How Insurance Companies Work

Although this post has nothing to do with nursing homes, I thought it worthy to share how insurance companies are not acting in good faith and do not protect insureds from mayhem.  The Charleston Post and Courier had a lengthy article on Allstate's unfair adjusting practices including their use of a computer software called Colossus.  The artilce mentions Mark Romano, a senior manager at Allstate and its top expert in Colossus, a program that calculates how much a person might be paid for an injury claim.  He was in charge of two projects to “tune” and “recalibrate” Colossus, work he knew could affect payments to thousands of people.

"Today, insurers have an array of computer programs that guide the flow of trillions of dollars to and from customers around the world. These programs include sophisticated “catastrophe models” that use weather data and other factors to predict an insurance company’s losses in a disaster. “Scoring models” use credit histories and secret algorithms to estimate which customers are more likely to file claims. Colossus and similar programs help companies manage claims. Like a TurboTax program for medical injuries, adjusters plug in information about a person’s loss — from a damaged spine to a fractured finger. Colossus then cranks out a range of payments to cover the costs. Insurance industry critics and even many insiders call these programs “black boxes” because their formulas, data sets and operational policies are cloaked in secrecy."

"The programmers studied how top adjusters made decisions and then created software to mimic their work. This program became known as Colossus and required answers to as many as 700 questions, ranging from the severity of injuries to how people experienced the loss of enjoyment in life. Injuries were broken down into 600 different codes. The program analyzed legal settlements and jury verdicts, combined this information with data entered by the adjusters, and generated what were supposed to be fair settlements."

"Romano discovered that if he used Colossus the way Allstate did, he could save its new Encompass division millions of dollars by “turning the knobs” of the software — paying people less in claims than they would have otherwise gotten."

"In South Carolina, for instance, CNA had divided the state into two territories — the “Liberal” area around Charleston and the “Conservative” region elsewhere. Allstate renamed the territories “Charleston” and “Palmetto.” By using Allstate’s Colossus tuning methods instead of CNA’s, Romano could reduce payments in the Palmetto region by 18 percent. Savings were even greater in the Charleston area — a 57 percent reduction. That meant the Allstate version of Colossus would turn a $10,000 claim in Charleston into a $4,300 payment."


Another adjuster named Rob Dietz was working for Farmers Insurance Group in the Seattle area. Unlike Romano, he was almost immediately appalled by Colossus. Farmers asked Dietz and other experienced adjusters to examine a sample of claims and come up with fair offers to pay people for their losses. These offers would be fed into Colossus to create a benchmark of payouts tailored to that area of the Northwest. But after the group finished, a facilitator said the ranges would then be reduced by 20 percent to create even lower benchmarks. The program was being rigged to make payments 20 percent lower than they should have been.

Adjusters were under constant pressure to stick with Colossus-generated payments even when the adjusters knew people deserved more.

Allstate pays those unrepresented people within 180 days, which would take care of 90 percent of the claims. The 10 percent who hired lawyers or didn’t accept claim offers would get the “Boxing Gloves” treatment. In these cases, Allstate would expect to tie up payments for three to five years.
Adjusters could mold its programs to reduce claims values across-the-board, described as “turning the knobs.”  "You could decline to enter data on high jury verdicts or unusually high injury settlements, which tricked the program into thinking an injury’s typical value was lower than it really was. You could train adjusters to code injuries in a way that didn’t account for their true severity, which also reduced payments."

These black boxes have a significant impact on what people in South Carolina receive for their claims, but state insurance regulators have no plans to study Colossus or other claim handling programs. Twenty percent of the top 30 U.S. insurers, including Allstate, use Colossus today.

Trackbacks (0) Links to blogs that reference this article Trackback URL
Comments (0) Read through and enter the discussion with the form at the end
Post A Comment / Question Use this form to add a comment to this entry.

Remember personal info?
Send To A Friend Use this form to send this entry to a friend via email.