McKinsey was embroiled in a
nationwide scandal over helping insurance companies squeeze customers.
Early in his political career,
2020 presidential candidate and South Bend Mayor Pete Buttigieg talked proudly
of his years at the consulting firm McKinsey & Company—his most “intellectually
informing experience,” at “a
place to learn … all the things about business I didn’t know.” With
Buttigieg’s rise to fourth place in the polls, however, the firm’s
unsavory activities have come under increasing scrutiny—its work in the past
decade with authoritarian states like Saudi
Arabia and China,
its immigrant detention cost-cutting advice so inhumane it shocked
even ICE workers.
Under pressure for more
transparency about his role at McKinsey, Buttigieg prevailed upon the firm to
waive his NDA and released his client list. But the campaign has dismissed
scrutiny of his clients on the basis that he was a just one cog with no
decision-making power.
And in response to
the firm’s recent scandals, Buttigieg has noted that he “left the firm a decade
ago” and called “what certain people in that firm have decided to do…extremely
frustrating and extremely disappointing.”
But McKinsey was mired in
high-profile scandals prior to Buttigieg’s decision to work there after
graduating from Oxford in 2007—and throughout his time there. It was implicated
in the 2001 Enron scandal (among other things, one of the company’s chief
executives, Jeffrey Skilling, was a former McKinsey man) and had become
notorious as the brains behind countless corporate cost-cutting schemes that
slashed jobs, such as the 2007 “Project
X” plan, in which Chrysler closed U.S. plants and laid off thousands
of factory workers.
Perhaps the most notorious of
these was the sprawling insurance scandal that became known as “the McKinsey
documents,” in which McKinsey revolutionized the insurance industry to maximize
profits at the expense of vulnerable policyholders.
In the early 1990s, Allstate,
then one of the country’s biggest auto insurers and looking to pare down how
much it was spending on claims, hired McKinsey to do what McKinsey is
best-known for doing: cut costs. McKinsey dutifully developed a strategy to
“radically alter our whole approach to the business of claims” and boost
company profits, which Allstate implemented in 1995. Internal documents
released years later showed that McKinsey cast the claims process as a
“zero-sum economic game,” where “Allstate gains” and “others must lose,” as one
PowerPoint slide put it—the “others” being claimants who had suffered the very
misfortunes and disaster their insurance was meant to cushion.
The strategy increased income
thirtyfold. Revenue soared from a yearly average of $82 million in the
preceding decade to an average of $2.5 billion in the decade that
followed. During that time, the amount Allstate paid out per every dollar it
charged customers for premiums dropped from around 69 cents to 43.5 cents. By
2007, it had hit a record profit of nearly $5 billion. The strategy was
considered such a success that two years later, the program was expanded beyond
auto insurance to fire, water and roof damage for homes.
Allstate’s surging profits
meant hardship for its customers. Claimants who had diligently paid their
premiums for years were suddenly abandoned at precisely the moment of crisis
their insurance was meant for. Many received low offers that covered only a
fraction of the costs. Some were treated as frauds and potential criminals.
Others were tied up in court until they simply gave up on ever recouping their
losses.
A host of other insurers also
made use of McKinsey. Insurance giant State Farm hired McKinsey in the early
1990s; like Allstate, by 2007, its profits had doubled over 1990s levels.A 2007
analysis by the Sun Herald in Biloxi, Miss., found that between 2002
and 2005 alone, even as eight major hurricanes wreaked destruction along the
coast and, particularly, in Florida, the insurance giant’s fire and casualty
subsidiary saw its net worth more than double to $7.7 billion and its payouts
per premium dollar drop from 70.6 percent to 51.6 percent.
By the time Hurricane Katrina
struck land in August 2005, property insurers across the country were operating
according to the McKinsey strategy, as the Bloomberg Markets cover
story “The Insurance Hoax” later detailed. Reports abounded
of insurers low-balling, underpaying, or simply flat-out refusing to fulfill
Katrina-related claims. In November 2005, Louisiana Attorney General Charles
Foti filed a suit accusing McKinsey
and nine other defendants, including Allstate and State Farm, of “rigging
the value of policyholder claims and raiding the premiums held in trust by
their companies for the benefit of policyholders to cover their losses.” The
state accused McKinsey of heading an insurance conspiracy.
The McKinsey-designed
insurance strategy was major news through the 2000s. This was thanks to
numerous lawsuits by both private attorneys and state officials like Foti, who
went to war with Allstate and State Farm on behalf of consumers railroaded by
the companies after not just auto collisions and fires, but natural disasters
like tornadoes and hurricanes.
They were given a boost by
Santa Fe lawyer David Berardinelli, who sued Allstate in 2000 for bad faith
denial of an insurance claim, and temporarily obtained 12,500 pages of
PowerPoint slides outlining McKinsey’s strategy. Forbidden from copying the
documents, Berardinelli took copious notes and published an exposé titled From
Good Hands to Boxing Gloves: The Dark Side of Insurance in 2006, the year
before Buttigieg joined McKinsey.
Insurers went to extreme
lengths to block other damning documents about McKinsey’s advice coming out
publicly during lawsuits. Ordered to release internal documents by a Missouri
court in 2007, Allstate simply refused and was held in contempt, racking up
$25,000-a-day fines that ultimately totaled more than $7 million. It took an
order from Florida’s insurance commissioner to finally bring the documents into
the light of day, and even then Allstate initially refused, relenting in April
2008 only after Florida suspended it from selling new insurance policies in the
state.
The documents made national
headlines in outlets like the Chicago Tribune and CNN, which produced
a February
2007 report looking at insurers' practice of low-balling
claimants. Former claims agents admitted to the network they had offered as
little as $50 to policyholders who had suffered bodily injury and used what
employees called “the three D’s”: delay, deny and, if it comes to it, defend.
The insurer’s refusal to
release the documents was understandable given what their contents revealed.
Inside were McKinsey’s PowerPoint slides positing a “zero-sum game” between
Allstate and its policyholders. “Leakage” was McKinsey’s term for paying
policyholders more than necessary. The company’s bet was that when faced with a
“take it or leave it offer,” most claimants would choose to take it,
particularly in the midst of the financial insecurity in the wake of an
accident. McKinsey advised Allstate that while most customers could be treated
with “good hands” (as in the company’s slogan, “You’re in good hands with
Allstate”) and get a quick settlement, those who refused the low-ball figures
the insurer offered should get the “boxing gloves” treatment and be made to
wait three years or more for a resolution.
If policyholders lawyered up,
McKinsey counseled that the company “align alligators”—adopt tougher legal
action—and then “sit and wait.” Clients fighting Allstate often gave up in the
face of years of litigation, local trial attorney David Shapiro told
the Sarasota Herald-Tribune. “There are many lawyers who won’t
take an Allstate case,” he said.
“[Allstate] pay[s] less than
every single insurance company, and they certainly will spend more on
litigation,” one former Allstate lawyer told the paper.
McKinsey also
recommended the adoption of a computer program named Colossus to remove the
discretion of claims agents in favor of “establishing a new fair market value”
for bodily injuries. The program could allegedly be “tuned” to produce low-ball
offers from the get-go. McKinsey instructed claims agents “to stay within the
Colossus range or below it in most cases.” The program would lead to profits,
McKinsey assured Allstate, and “shareholders will notice.”
The long-running scandal
raises the question of why Buttigieg, as rival candidate and Hawaii Rep. Tulsi
Gabbard put it, “chose to work for a company like McKinsey.” But it also raises
another question: How much of the firm’s ethos—putting corporate profits over
the health and economic security of the US public with a ruthless, amoral
zeal—was internalized by him?
According to Buttigieg, his
first client for the firm was the health insurer Blue Cross Blue Shield of
Michigan. By his own
account, according to the New York Times, the insurer had “had grown
in such a way that there was a great deal of duplication and some people didn’t
even know what the people working for them were doing.” Two years later, it
laid off 10% of its workforce, froze pay for non-union workers and increased
its rates.
As the Huffington Post reported,
Buttigieg went on to serve as part of a team that recommended cuts to the U.S.
Postal Service and the replacement of unionized postal workers with privatized
staff. And as the Intercept’s Ryan Grim noted,
Buttigieg would later credit his “great experience” at McKinsey with exposing
him “to a lot of different ideas and ways of solving problems,” coming to view
running the city of South Bend as akin to “running a corporation” and to see
its 100,000 residents as “stakeholders.” Buttigieg’s technocratic
style of mayordom earned him critics in
South Bend, including residents, the director of a local charity for the
homeless, and a city council member and now mayoral rival, who complain of
top-down, data-driven policies that made life harder for the homeless and accelerated the
displacement of communities.
Buttigieg, the Rhodes Scholar,
is known for doing his homework. It stretches credulity that he was unaware of
the massive insurance scandal engulfing the company before and throughout his
years there, one that laid bare the heart of McKinsey’s business strategy:
Maximize profits, no matter what the human cost.
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