The Allstate Corporation has been at the forefront of the insurance industry in unjustifiably raising home and automobile insurance rates relative to the amount paid out in claims, in using questionable practices to settle claims and in attempting to shift costs to taxpayers, according to a detailed new study released today by the Consumer Federation of America.

“Allstate is certainly not the only insurer pursuing these anti-consumer practices, but it has been in the vanguard in developing and implementing many of them,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner and Federal Insurance Administrator.

CFA’s report, entitled “The Good Hands Company or a Leader in Anti-Consumer Practices?” identified several significant problems with Allstate’s home and automobile insurance practices:

1. Excessive rates and profits, compared to the low level of claims that Allstate has paid out to consumers.  From 1987 to 1996, property-casualty insurers overall paid out 70 percent of premiums as benefits.  From 1997to 2006, the payout was only 65 percent, a decline of 7.1 percent in value to consumers for the typical insurance product.  In the late 1980s and early 1990s, Allstate’s insurance products were of slightly greater value per premium dollar to consumers than those of other insurers.  However, the company’s property-casualty products have become less valuable than the industry average in recent years.  Allstate paid out 73 percent of premium in benefits from 1987 to 1996 and a startlingly low 59 percent from 1997 to 2006, a decline of 19.2 percent in the value of Allstate’s product to consumers.

   As the consumer value of Allstate’s policies has declined, their profits have increased.  Allstate’s profits were consistently higher than that of the overall industry during this period, averaging about 6 percent more. Allstate’s current return on equity of 25.8 percent is also significantly higher than the returns it earned in the late 1980s.

2. Questionable claims settlement practices, resulting in unjustifiably low claims payments. Allstate was one of the first major insurers to adopt claims payment techniques designed to systematically reduce payments to policyholders without adequately examining the validity of each individual claim, such as an automated payment system called Colossus.  It adopted these techniques after being told by a consultant that these systems would put them in a “zero-sum game” with claimants, including their policyholders who filed claims, in which Allstate shareholders would benefit financially at the expense of policyholders.

   This graph, based on information produced by Allstate, offers significant evidence of a pattern of underpayment.  It shows that Allstate has consistently paid out lower claims for bodily injuries relative to the rest of the property-casualty insurance industry over more than a twenty year period.  (It is indexed to 1993, which is listed as “100.”)  From 1993 to 1996, Allstate’s paid severity dropped by 21 percent to 79, while industry-wide payments dropped to 94.  Since 1996, Allstate’s paid severity has slowly increased to about 98, while the industry increased to 117.  Overall, Allstate reduced its payouts on these claims by almost 20 percent relative to the industry result.

3. Mistreatment of consumers throughout the country in the aftermath of Hurricane Katrina. Allstate has proven to be a fair weather friend for many policyholders.  It has dropped coverage for hundreds in many coastal areas around the country.  In 2005 and the first half of 2006, Allstate abandoned thousands of Floridians it had insured, dropping about thirty percent of its book of business in that short period of time.

   Yet, they actually increased their market share for automobile insurance in Florida during 2006.  This chart shows how Allstate cut policies for homes in Florida in 2005 and 2006, while increasing the number of auto policies it sold in the state.

4. Unfair rating and underwriting practices. Allstate has been a leader in developing complex and difficult to understand pricing systems, using credit scores and multiple rate “tiers” not clearly related to the risk of their customers.  These trends make comparison shopping for consumers more difficult and appear to lead to higher rates for poorer and minority consumers.
5. High consumer complaints. Complaints filed against Allstate are greater than almost all of its major competitors.  Many of these complaints relate to claims settlement practices consumers have perceived as unfair.  According to data collected by the National Association of Insurance Commissioners, Allstate’s “complaint ratio” was the second worst of thirteen major automobile insurers in 2005 and 2006 (tying with Farmers Insurance.)  Allstate had the second worst complaint ratio among eight major home insurers in 2005, and the lowest ranking in 2006.
6. Shifting costs to taxpayers. Allstate is an industry leader in seeking taxpayer subsidies for its riskier insurance coverage, especially in Congress.  In the wake of Hurricane Katrina, Allstate and other major insurers have been criticized by state officials and policyholders for underpaying claims for wind damage and shifting these costs to the flood insurance program, which is supported by tax dollars.  A newspaper investigation found that Allstate might also have charged the government more for materials used to repair flood damages paid for by taxpayers than Allstate pays for the same materials to repair wind damages.

   Allstate’s practices reflect the significant but not always highly visible changes that propertycasualty insurers have made in recent years in the way they assess risk, set rates and manage claims.  The aftermath of Hurricane Katrina exposed the harmful effects of many of these changes on policyholders, especially lower income and minority consumers.  For example, insurers have changed policy language to hollow-out the coverage offered, particularly for home insurance, and dramatically increased consumers’ out-of-pocket costs.  Many insurers have used egregious and misleading anticoncurrent-causation language in some policies, which causes consumers to lose wind coverage if flood losses occur, even if the losses caused by flooding are distinguishable from and occur after wind losses.

“The anti-consumer trends that Allstate has often been a leader in implementing do not appear to be justified by any increase in financial risk borne by property-casualty insurers,” said Hunter.  “In fact, a detailed analysis of the investment performance of Allstate and other property-casualty insurers shows that they represent a below-average risk for investors, as measured by standard measures of risk for investment.  Allstate has, indeed, had remarkable results for its investors, returns that are well above what is required for this low-risk insurer.”

“We urge consumers to pay close attention to the concerns we have identified with Allstate’s practices before purchasing home and auto insurance from Allstate or renewing a policy,” said Hunter.

“We also urge action by state insurance departments, the National Association of Insurance Commissioners, and the federal government to study and correct Allstate’s practices and to consider taking steps regarding other insurance companies that pursue the anti-consumer practices detailed in this report,” said Travis Plunkett, CFA’s Legislative Director.