The insurance industry tried every imaginable strategy to change the rules of the game, and their hard (but devious) work has paid off. Insurance companies have a “product” consumers are required by law to purchase and a marketing scheme that negatively brands those who seek to utilize what their money has bought. Insurers have used their massive financial influence and a lot of misinformation to invade every level of the legal system and manipulate public opinion, and now it’s no surprise that they’re winning their own game.
Of course, it’s easy to win a game when your opponents are your customers and you neglect to tell them that you’ve changed the rules.
Lawsuit lottery? Jackpot justice? Yeah, right. If anyone is hitting the jackpot, it’s insurers, not the insured.
It’s no accident that the most widely recognized insurance corporations show up on the list of Fortune 500 companies: Allstate, State Farm, Progressive, Nationwide, AIG, and Liberty Mutual. Though you won’t see GEICO on the list, they’re doing just fine; the insurer’s parent company, Berkshire Hathaway, earned more of both revenue and profit than any of its competitors. A full 20 property/casualty insurance companies (as opposed to health and life insurance companies) made the list, with revenues for 2013 ranging from “just” $5,000,000,000 (Old Republic National) to $162,500,000,000 (Berkshire Hathaway).
State Farm brought in $65,300,000,000. Liberty Mutual made $36,900,000,000. Allstate earned $33,300,000,000. Nationwide brought in $30,400,000,000. And don’t imagine that these companies paid out in premiums what they earned. Of these twenty, just two reported a loss. The other 18 saw millions of dollars in profits at a minimum.
Nationwide’s profits hit $748,500,000. Liberty Mutual ended up with $829,000,000. Progressive’s profits exceeded $902,000,000. Allstate’s whopping $2,306,000,000 in profits still trailed the $2,473,000,000 brought in by Travelers, the $2,832,300,000 that USAA earned, State Farm’s $3,159,200,000, and AIG’s $3,438,000,000. All of these numbers pale in comparison to Berkshire Hathaway’s $14,824,000,000.
They can talk about the “lawsuit lottery” all they want, but the numbers don’t lie. The insurance industry isn’t hurting. The claimants are.
A Zero-Sum Game
We’ve said before that the insurance industry sees the claims process as a game – not a fun game between friends, but a cutthroat contest. It’s what professionals in economic theory and game theory (basically, the study of decision-making) call a “zero-sum” game: one party can only win if another party loses. In the insurance industry’s eyes, this meant that the only way for these companies to hold onto those millions or billions of dollars in profits was to make sure the claimants who really needed the compensation most saw as little of the money as possible.
To win, the insurance company would have to:
- Change the claims process internally by minimizing and delaying payouts.
- Create enough social stigma to scare prospective claimants away from making claims.
- Lobby for legislators to pass laws that favor the insurance industry, like tort reform laws.
- Deny small claims and force claimants to file lawsuits that are too expensive to be profitable.
- Fill judicial seats with judges partial to big business and the insurance industry.
Check, check, check, check, and check.
- Instituting the Colossus computer system reduced adjusters’ freedom to evaluate claims and drastically cut down the amount of compensation claimants could receive, at least without putting up a fight.
- Spreading lies about the case of Stella Liebeck vs. McDonald’s and coining phrases like “jackpot justice,” “lawsuit lottery,” and especially “sue-happy” managed to turn public opinion against claimants and create a misinformed social bias that all personal injury claims are frivolous.
- Across the country, tort reform laws like caps on damages have become a reality.
- When victims do muster up the courage to file claims, insurers are willing to spend more to defend the claim in litigation than it would cost to just pay it. Their reason? They want to send a message to claimants and plaintiff’s attorneys that while legitimate, these small claims aren’t worth the hassle and expense to pursue.
- In state after state, insurers have essentially bought judges by contributing millions of dollars to fund the judicial campaigns of corporation-friendly candidates.
Insurance doesn’t have to be a zero-sum game. Once upon a time, the early concept of insurance evolved to create a win-win situation. If someone experienced a loss – of a home, of goods to be traded, of an automobile, or of health that resulted in medical bills – insurance prevented that loss from being catastrophic. Those who paid in but never had to make a claim still got something for their money. Everyone who participated in a community insurance program had peace of mind in knowing that their risks were shared. When insurance transitioned from a closed-community program into a corporate enterprise, the win-win potential actually increased. Insurers won in that they made money from collecting their policyholders’ premiums and investing that money to earn “float” income. Claimants won in that they had the security of knowing they were covered if they did experience a loss.
Our modern insurance industry isn’t looking for a situation that benefits everyone, but instead a way to reap all of the advantages of what’s supposed to be a two-way relationship.
A Captive Consumer Base
Even without changing all the rules, the auto insurance industry, in particular, had a built-in advantage over just about every other industry. Their customers are obligated to purchase their product. Laws in almost every state require you to buy auto insurance to drive legally. Auto dealers won’t even let you test drive a car without proof of coverage. You probably have never given any thought to how laws mandating that drivers obtain auto insurance came to be. After all, it’s been the case since the 1920s in some states, which means that in many states, most drivers on the road today have never known a world in which auto insurance was optional.
There are clear reasons why insurance – at least in the sense of the pure concept of risk management that it originated as – makes sense. The average motorist probably can’t come up with the tens or hundreds of thousands of dollars (or more) that victims of their poor driving need for recovery.
But because auto insurance is mandatory for most drivers across the nation, insurance companies have a lot of freedom to do as they please. They really do operate in a “free market,” so free in fact that even their customers have little influence on their behavior. Even in the case of purchasing basic necessities like food, consumers have plenty of options. They could cook at home or go out. They can buy the cheapest foods or the most expensive. They can eat at pricy restaurants or choose an item off the value menu at a fast food joint.
When it comes to insurance, consumers have far less freedom. The different companies operate in much the same way. They’re all using the same strategies to increase profits and decrease payouts. And despite every company claiming an ability to save policyholders hundreds of dollars, the truth is that we policyholders are all just trying to choose the lesser evil out of dozens of companies that don’t have our best interests at heart.
Even a Loss Is Still a Win for These Guys
When claimants lose, the results are devastating. Sometimes they can’t get the medical care they need. In some cases, they have a condition that modern medicine can treat but no way to pay for it, so they may be forced to spend the rest of their lives in constant pain, living with a disability that could be treated but won’t be. Families that lost income while a claimant was unable to work because of an injury will never be able to recoup the money they’ve lost, and that could spell financial disaster. If the injured person’s disability compromises their future ability to provide for their family, they’re out that money, too. Real claimants know that a personal injury claim isn’t about getting rich – it’s about getting back some money to make up for the expense, the pain, and the life adjustments that come as the result of their injuries.
But on the occasions that the insurance industry doesn’t get its way, even after rigging the game, their loss is a minor inconvenience. After all, even if they ultimately have to pay a claim, their strategy of delaying payments has already allowed the company to generate more money from the “float” investments. Even if they ultimately have to pay a claim, they don’t have to pay that much. Caps on damages and other one-sided laws passed under the guise of tort reform have reduced the financial risks to the insurance company. The upshot is that they make less money than they would without paying the claim. Maybe their profits will only be in the hundred millions of dollars this year instead of the billions of dollars. Sad, I know.
The tricks of the modern insurance industry have changed the claims process, probably for good. But no matter how many obstacles insurers are throwing up to block victims from pursuing legitimate claims, they can only make the game more challenging. Winning is still possible – victims just need someone equally knowledgeable about the claims process and insurance company’s tactics on their side.