Insurers Can Manipulate Computer Systems to Underpay Claims
Computerized claims systems used by most of the nation’s largest insurance companies can easily be adjusted to make broad-scale “lowball” claims payments to injured consumers, payments that are less than what they should receive under their insurance policies, according to a new study released by CFA last week. Report author Mark Romano, CFA Claims Project Director, was the “subject matter expert” on the Colossus injury claims evaluation system at Allstate and Encompass insurance companies for almost ten years. He said he hopes the report will serve as “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.”
The report, “Low Ball: An Insider’s Look at How Insurers Can Manipulate Computerized Systems to Broadly Underpay Injury Claims,” details the history insurance companies’ use of Colossus, which is sold by Computer Sciences Corporation (CSC), and other similar software products. It provides considerable information about how these programs are set up, “tuned” to reach particular claims payment monetary goals and adjusted over time. The report also identifies specific techniques that insurers can use to directly and indirectly produce “lowball” claims. “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. “Consistency is a legitimate goal, but these companies tell a different story behind closed doors. 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.”
CFA Director of Insurance J. Robert Hunter said the National Association of Insurance Commissioners’ examination of the issue “was incomplete and flawed.” Documents from a class action lawsuit against CSC reveal 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.” He said the documents also reveal that “top executives at these companies violated their obligation to deliver fair claims’ payments to their own policyholders on a huge scale, in order to increase profits.”
The report includes specific recommendations to state insurance regulators to better protect consumers from insurers that manipulate Colossus and similar systems to unjustifiably reduce claims’ payouts. Recommendations include:
- Regulate all companies, such as CSC, that sell claims adjustment software.
- Examine and monitor the use of computerized claims assessment systems by major insurers.
- Require insurers to notify consumers in writing that a computerized claims assessment was used to process their claim and to provide a copy of the report generated by the system.
House Panel Considers Investment Adviser Oversight
The House Financial Services Committee held a hearing last week on legislation to create a new self-regulatory organization (SRO) for investment advisers, something investment advisers strongly oppose. In a letter to committee members in advance of the hearing, CFA Director of Investor Protection Barbara Roper praised the committee for focusing on the “long-festering problem” of inadequate investment adviser oversight, but said CFA could not support the bill (H.R. 4624) as drafted.
In particular, the many exemptions the bill provides to various different types of advisers would preclude the equitable sharing of regulatory costs among large and small advisers, she wrote, leaving many smaller advisory firms that serve less wealthy clients bearing a disproportionate share of the increased cost. Roper noted that alternative approaches are available, including imposition of user fees to fund more frequent inspections, that would not inflict any new burdens on taxpayers.
“While we applaud the Committee for focusing on the issue of investment adviser oversight, this legislation is not the answer,” Roper wrote. “Rather than moving forward with a bill that clearly fails to solve the issues it is intended to address, we urge the Committee to conduct an objective review of the available alternatives in order to arrive at an approach that increases the quality of oversight at a reasonable, and equitably shared, cost to the investment adviser community and their clients. We look forward to working with the Committee to achieve that goal.”
Bank Overdraft Fees Inch Upwards
After two years of holding steady, fees charged by banks when consumers overdraw their accounts are starting to inch upwards, according to a new survey of overdraft fees at the nation’s largest banks released by CFA last week. The two-year reprieve from fee increases coincides with implementation of a new Federal Reserve Board requirement that banks get affirmative permission from consumers to incur overdraft fees on debit card and ATM overdrafts. While the new survey found that the typical overdraft fee remains at $35 per transaction, two of the largest banks – U.S. Bank and Fifth Third Bank – have announced changes to their tiered fee structures that indicate rates are again on the rise, according to CFA Director of Financial Services Jean Ann Fox.
Charges for a single transaction are high – ranging from $33 to $37 – but the cumulative impact is even greater. Maximum fee and daily limit fee policies at the biggest banks indicate that consumers can be charged as much as $370 in a single day. “Bank overdraft loans are a form of payday lending,” Fox said. “Banks are charging staggeringly high rates for short-term borrowing when fees are computed the same way payday loan rates are calculated.”
CFA will be submitting the survey results to the Consumer Financial Protection Bureau, which has requested comments on bank practices involving overdraft fees and terms. The comment period ends June 29.
CFA’s brochure on overdraft fees is available here.
Federal Agencies Urged to Strengthen Energy Efficiency Standards
A group of consumer and energy efficiency organizations including CFA wrote to the Department of Energy last week, urging that agency to strengthen its proposed energy efficiency standards for battery chargers. The proposed standards covering roughly 75 percent of all battery chargers (Product Classes 2-6) are significantly weaker than standards adopted earlier this year by the California Energy Commission, the groups wrote. The groups called on DOE to revise its “flawed” cost-benefit analysis. “We believe that a revised analysis which corrects these flaws and considers levels equivalent to those adopted by the CEC will find that standards at least as strong as those adopted by the CEC for Product Classes 2-6 are cost-effective for consumers,” they wrote.
At the same time, CFA, along with other national consumer and environmental organizations wrote to U.S. Customs and Borders and the Treasury Department regarding a proposed rule from those two agencies on the importation of products that violate applicable energy efficiency rules. Fair and effective enforcement of energy efficiency rules is an important part of the nation’s energy strategy, they wrote. “Such enforcement can help protect the environment, reduce utility bills for businesses and consumers, and ensure a level playing field for companies that do comply with the law,” they wrote. “To that end, we support enforcement efforts that will bar imports of noncompliant products without placing significant burdens on imports of compliant products.
Unfortunately, the groups wrote, for reasons detailed in the letter, the proposed rule “will not be effective in reducing noncompliance among imported products.” They called on the agencies to take additional steps to rectify these problems.
CFA Honors Distinguished Consumer Service
CFA held its 42nd annual Awards Dinner June 13. Former Commodity Futures Trading Commission Chair Brooksley Born and Senator Jeff Merkley received the Philip Hart Public Service Award. The Esther Peterson Consumer Service Award was presented to Larry Blanchard, Corporate and Government Affairs Consultant to CUNA Mutual Group. Marketplace Radio received the Betty Furness Consumer Media Service Award, with Senior Editor Nancy Marshall-Genzer accepting the award on behalf of the program.