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Cutting Costs, Increasing Profits: Insurance Company Economics

It has probably occurred to many of you that we aren’t exactly fond of massive insurance companies. This comes from decades of being in naturally adversarial relationships with their attorneys. After all, when you represent the injured, the argument usually comes down to insurers trying to pay as little as possible or nothing at all, while all we try to do is get what was promised to our clients in the first place. 

Enormous conglomerates like Allstate, State Farm, GEICO, Progressive and Nationwide are usually mentioned whenever you come across a “Top Ten Worst Insurance Companies” list in a consumer rights magazine or website. They also always seem to be mentioned whenever there is an expose’ on the news about bad faith insurance practices, or always seem to be the ones issuing blanket denials to thousands of people in the wake of a natural disaster.

A simple premise for any business is that the bigger it gets the more profit it has to make in order to stay afloat. More money has to be spent on employees, advertising, office space, and claims. And, of course, the stockholders have to be satisfied.

As they will tell you in any basic economics class, one of the best ways to improve profits is to cut expenditures. Large companies like Allstate, State Farm and the like have figured out some great ways to increase profits (increasing the client base by making it easier to get insurance) while cutting expenditures (hiring young and inexperienced claims adjusters at a fraction of the cost, keeping law firms on retainer, and denying or minimizing as many claims as possible.)

These methods have worked like gangbusters. For two consecutive years in a row, insurance companies have earned record profits. These profits occurred despite huge disasters like Hurricane Katrina. Here is how they earned their money.

Increasing Profits

It used to be very difficult to get car insurance from GEICO. One of the reasons that their rates were so low was because they were extremely selective about the policies that they offered. A spotless driving record was a must in order for anyone qualify for coverage. And once you had a policy, it was necessary for you to maintain a spotless driving record in order to stay covered. If you got so much as a speeding ticket, you would receive a letter towards the end of your term informing you that you would be required to seek coverage elsewhere.

While this might seem heartless, it was actually an incredibly smart way to run an insurance company. GEICO offered extraordinarily low rates to the safest drivers in the country on the grounds that if they were going to be involved in an accident, it probably wouldn’t be their fault. They offered low rates because they had a very specific pool of drivers and a very small rate of accidents where their policy holders were actually at fault. In other words, GEICO drivers used to get into accidents all the time, but more often than not, they would be hit by other drivers. Which was officially not GEICO’s problem.

This changed once Warren Buffett became the majority shareholder in 1996. The selectivity that GEICO was known for was thrown out the window and was replaced by the Lizard, the Cavemen, and “I Just Saved a Bunch of Money on My Car Insurance.” By lowering their standards and increasing their profile through slick and irrelevant advertising, GEICO’s profile and market share came to rival other insurance giants such as State Farm and Nationwide, who also had lower standards and a high advertising presence.

Lowering Costs

If an insurance company is less selective about their clients, then the insurance company will inevitably be paying more for accidents and injuries. So the most important way that insurance giants can lower their costs is to lower the amount of money that they pay out on claims.

There are lots of ways to accomplish this goal. But one of the easiest ways is to simply deny a claim, or to only offer a fraction of what the claim is worth. Challenging any medical claim is almost a certainty with companies like Allstate, who are notorious for dragging injury victims through court after only offering a “take it or leave it” lump sum that is only worth pennies on the dollar of stated policy coverage.

Insurance giants also save money by keeping law firms on retainer rather than paying an hourly rate for their services. Most giant insurance companies have a high powered law firm on retainer in every state in America, which means that they can work younger attorneys to death and spend years on even the flimsiest of cases. They do this not because they think that they will win, but because insurance companies have the benefit of billions of dollars of profits. The people who had their claims denied do not. It is a simple matter of filing motions, delays, asking for arbitration and then ignoring the results, filing requests for dismissals, changes of venue, or any other superfluous trick that you can think of in the hopes that the plaintiff, who is falling deeper into debt on a daily basis, will either give up or accept a pittance as a settlement. This adds up to more profits for the insurer. And they are truly not worried about the fact that they are losing a customer. There are thousands more who heard the jingle or thought that the lizard was cute who would be more than happy to sign up.

Large insurers also cut costs by doing the equivalent of automating what used to be expensive tasks. While it is true that they have saved millions by making it easier to sign up for a policy online or over the phone, that isn’t necessarily where the most money is made. Perhaps the most expensive employee at an insurance company is a professional adjuster. There have to be several of them, they have to travel, and they have to be experts on car accidents, repair costs, and medical costs.

At least, that’s how it used to be. At Progressive, Allstate and State Farm, adjusters are barely out of college (if that,) hardly ever leave their cubicles, and know practically nothing about car accidents or medical bills. They use adjusting estimate software that bases what they offer you on regional averages. In other words, if you got into an accident and sprained your leg, they simply type “broken leg” into their programs, and then they offer you exactly what the program tells them to offer you, and not a penny more. Although they certainly will offer less. These people are essentially drones that need no real expertise as they have a rigged program to do the estimates for them. In terms of employee salaries, there is obviously a lot of cost cutting going on here.

Believe it or not, there are actually some good insurers out there. There are companies that limit the number of policies that they give out, only offer insurance to people that have good records, and have experienced claims adjusters that give accurate and fair estimates of damages. And remaining small and selective is one of the reasons that they are able to do so.

Insurers like Amica Mutual, the Chubb Corporation and Travelers are not “big” in the traditional sense (meaning you won’t find flashy advertising or cattle-call policy standards,) but you do find experienced professionals and fair treatment in the event of an accident. This means that you probably won’t have to call us.

If you do find yourself injured in an accident or at work, and find that your insurer is more concerned with their quarterly profits than with taking care of your needs, contact our offices for a free legal consultation today.