Wall Street Journal: Auto Insurers Criticized for Using Injury-Evaluation Database

Jun 4, 2012

The following article was published in The Wall Street Journal on June 4, 2012:


Auto Insurers Criticized for Using Injury Evaluation Database

By Leslie Scism and Erik Holm


The auto-insurance industry’s use of a database called “Colossus,” and other similar programs, to determine how much injury victims are compensated from accidents has led to millions of “lowball” payouts, a consumer-advocacy group alleged.

The Consumer Federation of America issued a report Monday arguing that insurers over time have grown more dependent on these programs, which track past claims payments and can be used to justify lower payouts to consumers.

The advocacy group urged insurance regulators to step in with stiffer rules on the use of such databases, which insurers have long argued are helpful in making payouts more consistent.

“All insurers using these products should be examined immediately,” Robert Hunter, the federation’s director of insurance and a former Texas insurance commissioner, said in a news conference Monday. “Millions of people are being mistreated.”

A spokesman for the National Association of Insurance Commissioners, which recommends standards for states to adopt, said the computerized systems should be “just one factor in helping a claim representative reach a settlement conclusion” and noted that states monitor the settlement of claims through laws mandating fair practices.

Insurers maintain the programs are tools that provide consistency and fairness in claims payments. Federation officials said that is a legitimate objective, but is only part of the story.

The Washington-based federation has a long record of pushing state regulators to take up a whole range of consumer issues, including the affordability of car insurance and the practice of imposing “force-placed” policies on homeowners with mortgages in default.

Some of the largest U.S. auto insurers, including Allstate Corp., ALL -0.18%have already faced numerous lawsuits alleging the software is marketed to insurance companies as a tool that will help them cut costs and increase profits.

Allstate, the nation’s largest publicly traded home and auto insurer by premium revenue, signed a multistate regulatory settlement in 2010 agreeing to pay $10 million, and set up a fund to help train state regulators on the use of software in adjusting insurance claims.

The federation maintains that regulators need to probe insurers’ use of these databases and extend their oversight to include the programs’ developers.

The consumer activists, including a former Allstate manager, said their examination of industry practices showed that the computerized systems, which are used by many of the nation’s largest insurers, can be “manipulated to produce ‘lowball’ claims offers to consumers.”

Colossus, a program created by Computer Sciences Corp. CSC -1.16%and leased to insurers, is the industry’s most popular injury-evaluation software, the federation said. In a statement Monday, Computer Sciences said the software “can help bring fairness and consistency” to the claims-evaluation process and promote the use of “best practices,” while still allowing the claims professional to “factor in unique claim attributes before determining the fair value for any individual claim.”

Insurance adjusters enter information into the program about each claim, including details such as medical bills and lost wages. The system generates a summary, which recommends to the adjuster a suggested payment range, the federation said.

“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,” said Mark Romano, the former Allstate executive who co-wrote the report.

An Allstate spokeswoman said the Northbrook, Ill., company’s claims practices are “sound, compliant with state laws, and effective at giving customers and claimants fair payments in a timely manner.”

“Behind closed doors, software-marketing representatives talk about the real reason insurers are willing to invest millions of dollars into software licenses, installations, employee training and maintenance for these products,” and that is cost savings, the report states.

The federation maintains that insurers can manipulate the database through several means. They can misclassify injuries to yield lower payout recommendations and remove higher-cost claims from the examples that the software uses to judge future payouts, Mr. Romano said.

As part of its 2010 settlement, Allstate agreed to enhance its oversight and internal auditing of the use of the Colossus database. The company also said it wouldn’t pay added incentives to adjusters who settle claims for amounts close to what the software deems appropriate. On Monday, the company spokeswoman noted that the state examiners who conducted the investigation “did not identify institutional issues involving underpayment of claims.”