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Week of 8.17.07

Web-Extended Interview: Darrell Preston

Darrell Preston Darrell Preston, a correspondent for Bloomberg News, talks to NOW about his investigation with colleague David Dietz on the inner workings and strategies of home insurance companies. This is an edited, extended version of the interview that appeared in the broadcast "Home Insurance 9-1-1"

NOW: What was your "big picture" finding about the insurance industry from this story?

DARRELL PRESTON (DP): Insurance companies are looking at the bottom line and trying to cut the amount they pay in claims. And in some cases, the consumers lose out. They don't realize that when they file a claim, the insurance company is taking steps to make sure that they pay as little as possible.

NOW: Why do you think this hasn't come to light earlier?

DP: Katrina brought a lot of these issues to the forefront of the debate in public about the insurance industry. After Katrina, thousands of people found that they were being denied claims, including Trent Lott, the U.S. Senator. This brought it to the public's attention. It hadn't been talked about much before, but it's been going on for about a dozen years now.

NOW: What happened a dozen years ago?

DP: Insurance companies began hiring the consulting firm McKinsey and Company to look at how they handle their operations. McKinsey quickly focused on how they handle claims, how they pay claims, and that became a new profit center for insurance companies, a way for them to cut their expenses and reduce losses. But the victims have been the people who file the claims that need to get reimbursed by their insurance companies.

Before McKinsey came in, companies basically paid every claim, they evaluated them, but they paid them. They didn't really take steps to systematically deny them. They just took their losses, and for the early 1990s, insurance companies weren't as focused on the bottom line.

NOW: Who were McKinsey's clients?

"...the insurance company is taking steps to make sure that they pay as little as possible."
DP: McKinsey worked for several of the largest insurance companies that provide housing and auto insurance—Allstate, State Farm, Farmer's Group and several others. They all hired McKinsey and eventually got very aggressive about their claims to keep their costs down.

NOW: What did they advise their clients to do?

DP: McKinsey told insurance companies to delay, delay, delay.

NOW: How did this affect the industry?

DP: They [insurance companies] found ways to delay payment of claims, to fight hard. In some cases, if an insurance company customer would take a low payment up front, then they would settle right away. But if somebody fought for more money, they would drag it out as long as possible. They hire attorneys and drag out the cases further delaying payment to the claimants.

NOW: Was this strategy something that you found in certain disasters, like Hurricane Katrina, or was it more systemic?

DP: In state after state, we found examples of people who didn't get paid. Hurricanes, fires, tornadoes, any kind of disaster where they lost their house, they spent sometimes a year, sometimes more, fighting with their insurance company to get the insurance company to agree to pay the amount that they thought they needed to get their house repaired or replaced.

NOW: Did any patterns emerge in how the companies avoided payment?

"In the last decade, the insurance industry's profits have just grown phenomenally."
DP: The most common pattern we found was that usually the insurance company came in with a very low offer right at the beginning that wasn't anywhere near what it would cost to repair or replace a house. The second pattern was that often they would go through several delays. Sometimes they would change adjustors four or five times. And that just takes more time, and the longer time it takes, the more time that money's in the insurance company's bank account and not in the consumer's bank account.

NOW: How has the strategy affected insurance companies' profits?

DP: In the last decade, the insurance industry's profits have just grown phenomenally. And just even in the last two years, including Katrina, they've posted the highest profits ever. If you look at the numbers from the insurance companies over the last decade, the percentage of money that they pay out in claims, even averaging good years and bad years, it's a lot less than it was ten or 20 years ago. They just don't pay out like they used to.

NOW: How has this happened?

DP: There's very little oversight of the industry. There's no federal regulation. The federal government lets insurance companies pretty much do whatever they want. [Individual] states regulate the insurance industry, but their main focus is on whether the companies have the money on hand to pay their claims. They don't really focus on whether they're treating their customer's right.

NOW: Could tighter regulation make a difference?

DP: Tighter regulation could make a difference but many state insurance commissioners are very loyal to the industry. A lot of them have been part of the industry for years.

NOW: So is anybody looking out for the customer?

DP: There's very little protection for insurance customers. Usually they're left to their own to fight. They can file a complaint with the state insurance department. But we found that very few are actually acted on.

NOW: As a reporter investigating this story, did you have a moment like, "Wow, I never imagined this?"

"The McKinsey documents showed very clearly that there was a strategy to not pay claims."
DP: Yes, it would be the discovery of the McKinsey documents. We saw this pattern of insurance companies not paying in some cases what was very obvious that somebody should be paid. And so this pattern was there. But we couldn't explain it until we found out about these McKinsey documents. The McKinsey documents showed very clearly that there was a strategy to not pay claims.

NOW: In what other ways, if any, are insurance companies working to reduce risk and therefore costs?

DP: One of the strategies is reducing exposure in areas that are subject to earthquakes or hurricanes or other catastrophes. In some cases they try to get state funds to take over the risk for catastrophes where they occur with some frequency, for example, hurricanes on the south Gulf Coast and earthquakes in California. Even in New Jersey and New York they've even tried to avoid some coastal areas because of the hurricane risk.

NOW: And what's wrong with that? It's a free market.

DP: It is a free market but the whole idea of insurance is insurance companies get this right to collect money from people and the responsibility to provide this protection in case of a catastrophe. And they seem to have lost their focus on that over the years.

NOW: What did you find out about making a claim by covering this story?

DP: I learned is that if you have a claim, never accept the first offer. Keep pushing as long as you can.

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