern (PA) Regional Office. Again, I asked for that detailed response, which I assumed Allstate surely had. After all, it had about three weeks to prepare a response from the time the CFA report was issued.
Instead, I got a flood of meaningless generalities such as we stand behind our practices (that may well be, but the issue is whether they are bad practices). Allstate said we’ve got dedicated claims people, dedicated managers, etc. (that may well be, but what are they dedicated to – perhaps denying meritorious claims). Allstate went on to say we have a high renewal rate (that may well be but perhaps that comes from people who haven’t put in a claim yet). Another response I saw in a news report was that 17 million people (the number of Allstate policyholders) can’t be wrong. I’m sorry, but as a long-time consumer reporter I can vouch for the fact that a lot more than 17 million people can be wrong, and in this case, the evidence suggests they are.
However, after all the dancing and backpedaling, I discovered that Allstate has nothing to say to refute the merits of the CFA report. Although Allstate claims the CFA report is littered with inaccuracies, it was unable to document them. When I asked why hasn’t Allstate prepared a detailed response to the CFA report, I was told that would give it more credibility than it is due. I replied if you could refute the report that would destroy it. Judge for yourself, but my bottom line is that if Allstate could refute the report it would. If it can’t, it will pound on the table and declare its virtue – in broad generalities, which is exactly what it did.
The bottom line is that this giant insurance corporation could not refute one line, one sentence, or one word of the CFA report. At least they were unwilling and apparently unable to do so. If a criminal is on trial for murder, he needs a defense. He just can’t claim he’s a nice guy and call character witnesses. I’m not saying Allstate has committed murder (although perhaps some policyholders might think so), but in the trial before the court of public opinion, Allstate offers no real defense. I would view their defense via generalities as a plea of guilty or perhaps a plea of nolo contendere (no contest). Therefore, I hereby move that the recommendations of the CFA be unanimously adopted by the public, by insurance commissioners, by the National Association of Insurance Commissioners, and by all others to whom they are directed. Here are some of those recommendations:
FOR CONSUMERS: In buying and renewing policies, customers should take into account that Allstate has precipitously dropped large numbers of customers even while the company is earning record profits. They should also take into account the fact that Allstate’s policies are often a poor consumer value. Furthermore, Allstate has been a leader in adopting highly questionable claims practices. CFA offers this piece of advice: “If a consumer receives either a small rate hike or a notice of a renewal with no reduction from Allstate, you should shop around to see if Allstate’s price is competitive. Allstate seems to think that consumers will not shop around unless they see a large rate increase, so it may not be following the lead of other insurers in lowering prices.”
CFA advises policyholders not to settle a claim for an amount deemed to be unfair. They should strongly advocate for a fair settlement, appeal to higher levels, perhaps file a complaint with their insurance commissioner or other consumer protection agency, and if necessary seek legal advice or go into small claims court on their own.
FOR THE STATES. The National Association of Insurance Commissioners, an organization of state insurance regulators, should launch a market conduct exam to look into the practices of Allstate, and see if they are legal and fair. Other companies that follow Allstate’s lead should be subjected to the same kind of scrutiny.
FOR THE FEDERAL GOVERNMENT. Congress and the Federal Emergency Management Agency (FEMA) should make sure that Allstate and other insurance companies are not unjustifiably enriching themselves by pushing claims that should be paid under homeowners wind coverage onto the flood insurance program and the taxpayers, which fund it. Among the many issues Congress should examine are the anti-concurrent causation (ACC) clauses. These enable insurers to deny wind losses even if they can be separated from flood losses. In addition, Congress should determine whether even without the aid of the ACC clauses, Allstate and other insurers were shifting wind losses under homeowners policies to the taxpayer supported flood program.
This also suggests that this may be a good time to review your homeowners, auto, and other insurance policies to make sure they are up to date and provide the coverage you need at a price that is fair. Unfortunately, most policyholders seem to wait until they have a loss to review their insurance program, something they should do at least once a year. Every major insurance catastrophe I’ve reported on, demonstrates that consumers too often don’t have sound insurance programs. So check your insurance now instead of crying about it when it’s too late.
Herb Denenberg is a former Pennsylvania Insurance Commissioner, professor at the Wharton School, and
Pennsylvania Public Utility Commissioner. He is a member of the Institute of Medicine of the National
Academy of Sciences and is a board member of the Center for Safe Medication Use. He is an adjunct
professor of insurance and information science and technology at Cabrini College. You can write Herb
at POB 7301,St. Davids, PA e-mail him at hdenenberg@aol.com or reach him at his two Web sites:
thedenrep_archive.org or denenbergsdump.org