Report: Insurers Manipulate Systems To Underpay Claims

June 04--A newly released report by a former Allstate Corp. claims executive working at a consumer rights group alleges that most of the nation's biggest insurance companies use computer systems that can be manipulated to underpay injury claims.

The report was issued Monday by the Consumer Federation of America, whose claims project director, Mark Romano, had worked for the Northbrook-based insurer, as well as CNA and Hanover. Romano last year joined the Consumer Federation of America as claims project director.

"This report is a wake-up call for consumers and regulators who are not aware of the many ways that computer claims' software can be manipulated to produce unjustifiably low injury payments to consumers and tens of millions of dollars in illegitimate 'savings' for insurers," Romano said in a statement.

Romano worked on the Colossus injury claims' evaluation system at Allstate and its Encompass unit for almost 10 years. Colossus, which the CFA says is the dominant claims system in the marketplace, is sold by Computer Sciences Corp. Allstate couldn't be reached for immediate comment.

"When CSC and its competitors talk publicly about computer-based claims' systems, they stress that the programs allow insurers to more consistently evaluate bodily injury claims," Romano said. But "software marketing representatives acknowledge that the real reason insurance companies are willing to invest millions in these systems is that they can dial down claims' payments to thousands of consumers at a time, regardless of whether these payouts are fair."

The report is called "Low Ball: An Insider's Look at How Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims."

The report includes excerpts from recently released court records in a class-action lawsuit, Hensley vs. Computer Sciences Corp., that reveals how Colossus and similar products are marketed to and used by insurance companies.

For example, One CSC executive told the court that Colossus could be "tuned" to potentially achieve a particular level of savings, such as 15 percent, for all claims.

"These documents show that most of the nation's top insurers used the Colossus system in ways that put millions of American consumers at risk of not getting the claims payments that they paid for with their premiums," Robert Hunter, CFA's insurance director, said in a statement.

In an media call, Hunter said Bloomington-based State Farm is one insurer that doesn't use Colossus.

It asked the National Association of Insurance Commissioners to regulate companies that sell claims adjustment software products.

"The NAIC should thoroughly investigate methods that all large insurers can or do use to directly or indirectly reduce claims' payouts in an illegitimate manner," the CFA said. The CFA said the NAIC and state regulators signed an agreement with Allstate in 2010 that required the company to make only "a few small changes in how it used Colossus."

Consumers groups have long called for insurers to disclose how they determine payouts.

In 2008, Allstate posted about 150,000 pages on its Web site that included the long-coveted "McKinsey documents" -- reviews prepared by McKinsey & Co., the consulting firm for the Northbrook-based company, as it sought to revamp its claims-handling practices in the 1990s.

Critics of the nation's biggest publicly traded home and auto insurer have tried for years to get courts to force Allstate to turn over the documents, claiming they hold the secret to what they say is the unfair treatment of policyholders.

McKinsey suggested strategies for Allstate to lower its claims-processing costs.

Allstate's release of the documents was on the heels of an appeals court ruling in Florida that upheld the regulator's suspension in January of the insurer from writing new policies in the state until it complied fully with subpoenas seeking information about how it sets rates. The situation had followed one in Missouri in which the insurer was willing to accept fines rather than submit similar documents to a court.

For years, Allstate refused to make the documents publicly available, calling its actions "respectful civil disobedience" and saying trade secrets were involved.

byerak@tribune.com -- Twitter: @beckyyerak

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