The following is a review of Trial Guides' public version of "From Good Hands to Boxing Gloves: the Dark Side of Insurance" which is sold to non-lawyers exclusively through Amazon.com. The reviews are written by Allstate's own agents in the national Allstate agent publication; Exclusive Focus.
For lawyers, we recommend the much more extensive From Good Hands to Boxing Gloves: How Allstate Changed Casualty Insurance in America text written for lawyers that addresses the insurance bad faith claims practices in much more detail, as well as additional chapters by Dr. Michael Freeman regarding Allstate's Minor Impact Soft Tissue or "MIST" defense. The legal version of the book continues to be cited on the Allstate Wikipedia page as the authoritative source on Allstate's underpayment tactics and the McKinsey Documents.
Reviewed in Exclusive Focus (Summer 2010)
In this issue of Exclusive Focus magazine, we are presenting two reviews of this controversial book about Allstate. The following reviews were independently written by two active Allstate agents who do not know each other’s identities. Both of them wish to remain anonymous.
Trial attorney David Berardinelli’s book, From Good Hands to Boxing Gloves, tells about a side of the Allstate business plan the company management would prefer to keep secret. Starting with a recap of an accident involving Jose and Olivia Pincheira, Berardinelli progresses to Allstate’s handling of their claim and details how his experience as their trial lawyer leads to uncovering a business practice that, in his words, is "The dark side of insurance."
After Berardinelli quickly relates the facts of the Pincheiras’ accident, he introduces us to McKinsey and Company, a high profile consulting firm hired by Allstate in 1992, ostensibly to help redesign the company’s core business plan with special emphasis on claims handling. Berardinelli spends the rest of the book describing McKinsey’s new claim process, designed specifically for Allstate. McKinsey calls it "Claims Core Process Redesign," or CCPR. It has since become Allstate’s standard for claims processing. According to Berardinelli, the CCPR plan would provide Allstate with record profits while, at the same time, deny financial benefits to its policyholders. Berardinelli further likens the McKinsey philosophy, which he says has become benchmark for the Allstate corporate philosophy, Wall Street’s Gordon Gekko’s claim that "Greed is good."
During the first few chapters, I initially found myself railing against Berardinelli’s supposition that Allstate was purposefully and maliciously denying the Pincheiras’ claim. After all, being a good "Allstater," I was naturally going to come to the corporation’s defense. Not knowing the explicit facts of the case, and instead relying on the summary Berardinelli presented, it seemed highly unlikely Allstate would engage in a process which not only involved an Allstate agent’s purported lies, but the use of a then-secret formula for defrauding Allstate’s own clients. As impatient as I was to quickly dismiss this book as a sour grapes retribution for running his client through the "mill," Berardinelli patiently tells a story that, in the end, makes a compelling case.
It was breathtaking to read about the depth and breadth the company went through in order to manipulate and, in essence, "invent" a new way to process claims. Previously implemented in other industries, the McKinsey "Greed is Good" philosophy successfully merged Allstate’s pursuit for ever-increasing profits at any cost with the new CCPR claims process. Berardinelli goes on to say that when used as the new standard, CCPR relegates insurance customers to nuisance status and treats them as an impediment to profits rather than the financial focal point they deserve to be.
In Chapter nine, Berardinelli reproduces a slide from McKinsey’s February 16, 1994 presentation to Allstate. The slide depicts a "Current Game" graph showing gradually declining payouts of bodily injury claims over a 1250–day period. The intent is to show that early in a claim’s history; BI payouts tend to be higher, followed by a tapering off and a gradual step-down effect until most claims are settled by the end of the 1250–day period. The same slide also depicts a graph entitled "New Game" in which McKinsey recommends Allstate settle 90% of its claims in less than 180 days, or the "Good Hands" segment, followed by a deliberate delay of about four more years to settle the remaining 10%. McKinsey labels this segment "Boxing Gloves." Berardinelli estimates that by giving customers the "Boxing Glove" treatment, Allstate can rack up billions in profit’s through this new delay tactic. According to Berardinelli, this strategy involves keeping clients away from attorneys, promising forthcoming fair settlement offers, but not delivering, and exploiting policyholders’ financial vulnerability by making lowball initial settlement offers.
Berardinelli’s logical presentation in From Good Hands to Boxing Gloves aligns the Allstate philosophy with McKinsey and Company’s credo of "Greed is good." It appears that encouraging Allstate’s pursuit of financial gains at the expense of the very customers it purports to serve is child’s play for McKinsey. Berardinelli reminds us that lest we forget one of the biggest financial scams of our time, one would do well to remember Enron. While the Enron name is synonymous with greed and corruption, it is McKinsey that provided them with the necessary internal mechanics required to pull off their ascent to the top of Wall Street. And while Enron ultimately took the big fall, McKinsey quietly slipped out the back door to pursue its next high-paying client.
From Good Hands to Boxing Gloves concisely chronicles Allstate’s connection to and its use of McKinsey and Company’s "Greed is good" philosophy. It defines Allstate’s current direction, which may well serve to dissuade new clients from ever coming close to Allstate’s "Good Hands" for fear they may have to wear boxing gloves instead.
"I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits." —John Mackey, Whole Foods Market CEO
"The time is always right to do what is right." —Martin Luther King. Jr.
Sears – "Satisfaction Guaranteed or your money back." Allstate – "You're in good hands." Reputation. Integrity. Doing the right thing. These are, or were, the driving forces of business. Yet we as agents, and especially long-term agents, who have lived by these attributes for years have seen these same virtues disappear at Allstate. We sense it like we sense a storm coming by the wind shifting in the trees. Something’s amiss in our corporation. Just who is the corporation’s customer? As agents, we know who our customer is, but who is Allstate’s customer?
In the must-read book From Good Hands to Boxing Gloves: The Dark Side of Insurance, attorney and author David J. Berardinelli exposes what agents know all too well: the shareholder is Allstate’s customer and enhancing shareholder return is its underlying operating principle. Mr. Berardinelli is a trial lawyer who worked to become the first person to obtain the now infamous "McKinsey Documents." The book talks about how the documents "teach insurers to profit by denying or delaying claims," and how Allstate’s "Good Hands" treatment of its customers has been supplanted with a more aggressive and adversarial approach which, metaphorically speaking, requires the policyholder to don a pair of boxing gloves to spar with the company in order to reach a fair claim settlement.
As agents, we know the traditional rules of insurance. Our customers believe us when we tell them that their homes, autos, property and their lives are in Good Hands. We are the face and heartbeat of the insurance contract to our customers. They pay their premiums and when they have a covered loss, they believe those Good Hands will make them whole. Replace the home damaged by a hurricane, tornado or fire; reimburse them for medical expenses or horrible injuries from an auto accident, especially if caused by an uninsured motorist. The customer naturally believes that Allstate will settle their claim fairly and promptly and will keep the policyholder’s best interests at the center of the process.
According to Berardinelli, "Casualty insurance is indemnity coverage. It doesn’t pay a set benefit. It pays as much as the policyholder needs, up to the policy limit to restore an insured to the same financial position after the loss that he or she was in prior to the loss."
I don’t know about you, but these days I have a sense of dread and uncertainty every time a customer calls to report a claim. I never know what to expect anymore. After all, we know Allstate wants to settle the claim as quickly as possible for the least amount of money. My fear is that Allstate will lowball the customer with a "take it or leave it" settlement offer. And when this happens, the boxing gloves come out and I get caught in the middle, trying to do the right thing for my customer. Naturally, the company usually wins and I lose another customer.
Allstate Hires McKinsey: 1992
First, a little background on McKinsey. They do not solicit clients. Clients have to seek them out, just as Enron did. So why did Allstate seek and then adopt McKinsey’s business model and what motives did senior executives at Allstate have?
As you may recall, in 1992 Sears, trying to prop up its suffering retail business, decided to spin off Allstate, Coldwell Banker and Dean Witter. Sears, of course, didn’t make the official announcement of its plan until 1993, but some senior executives at Allstate seem to have been tipped off to the then-secret restructuring plan.
Enter Ed Liddy
In 1992, Sears’ CFO was Ed Liddy. Just two years later he becomes president and CEO of Allstate. Coincidence? While at Sears, Liddy’s executive compensation was mostly in the form of Sears stock and options, which were dependent on the entire performance of four separate businesses. All that changed when Allstate was spun off and became the nation’s largest publicly traded personal lines insurance company. Thereafter, executive stock options would depend solely on Allstate’s ability to increase net profits and build the value of Allstate Stock.
McKinsey urged Allstate to align the interests of its employees and management with those of the shareholder. According to Berardinelli, "Proof of McKinsey’s plan to put shareholders ahead of policyholders isn’t hard to find. Allstate’s 2005 Proxy Statement clearly spells out this plan: ‘Because we believe strongly in !inking the interests of management with those of our shareholders, was first instituted stock ownership goals in 1996 for executives at the vice president level and above." Therefore, "Allstate CEOs are required to own company stock worth seven times their annual salary. Senior management executives are required to own stock worth four times their annual salary."
You do the math. If you owned millions of Allstate shares whose interest would you protect? Who would your customer be, the policyholder or the shareholder?
"At the time of his retirement on December 31, 2006 Liddy owned almost 4 million shares of Allstate worth approximately $250,000,000 at the market price of $65.11" But wait, there’s more! "In all, Liddy’s move to Allstate in 1994 netted a PERSONAL FORTUNE of approximateIy $350 million upon retirement on December 31, 2006 – much of it due to McKinsey’s business model."
For Liddy and other executives, including current president and CEO Tom Wilson, it was, and still is, a sweet, sweet deal indeed. For policyholders, it means excessive premiums combined with reduced claim payments. And it continues to mean rate increase upon rate increase for our customers. No hard "talking path" can explain away the obvious: Executive endorsed, expertly entrenched, corporate-sponsored greed.
Mr. Berardinelli’s book reads like: a murder mystery in which he delves into the whodunit of Allstate and McKinsey like Sir Arthur Conan Doyle’s Sherlock Holmes. Among chapter titles and sub-titles:
- Good Hands or Boxing Gloves
- An Alternative Explanation of Earnings
- McKinsey and the Greed is Good Model
- McKinsey’s Solution to the Allstate Problem
- Changing Employee Behavior
- We get What we Measure
- Litigation as a tool
- Redefining the Game
Eye-opening for agents will not be what Allstate’s culture is, as we experience this out of control beast on a daily basis. What will be eye-opening is the "smoking gun" itself; the subpoenaed McKinsey slides from the presentation in which the profitability to be had – by basically turning the claims process into an adversarial, litigious profit center – was revealed. The "keep ‘em running, keep ‘em guessing" human resource policy that has affected agents and employees since 1994, when most agents were employees, continues to fester as RFG for today’s so-called ‘independent contractor’ Exclusive Agents. As the McKinsey report states: "We get what we measure. The new measurement approach will be based on the processes and activities required to achieve the desired outcomes (increasing profits)." Does this sound a bit like Expected Results or RFG?
While the main subject of Mr. Berardinelli’s book deals with McKinsey and the claims paying process changes to increase profitability at Allstate using CCPR, it isn’t a stretch at all for us to surmise that McKinsey must have been asked for other ways to increase profitability in Allstate’s distribution sector – the agency system. At the time, the vast majority of agents were Allstate employees who began to feel the effects of the company’s shifting plan. The costs of running an office, which the corporation previously assumed, were slowly shifted to agents through the Neighborhood Office Agent (NOA) program and then in 2000, Allstate completely shifted its costs, including pensions, employment taxes, health insurance, etc. to its newly-converted "entrepreneurial" agent work force. Thus, the greatest oxymoronic tide in Allstate history: the Independent Contractor Exclusive Agency Owner!
Enter 2010. Agents are being terminated for lack of production, for AFS, agency standards and perhaps most absurdly – for ALI. Now the Ideal Agency Model, part of the Sales and Customer Service Roadmap, threatens to eliminate thousands of agents as they struggle to grow their agencies to meet this new $4 million per agency corporate standard. Indeed, the future looks bleak for the agency force. Yes, some will make it, but most will fail for a number of reasons, including rates, MMGs and a lack of capital. McKinsian in its goals and objectives, the Ideal Agency Model was described as follows by Joe Richardson in an announcement released to the field:
- "Base on agency feedback and modeling, Allstate has determined an ideal scale that puts an agency in an optimal financial position while still encouraging growth and sustainability."
- "An agency’s progress towards this ‘ideal agency model’ will be measured, and tools are being built to support agencies in their efforts to maintain a positive ‘trajectory’ towards the model."
- "For agencies who have already met or exceeded the ideal model, Allstate will continue to provide extensive support to encourage growth and sustained success."
The future for many small to medium size agencies is clear: grow or go. Zero tolerance.
While the Good Hands to Boxing Gloves business model is being applied to the detriment of policyholders, it is helping to achieve the "expected results" that company leaders need to enhance their compensation levels and, of course, increase shareholder value.
It is very clear to this writer that this same Good Hands to Boxing Gloves business model has, and will continue to be, applied to the agency force.
Make no mistake. At a minimum, Allstate has a 10-year plan on just when and where they are going. It’s common knowledge that the company plans to reduce the number of existing agents by up to 3,300 existing agents over the next few years. If you don’t plan accordingly, you may just be knocked out of the ring whether it’s your first or your fiftieth fight.
Buy your copy of the public version of From Good Hands to Boxing Gloves on Amazon.com
Please note: This shortened version is not intended for lawyers. It does not contain the extensive review of Allstate's claim practices discussed in legal terms, provide insights on insurance bad faith claims, or contain the chapters by Dr. Michael Freeman on insurers' "minor impact" or "MIST" defenses. For the legal copy providing that information please order From Good Hands to Boxing Gloves: How Allstate Changed Casualty Insurance in America, which is only available to plaintiff lawyers on the Trial Guides web site.