Is there a way for insurers to provide more information about claims outcomes–specifically, how much insurers actually pay out to close a claim, versus how much the claimant sought? A journalism “auditor” suggested recently that the lack of such hard numbers makes it impossible to accurately judge the industry's claims-handling performance, and he may be onto something.

Dean Starkman, who edits “The Audit” for Columbia Journalism Review, got into the middle of a major brouhaha over the accuracy and fairness of a cover story in last September's Bloomberg Markets magazine, “The Insurance Hoax,” which I had taken to task in my blog as a “hatchet job.”

Mr. Starkman disagreed, praising the investigative report in his July 8 online column, headlined: “Fact Fight” (Click here to read his full report, and here and for my last blog on the topic.)

My blog today deals with a suggestion he made in the course of his audit report, in which he complained that while the insurance industry can easily drown critics in data, a key statistic–how big a share of a claim policyholders actually end up with–is lacking.

In his posting, Mr. Starkman said that “…despite this seeming surfeit of information, insurance lacks a useful metric forof all thingsclaims-handling performance. While deeply ironic to anyone who has ever hoisted a phonebook-sized volume of, say, Bests Aggregates and Averages, the industry fact bible, it is nonetheless true that no aggregate figures exist to document the amount policyholders actually demanded from insurers, a key figure that could then be compared to how much insurers chose to pay.”

In effect, “there is no 'insurer payout ratio,' which I like to call the 'Starkman ratio,'” he added, likening the lack of such a statistic to “a discussion about a mutual fund without knowing its past performance.”

He said that “as a result, arguments over insurer claims performance tend to take on almost a theological tone. News organizations point to harrowing individual cases, statistics that show insurers pay little in claims as percentage of premiums (as low as 55 percent or 65 percent depending on whos counting) and the industrys wild profitability as proof that insurers routinely take advantage of policyholders in their moment of need.”

He noted that “insurers say the sob-story anecdotes are either anomalous or bogus altogether, that the use of certain ratios out of context is irresponsible and misleading, that policyholders are more likely to game the system than insurers, and that critics do not understand or fail to note the industrys (supposedly) wildly cyclical nature.”

Indeed, that's exactly what the industry says.

“Into this howling maw dropped 'The Insurance Hoax,'” he noted. “The two-part, 11,000-word series…compiles court records, whistleblower accounts, internal documents won in discovery, and financial figures to describe profiteering on a vast scale, driven in part by a claims-handling system engineered by consultants to lowball legitimate claims or deny them outright.”

I do not recall seeing any statistic along the lines of the “Starkman ratio” in this industry. Do any of you? If so, please speak up.

The next question is what value such a ratio would have.

The assumption behind Mr. Starkman's argument is that it's impossible to tell how good a job insurers are really doing in paying claims without knowing what percentage of a reported loss is actually reimbursed.

But would this really tell us anything useful, or would such information be totally out of context? Leaving out, for the sake of argument and simplicity, any thoughts about deductibles, consider the following problems with such a ratio.

Insurers say many claimants often mistakenly include losses not covered under their policy in their claims–or, worse, sometimes intentionally pad claims to defraud carriers out of more money than they are owed, figuring that it can't hurt to ask, right?

If a policyholder files a claim seeking $10,000 under such a scenario, but is really only owed $8,000 for whatever reason, and the insurer pays the full $8,000, the insurer's “Starkman ratio” in this case would be 80 percent. That would make it appear that the insurer shortchanged the policyholder, when if fact they paid exactly what they owed.

Also, carriers that earned a “Starkman ratio” of 90 percent or higher might look like they are doing a great job, when in fact–if they are paying losses they don't cover or which are fraudulent, merely to keep their ratio and public image up–they might not be around much longer to pay anyone's claim, legitimate or otherwise.

What about a lawyer's contingency fees, if legal action to dispute a claim is initiated? How would the attorney's cut–which is often substantial, yet doesn't go into the claimant's pocket–figure into the ratio?

Anyone trying to judge the industry's performance by aggregating all of the “Starkman ratio” data across the industry or lines of business would run into even bigger problems in terms of whatever conclusions you might draw from the gross numbers. Theoretically, you could make such numbers “prove” whatever you want with such a ratio.

I am intrigued by Mr. Starkman's suggestion, but wonder whether it would do more harm than good–certainly from the insurer's standpoint. I am certain plaintiff attorneys and consumer advocates would love to get their hands on such statistics, which could easily be manipulated and spun to show that insurers are all a bunch of thieves.

I am skeptical, but open to suggestion. What do you folks think?

Special Reports /

Can Insurers Better Quantify Claim Outcomes?

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