|By Tony Bartelme, The Post and Courier, Charleston, S.C.|
|McClatchy-Tribune Information Services|
"God, please don't let me hurt someone," he prayed.
Dizzy again. These bouts of vertigo were barely noticeable at first, but something else was going on now. At night, he would lie in his bed, stare at the ceiling and watch everything twirl. In the morning, the spells came in waves during his commute to
Colossus was part of a quiet revolution in the insurance industry.
Before the early 1990s, insurance was a decidedly human endeavor, especially when it came to setting rates and paying claims. To set premiums, insurers relied on computations from their actuaries -- mathematical wizards armed with statistics and tables that assess various risks. When it came to paying claims, insurers often sent adjusters into the field, where they met face-to-face with people injured in car wrecks.
Today, insurers have an array of computer programs that guide the flow of trillions of dollars to and from customers around the world. These programs include sophisticated "catastrophe models" that use weather data and other factors to predict an insurance company's losses in a disaster. "Scoring models" use credit histories and secret algorithms to estimate which customers are more likely to file claims. Colossus and similar programs help companies manage claims. Like a TurboTax program for medical injuries, adjusters plug in information about a person's loss -- from a damaged spine to a fractured finger. Colossus then cranks out a range of payments to cover the costs. Insurance industry critics and even many insiders call these programs "black boxes" because their formulas, data sets and operational policies are cloaked in secrecy.
Few people at Allstate knew more about Colossus than Romano. On organizational charts, he was
Romano has thick black hair and wears thin glasses. His brown eyes widen when he wants to make a point. He had gone into the business to help people, but he knew that his work on Colossus would do the opposite.
During his hourlong commute to
Birth of Colossus
Among computer programmers, the name Colossus has a rich history. In
The insurance industry's version of Colossus was born in
It's the adjuster's job to evaluate people's losses and come up with ways to settle their claims. This often meant assessing what people did in their careers and how an injury might affect their future income and overall enjoyment of life. Longtime adjusters talk about the challenge of sizing up people when they're suffering, and the knowledge adjusters need, from medicine to car repairs, to calculate a fair settlement.
The inherent complexity in putting numbers on injuries also meant that adjusters often came up with different amounts for similar types of claims. In
The programmers studied how top adjusters made decisions and then created software to mimic their work. This program became known as Colossus and required answers to as many as 700 questions, ranging from the severity of injuries to how people experienced the loss of enjoyment in life. Injuries were broken down into 600 different codes. The program analyzed legal settlements and jury verdicts, combined this information with data entered by the adjusters, and generated what were supposed to be fair settlements.
A few people questioned whether computer programs were up to this complex task. An Australian law professor wrote that the development of Colossus was "just one instance of an important challenge of the information age: how to ensure that computer-based decision making is fair and non-discriminatory." But Colossus was a huge success. Within a few years, payments for similar claims were more consistent and the costs of those claims had stopped rising.
Amid this sticker shock, industry leaders asked why they had so badly underestimated their potential losses. They found answers in newly created "catastrophe models," computer programs that predicted potential damages in a hurricane or other disaster. These models warned that future hurricanes would be even more costly, and with these new predictions in hand, insurers soon justified massive rate increases in home insurance premiums, especially in
While insurance premiums are the insurance industry's main source of income, payments for claims are its biggest costs, the equivalent of rubber for a tire manufacturer. Claims also are at the heart of why people buy insurance. Insurance is based on the idea of sharing risk, a grand communal exercise that involves collecting
An adjuster's story
Romano grew up in
Romano's first job was as an adjuster with
Romano handled auto insurance claims and worker's compensation cases, learned about medicine, the law and how to establish rapport with people in distress. "You did it all, and it was an incredible education in how the world works." Not all of this education was positive. A year into his career, he took over a new territory, and when he introduced himself to auto repair shop owners, "One guy said, 'Hey, do you want the same deal as the other guy?' " Romano wasn't sure what to do. "I went to my father and said, 'These people are offering me things.' And he said, 'Don't you dare ever do anything like that.' That's how naive I was at that point."
But the vast majority of those he met were "really good, decent people trying to put their lives together." He remembered a case in which he helped a family set up a scholarship to honor their child, who had died in a car wreck. By then, Romano had moved to another company,
Then, after Hurricane Andrew in 1992,
By then, the Australian creators of Colossus had sold the program to
CSC's marketing materials have long touted Colossus as a way to help insurers "establish consistent recommended settlement ranges,"
In Romano's mind, it made good business sense for companies to automate claim payments, though he feared something could be lost without a more personal touch. And based on his years working as an adjuster, the payouts Colossus spit out for CNA seemed fair. He excelled in his job and eventually was transferred to CNA's bright red headquarters on
The profit center
Allstate was created a year after the stock market crash of 1929, when
Thus, the iconic slogan was born: "You're in Good Hands with Allstate," along with the logo of a pair of hands cradling a car. (The car was later removed.) By 2000, the "Good Hands" phrase was the most recognized advertising slogan in America, according to a
Romano heard rumors about the deal months before it was made public. A senior vice president approached him and said, "
Allstate renamed the CNA division Encompass, and Romano soon met with Allstate executives who, he said, "began indoctrinating me in their Colossus philosophy."
Romano discovered that if he used Colossus the way Allstate did, he could save its new Encompass division millions of dollars by "turning the knobs" of the software -- paying people less in claims than they would have otherwise gotten.
"It became my responsibility and goal to save
Romano was so successful that Allstate transferred him from the Encompass office downtown to
About the same time in 2000,
Farmers was just beginning to implement Colossus. As part of that effort, the company asked Dietz and other experienced adjusters to examine a sample of claims and come up with fair offers to pay people for their losses. These offers would be fed into Colossus to create a benchmark of payouts tailored to that area of the Northwest. But after the group finished, a facilitator said the ranges would then be reduced by 20 percent to create even lower benchmarks.
Dietz was stunned. To him, it meant that the program was being rigged to make payments 20 percent lower than they should have been. "That's not how I learned the tenets of good faith and fair dealing."
Worse, after this session, he said he and his colleagues were under constant pressure to stick with Colossus-generated payments even when the adjusters thought people deserved more. He felt Colossus was turning his profession into keyboard slaves, and for a "person with logger's fingers," this didn't bode well for his career prospects. He was also taken aback by the secrecy around Colossus. "I still have the old memo that says we were not to disclose the fact that we were using Colossus."
Dietz eventually quit Farmers to work with trial lawyers, and in 2002, a
Farmers asked a judge to stop the seminar, arguing that Dietz and the other adjuster would reveal confidential information. The judge declined, and Farmers eventually dropped the suit. Lawyers from all over the nation flew in for the talk.
Good hands, boxing gloves
This was the beginning of what would become a decade-long legal assault on Colossus and other claim-handling programs, one that would somehow bypass Romano, despite his extensive work at Allstate with the program.
One of the most aggressive pushes came from
He learned about Colossus while representing a husband and wife hit by an uninsured drunk driver. Allstate refused to pay their medical bills, and curious about
Allstate eventually capitulated, and the materials provided a window into a company in flux. The most incendiary documents stretched back to the early 1990s. At the time, insurers were railing about what they considered a wave of frivolous lawsuits from lawyers who used aggressive advertising campaigns to lure clients. In 1992, Allstate hired
One of the McKinsey presentation slides described how the company could become more efficient if it targeted people who didn't have lawyers. In its "Good Hands" approach, Allstate would pay those unrepresented people within 180 days, which McKinsey said would take care of 90 percent of the claims. The 10 percent who hired lawyers or didn't accept claim offers would get the "Boxing Gloves" treatment. In these cases, Allstate would expect to tie up payments for three to five years.
Over time, Allstate employees testified that they were trained to build rapport with customers and discourage them from hiring lawyers. Berardinelli and a growing cadre of lawyers alleged that the "good hands" strategy actually involved delaying and denying claims for several months and then making lowball offers as people felt more financial pressure. They argued that Colossus and other claim-handling programs were important parts of this profit-making plan, with some testimony showing that Allstate could reduce bodily injury payouts by
In a 2008 press statement, Allstate said the materials were part of "a complex body of work that as a whole demonstrates a careful, fact-based analysis to better enable the company to more promptly investigate and more consistently and effectively evaluate claims." Allstate told
Meanwhile, other industry officials have long discounted the importance of the McKinsey documents.
Rather, he said, such programs reflect an understandable use of technology. "There are millions of claims every year and a lot of commonality between them," he said, adding that said Colossus and Xactimate, a Colossus-like program that handles home insurance claims, "harness the computer to process large amounts of data quickly and inexpensively, and that allows insurers to provide coverage that's very affordable." Insurers wage a "technological arms race against each other on a daily basis," he said, and companies with the best technology have an edge. "This is a competitive industry, and it's not in the insurer's interest to treat a customer poorly."
But Berardinelli and others alleged in class-action lawsuits that insurers were doing exactly that -- failing to pay customers what they were due. More documents and testimony emerged, including manuals that described how tuning Colossus was "both an art and a science" that was done "based on the desired projected savings." One slide from CSC said, "What does Colossus Really do" and begins with a list: "Lowers indemnity payouts ... lowers loss ratios ... improves surplus/profitability." Other documents urged employees to avoid using the word "savings" to describe the benefits of Colossus and "use a more vague term such as 'consistency.' "
One of the most prominent lawsuits involved a woman from
Hensley's claim had been handled by one of Romano's underlings, and Romano was one of the first at Allstate to learn about the lawsuit.
Crisis of conscience
It landed in his email inbox on
His responsibilities had grown. His tuning directly affected how thousands of claims employees across the country did their jobs, and through them, how much tens of thousands of policyholders were paid for their losses. He was part of a small group of insurance professionals nationwide that met regularly to discuss Colossus-related issues.
These meetings often happened in warm places, including
He didn't talk about insurance, though. The issues he was wrestling with were complex, and he was more interested in how his daughter was doing. He also kept much of his worries from his wife. In 2003, she was diagnosed with multiple sclerosis, and he wanted her life as stress-free as possible. "I didn't share my feelings about Colossus with anyone, but if I had talked about it, I would have said, 'I'm doing some stuff that I'm not too thrilled to be doing.' "
In his mind, Colossus was as malleable as clay. You could mold its programs to reduce claims values across-the-board, which he described as "turning the knobs." You could decline to enter data on high jury verdicts or unusually high injury settlements, which tricked the program into thinking an injury's typical value was lower than it really was. You could train adjusters to code injuries in a way that didn't account for their true severity, which also reduced payments.
In late 2007 and early 2008, even as the Hensley and similar lawsuits began to produce out-of-court settlements worth tens of millions of dollars, Romano worked on new ways to "recalibrate" and tune Colossus, projects that he said would generally "lower settlement values" and increase profits.
His migraines grew more severe. Doctors prescribed tranquilizers, ordered physical therapy sessions. Nothing helped. He couldn't sleep. The dizzy spells became more jarring until the doctors told him to turn over his car keys. He temporarily left work and went on disability. Through this haze, he began to see other things more clearly: People were being hurt by Colossus, and it was tearing him apart. He couldn't turn the knobs anymore.
On his last day at Allstate, he was told to hand in his laptop and badge. On the long drive home, he had no bouts of vertigo, only relief bordering on exhilaration. "It was the first step in regaining my self-respect." He had a new quest: to help consumers better understand how the insurance industry can fail to live up to the promise of paying people in their times of need. He thought he would be part of a larger chorus, especially now that state regulators had turned their attention to Colossus.
In 2009, led by
The regulators announced their findings a year later: Overall, they found no "institutional issues involving underpayment of claims" but that Allstate failed to tune the software in a consistent way across the nation. "Colossus was a black box. We looked into the black box and saw some problems,"
Among other things, the regulators ordered Allstate to tell consumers when they had used Colossus to calculate a claim payment. Allstate also was fined
In a statement to
"A part of this story is the failure of state insurance regulators to police insurance companies' conduct," added
Romano asks himself the same question. The investigation was hardly a secret in
Hunter remembers the call. "One of the first things he said was that he wanted to help consumers, which is something I liked." Hunter had already assembled a large body of information about Colossus but was happy to learn about Romano. "Suddenly we had a guy from inside who knew how it worked."
Romano joined the group and co-wrote a paper last summer with Hunter: "
These black boxes have a significant impact on what people in
Romano isn't so sure the issue is dead. Insurance is too important to people. He's seen how it helped make people's lives a little easier in their time of need. He was proud to call himself an adjuster but knows he lost his way, as has the industry he once so respected. Today, Romano spends his time working on ways to inform consumers about the complexities of insurance, help people the best he can. That's what he always wanted to do; it's what insurance is supposed to do. His migraines have all but vanished.
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