How Insurance Carriers Systematically Underpay Claims: The Consulting Industry Behind It

This Is Not a Conspiracy Theory — It Is Documented History

If you have ever filed an insurance claim and felt like the process was designed to exhaust you into accepting less than you deserve, you are not imagining things. Beginning in the early 1990s, major insurance carriers hired elite management consulting firms to redesign their entire claims-handling operations. The objective was not to improve service to policyholders. It was to reduce the amount of money paid on claims — systematically, across every line of business, on every claim.

The strategies that emerged from these consulting engagements have been documented in court proceedings, exposed through litigation discovery, examined in regulatory hearings, and analyzed in detail by two essential books that every policyholder should read. What those documents reveal is not a collection of isolated bad actors. It is an industry-wide transformation in how insurance companies approach their fundamental obligation to pay covered claims.

The Two Books That Exposed It All

“From Good Hands to Boxing Gloves” by David Berardinelli (2008)

David Berardinelli is a bad faith attorney who became the first person to obtain the internal McKinsey & Company consulting documents that Allstate had fought for years to keep sealed. His book, From Good Hands to Boxing Gloves: The Dark Side of Insurance, documents Allstate’s transformation from the “You’re in Good Hands” company into one that systematically underpaid claims as a core business strategy.

The book details how Allstate retained McKinsey & Company in the early 1990s to redesign its claims operations. McKinsey produced approximately 13,000 pages of documents — including PowerPoint slides, strategy memos, and implementation plans — that laid out a comprehensive blueprint for reducing claim payouts while increasing profitability. These documents were created for Allstate’s headquarters in Northbrook, Illinois, and were initially kept under seal as “trade secrets.”

Berardinelli’s central finding is stark: McKinsey recommended that Allstate settle 90 percent of claims in less than 180 days — the “Good Hands” segment — using low, quickly calculated offers. The remaining 10 percent of claimants who protested or hired attorneys would receive the “Boxing Gloves” — years of deliberate delay and aggressive litigation tactics designed to make fighting for fair payment more painful than accepting the lowball offer. Since the book’s publication, an estimated 50 percent of the insurance industry has adopted similar techniques.

“Delay, Deny, Defend” by Jay Feinman (2010)

Rutgers Law professor Jay M. Feinman expanded the analysis beyond Allstate in his book Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and What You Can Do About It. Where Berardinelli focused on one carrier, Feinman documented how the entire industry adopted the McKinsey-style approach to claims handling.

Feinman’s thesis is that the insurance industry underwent a fundamental shift in how it views the claims process. Instead of treating claims as the fulfillment of a contractual promise — the very reason policyholders pay premiums — carriers began treating every claim as a negotiation to be won. The title itself captures the three-part strategy: Delay the claim until the policyholder is desperate. Deny all or part of the claim, forcing the policyholder to fight. Defend the denial aggressively, making the cost of challenging the carrier prohibitive for most people.

Feinman specifically identifies the role of McKinsey & Company and other large consulting firms in designing these systems, noting that the strategies “involve sophisticated techniques to avoid the prompt and fair payment of claims and to reward company employees for underpaying valid claims.”

The McKinsey Documents: What the Slides Actually Said

The McKinsey documents became public just once at a regulatory hearing — in May 2005, before the Kentucky Department of Insurance in Lexington. Additional documents were later forced into public view through litigation in Florida, where the state insurance commissioner suspended Allstate from selling new policies in 2008 after the company refused to produce the documents. What those materials revealed was an explicit, deliberate strategy to reduce claim payouts as a profit center.

“Zero Sum Economic Game”

One McKinsey PowerPoint slide from a 1994 presentation to Allstate executives declared the claims process a “Zero Sum Economic Game.” The slide stated explicitly: “Allstate gains … others must lose.” Another slide elaborated: “Improving Allstate’s casualty economics will have a negative economic impact on some medical providers, plaintiff attorneys, and claimants.”

This framing is significant because it treats the policyholder not as a customer fulfilling a contractual right, but as an adversary competing for the same pool of money. Every dollar paid on a legitimate claim was characterized as a dollar “lost” to the company. This is the philosophical foundation upon which the modern claims-handling apparatus was built.

“Good Hands or Boxing Gloves”

Perhaps the most infamous slide McKinsey prepared for Allstate was entitled “Good Hands or Boxing Gloves.” The strategy co-opted Allstate’s own marketing slogan. When a policyholder files a claim, McKinsey advised, first make a low offer. If the policyholder accepts the low amount, treat the person with “good hands.” If the policyholder protests or hires a lawyer, fight back with “boxing gloves.”

The strategy was designed to create a rational choice for the policyholder: accept the lowball offer quickly and get paid something, or challenge the offer and face years of delay, legal costs, and aggressive defense tactics. McKinsey calculated that most policyholders would choose the path of least resistance. They were right. Allstate would pay claims fairly, or promptly — but not both.

The “Alligator” — Sit and Wait

One slide displayed at the Kentucky hearing featured an image of an alligator with the caption “Sit and Wait.” The slide instructed Allstate to take an “alligator approach” to claim payments and settlement offers — delay, wait, and allow the passage of time to frustrate policyholders into accepting less or simply walking away. For someone who has suffered a fire or a serious injury, time is not on their side. Medical bills accumulate. Temporary housing costs mount. The mortgage on a destroyed home still needs to be paid. The carrier, by contrast, faces no such pressure. It can afford to wait indefinitely.

Segmenting Claimants for Strategic Advantage

McKinsey advised Allstate to segment claims into three categories: unrepresented claimants, represented claimants likely to settle, and represented claimants likely to go to trial. Each category received different treatment. McKinsey described this segmentation as a “critical step” in taking advantage of opportunities in claims processing. For the represented-try segment, the documents noted that “market values can be shaped through strategic selection of cases to proactively try” — meaning Allstate should deliberately take certain cases to trial to drive down settlement values across the board.

“Exploiting the Economics of the Practice of Law”

McKinsey presentations characterized the “boxing gloves” approach as “exploiting the economics of the practice of law.” The insight was cynical but effective: most plaintiffs’ attorneys work on contingency, meaning they advance all costs of litigation. If the carrier can make litigation expensive enough and drawn out enough, many attorneys will either decline the case or pressure their own clients to settle for less. The carrier does not need to win every case. It only needs to make fighting uneconomical.

The Claim Core Process Redesign (CCPR)

Allstate implemented the McKinsey recommendations through a program called Claim Core Process Redesign (CCPR), rolled out in 1995. The stated objective, according to one slide, was to “radically alter our whole approach to the business of claims.” The results were dramatic. In the decade after CCPR implementation, the amount Allstate paid out per premium dollar in auto casualty claims dropped from approximately 63 cents to 47 cents, according to A.M. Best data. That 16-cent reduction across Allstate’s massive book of business represented billions of dollars in reduced payments to policyholders — and corresponding increases in company profits.

Colossus: The Software That Replaced Adjuster Judgment

A central component of the McKinsey strategy was the adoption of computer software to remove individual adjuster discretion from the claims valuation process. The program was called Colossus, developed by Computer Services Corporation (CSC). McKinsey recommended Colossus specifically for its ability to “establish a new fair market value” for claims — which in practice meant generating artificially low valuations that would replace the judgment of experienced adjusters.

How Colossus Works

Colossus converts medical data into numerical scores. An adjuster inputs diagnosis codes, treatment information, and other claim data, and the software generates a settlement value based on up to 10,720 internal rules and approximately 750 recognized injury categories. Each insurance company is free to adjust the software’s “value drivers” to raise or lower the settlement values the program produces.

This is where the system becomes problematic. Carriers can — and do — “tune” Colossus to produce lower valuations. Some insurers deliberately exclude high-value settlements and jury verdicts from the benchmark data that feeds the algorithm. When the large awards are stripped out, every remaining valuation skews lower. A 15-year-old internal memo that surfaced in litigation showed that Colossus had been set to produce awards that were, across the board, 20 percent below the prior average.

The manufacturer of Colossus was not shy about this feature. Sales literature published by CSC boasted that “the program will immediately reduce the size of bodily injury claims by up to 20 percent.” This was not presented as a flaw. It was the selling point.

The Property Claims Equivalent: Xactimate and Desk Reviews

While Colossus was designed for bodily injury claims, property claims have their own version of this dynamic. Estimating software like Xactimate is used industry-wide to price property damage repairs. The software itself is a legitimate tool — the problem is how carriers use it. Field adjusters inspect the property, document the damage, and prepare an estimate. That estimate is then submitted to a desk reviewer — someone who has never visited the property — who cuts line items, reduces quantities, eliminates entire categories of damage, and overrides the field adjuster’s professional judgment.

The result is a payment that bears little resemblance to what the field adjuster found. The policyholder never sees the original estimate. They only see the reduced version, and they are told this is what the damage is worth. This is not a failure of the claims process. It is the claims process working exactly as it was designed to work after the consulting firms got involved.

How the Rest of the Industry Followed

Allstate was the pioneer, but it did not remain alone. Once the financial results of the McKinsey strategy became visible — higher profits, lower payout ratios, and no meaningful regulatory consequence — competitors rushed to adopt similar approaches. Each carrier implemented its own version of the playbook, tailored to its market and organizational structure, but the underlying philosophy is the same across the industry: treat claims as a cost to be minimized rather than a promise to be fulfilled.

Allstate: The McKinsey Blueprint

Allstate remains the most thoroughly documented example of consulting-driven claims suppression. The CCPR program institutionalized the “boxing gloves” approach across every claims office. Adjusters were trained to find reasons to deny rather than reasons to pay. Initial offers were calculated at approximately 80 percent of comparable past claims — an automatic 20 percent haircut before negotiation even began. Policyholders who accepted were processed quickly. Those who fought were subjected to years of delay and aggressive litigation.

State Farm: The Manager Override System

State Farm developed its own approach to achieving similar results. The company uses a system where team managers and centralized review teams override field adjusters’ assessments. A field adjuster inspects a roof, documents the damage, and recommends replacement. The estimate goes up the chain, and a manager — who has never set foot on the property — revises the assessment downward based on the company’s internal damage definitions.

These internal definitions are not found in the policy language. State Farm restricts its adjusters from independently deciding when a roof should be replaced, requiring manager approval that applies the company’s own criteria rather than industry standards or the plain language of the policy. Communication with policyholders is increasingly done remotely, with explanations attributed to unnamed managers — “the manager said” with no name provided and no substantive explanation offered.

State Farm has also centralized its audit teams for both auto and homeowners claims. These teams review estimates prepared by independent shops, contractors, and even the company’s own field adjusters — cutting line items and reducing payments before the policyholder ever sees a number.

Farmers Insurance: Controlling the Appraisal Process

Farmers Insurance takes a different but equally effective approach to claims suppression. The company relies heavily on in-house appraisers and preferred vendors whose continued relationship with Farmers depends on producing results that align with the company’s interests. When an independent contractor produces an estimate that exceeds the company’s figure, Farmers can point to its own appraiser’s lower number as justification for the reduced payment.

Perhaps more significantly, Farmers has modified its policy language to restrict the appraisal process — the policyholder’s primary contractual remedy for disputing the amount of a claim. Farmers’ “Next Generation” homeowner’s policy restricts what the appraisal panel can determine regarding overhead and profit and building ordinance coverage, effectively writing the appraisal remedy out of their policies for precisely the categories where the largest disputes arise. When the appraisal process itself is controlled by the carrier, the policyholder’s last contractual safeguard becomes meaningless.

CSAA/AAA: California Wildfire Claims

CSAA Insurance Group, which operates under the AAA brand, has drawn particular scrutiny for its handling of California wildfire claims. In wildfire losses, where entire homes are destroyed, the primary disputes involve replacement cost valuations. CSAA has faced bad faith litigation alleging intentional lowballing of replacement values — with policyholders documenting differences of several hundred thousand dollars between CSAA’s covered replacement values and actual contractor quotes to rebuild.

Investigations have shown that CSAA failed to account for differences in local construction costs when estimating replacement values, failed to regularly update replacement cost estimates as required, and placed the burden on policyholders and their agents to obtain replacement cost information — rather than fulfilling its own obligation to accurately assess and communicate coverage limits. For wildfire survivors already dealing with the loss of everything they own, these practices compound the devastation.

Preferred Vendor and Managed Repair Programs: Suppressing Claim Values by Design

One of the most effective modern tools for suppressing claim values is the “preferred vendor” or “managed repair” program. Under these programs, the insurance company maintains a network of contractors who have agreed to perform repairs at rates set by the carrier. The policyholder is steered — sometimes pressured, sometimes contractually required — to use these contractors rather than selecting their own.

The economics are straightforward. The carrier negotiates discounted rates with its preferred vendors. These vendors accept lower margins because the carrier provides a steady stream of work. The policyholder receives repairs performed at below-market rates, often by contractors whose primary obligation is to the carrier that sends them business, not the homeowner whose property they are repairing. Cost savings for the carrier can come at the expense of repair quality, as contractors cut corners to meet the insurer’s budget constraints.

The managed repair model also creates a baseline that the carrier uses against policyholders who choose their own contractor. When your independent contractor bids $80,000 and the carrier’s preferred vendor would do the same work for $50,000, the carrier points to its vendor’s lower price as the “market rate” and refuses to pay the difference. The fact that the preferred vendor’s price reflects a negotiated discount — not the actual market cost of the repair — is conveniently ignored.

The Biased Expert Pipeline

The consulting-driven claims model relies heavily on a network of carrier-retained experts — engineers, hygienists, appraisers, and other professionals whose continued engagement depends on producing reports that support the carrier’s position. These are not independent experts conducting objective investigations. They are vendors in a repeat-business relationship where the conclusions are expected before the inspection begins.

A carrier-retained engineer who consistently recommends roof replacement will stop receiving assignments. An industrial hygienist who finds extensive contamination requiring costly remediation will not be called back. The financial incentive is structural and self-reinforcing: produce reports that minimize the carrier’s exposure, or be replaced by someone who will. This pipeline of biased expertise is essential to the claims-suppression model because it provides the carrier with “expert” cover for underpayment decisions.

The Common Tactics in Practice

The consulting-driven claims model manifests in predictable, repeatable tactics that policyholders encounter on virtually every significant claim. Understanding these tactics is the first step toward defeating them.

1. The Lowball First Offer

The initial settlement offer is almost always calculated to be significantly less than the actual value of the claim. This is not an accident or a good-faith disagreement. It is the opening move in a negotiation designed to anchor the policyholder’s expectations at a number far below what the claim is worth. The carrier knows the offer is low. It counts on a significant percentage of policyholders accepting it anyway — out of exhaustion, financial desperation, or simple ignorance of what their claim is actually worth. Learn more about why you should never accept the insurer’s first offer.

2. Delay as a Weapon

Deliberate delay is the single most effective claims-handling tactic because it costs the carrier nothing and costs the policyholder everything. A carrier that takes four months to respond to a supplement request, six months to approve additional work, or a year to resolve a dispute over coverage is not being thorough. It is executing the “sit and wait” strategy that McKinsey recommended on a slide with an alligator. California law imposes specific deadlines on claim handling — 15 days to acknowledge receipt, 40 days to accept or deny after proof of claim — but carriers routinely push these boundaries and face minimal consequences. Read more about insurance company delay tactics.

3. The Desk Review Override

The field adjuster inspects the property, documents the damage, and prepares an estimate. Then a desk adjuster — who has never seen the property and has no firsthand knowledge of the damage — reviews the estimate and cuts it. Line items are removed. Labor times are reduced. Material quantities are decreased. Entire categories of damage are eliminated. The field adjuster’s professional judgment is overridden by someone whose job performance is measured, in part, by how much they reduce claim payments.

4. Scope Limitation

Carriers routinely narrow the scope of covered damage. Water damage is limited to the room where the leak occurred, ignoring migration through walls and subfloors. Fire damage is scoped to the area of direct flame contact, ignoring smoke and soot contamination throughout the structure. Wind damage is addressed shingle by shingle rather than evaluating the roof system as a whole. Each limitation reduces the carrier’s payout and transfers the unaddressed damage to the policyholder.

5. Depreciation Manipulation

Insurance carriers depreciate virtually everything they can — and many things they cannot legally depreciate, such as labor costs in many states. Items with decades of useful life remaining are depreciated to near-zero value. New categories of depreciable items are invented. The depreciation holdback on an initial payment can be so large that the policyholder cannot afford to begin repairs — which the carrier then uses as evidence that the repairs are not being made, justifying further delay or denial.

6. Denial of Overhead and Profit

No licensed general contractor performs work at net cost. The standard in the construction industry — and in the estimating software carriers use — is 10 percent overhead and 10 percent profit. Yet carriers routinely strip O&P from their estimates, claiming it is only owed when the policyholder hires a general contractor to manage multiple trades. This argument ignores the reality that any significant property loss involves coordination across multiple trades, and that no competent contractor will agree to work at cost. Learn more about overhead and profit.

7. Recorded Statements and Examinations Under Oath

Carriers request recorded statements and examinations under oath not to investigate the claim, but to build a file that can be used against the policyholder. Questions are designed to elicit statements that can later be characterized as inconsistencies. The process itself serves as a delay tactic, adding weeks or months to the claim timeline while the policyholder waits for the carrier to “complete its investigation.”

California’s Response: The Fair Claims Settlement Practices Regulations

California’s Fair Claims Settlement Practices Regulations (10 CCR §2695.1 through §2695.12) exist precisely because of the tactics described in this article. These regulations establish minimum standards for claims handling that directly address the consulting-driven playbook. They are enforced by the California Department of Insurance under the authority of Insurance Code §790.03(h), which identifies sixteen unfair claims settlement practices.

Key Regulatory Protections

• Timely communication— Insurers must acknowledge receipt of a claim within 15 calendar days and begin investigation immediately (10 CCR §2695.5(e)).
• Prompt acceptance or denial— Upon receiving proof of claim, the insurer must accept or deny the claim within 40 calendar days (10 CCR §2695.7(b)).
• Prompt payment— Upon acceptance, the insurer must tender payment within 30 calendar days (10 CCR §2695.7(b)).
• No forced vendor selection— No insurer shall require the insured to have property repaired by a specific individual or entity (10 CCR §2695.9(b)).
• Fair investigation— The insurer must conduct a thorough, fair, and objective investigation sufficient to determine coverage (10 CCR §2695.7(d)).
• Written explanation required— Any denial or partial denial must include a written explanation of every basis for the decision, with reference to the specific policy provisions (10 CCR §2695.7(b)(1)).
• No misrepresentation of policy provisions— The insurer shall not misrepresent pertinent facts or policy provisions relating to coverage at issue (10 CCR §2695.4).
• Measurement and scope standards— For first-party residential property claims, the insurer must provide accurate measurements and a detailed scope of damage (10 CCR §2695.9(d)).

These regulations provide the framework for holding carriers accountable. Learn more about California’s Fair Claims Settlement Practices Regulations and how to use them to protect your claim. When a carrier violates these regulations, it may constitute evidence of bad faith.

Why the Consulting Model Persists

The obvious question is: if these tactics are documented, exposed, and regulated against, why do they continue? The answer is economics. The consulting-driven claims model is extraordinarily profitable. For every policyholder who fights back, hires a public adjuster, or files a bad faith lawsuit, there are dozens who accept the lowball offer, give up on the supplement, or walk away from money they are owed.

Regulatory penalties, when they are imposed, are a fraction of the savings generated by underpayment. A carrier that saves billions by systematically underpaying claims and pays millions in fines has made a profitable trade. The system will continue as long as the cost of compliance exceeds the cost of violation.

This is also why the consulting firms themselves face no accountability. McKinsey & Company designed and recommended the strategy, but it was implemented by Allstate and adopted by competitors. The consultants move on to the next engagement. The carriers implement the recommendations. The policyholders bear the consequences.

What You Can Do About It

Understanding how the system works is the most important step toward defeating it. These tactics are designed to work on policyholders who do not know their rights, do not understand the claims process, and do not have the resources or knowledge to fight back. When you know what the carrier is doing and why, you can respond strategically.

1. Never accept the first offer— The initial offer is the “good hands” number — calculated to close the claim quickly at a fraction of its value. Request a detailed breakdown and compare it to actual repair costs from licensed contractors. See why the first offer is almost always too low.
2. Document everything in writing— The carrier’s claims file is built to support the carrier’s position. Build your own. Confirm every phone conversation in a follow-up email. Request every denial and every decision in writing. Create a paper trail that documents delay, bad faith, and procedural violations.
3. Know the regulations — California’s Fair Claims Settlement Practices Regulations impose specific obligations on the carrier. Cite them. When the carrier misses the 40-day acceptance deadline, say so in writing. When the carrier fails to provide a written explanation for a denial, demand one with a citation to 10 CCR §2695.7(b)(1).
4. Get your own estimate— Do not rely on the carrier’s estimate as the measure of your loss. Hire a licensed contractor to prepare an independent repair estimate. The difference between the carrier’s number and the actual cost of repair is the measure of underpayment.
5. Consider hiring a public adjuster— The carrier has an entire team of adjusters, engineers, and consultants working to minimize your claim. A licensed public adjuster works exclusively for you, knows the same estimating tools and regulations the carrier uses, and can level the playing field.
6. Invoke the appraisal clause— Most homeowner’s policies contain an appraisal clause that provides a binding process for resolving disputes over the amount of loss. This is often faster and less expensive than litigation, and it removes the carrier’s ability to stall indefinitely.
7. File a complaint with the California Department of Insurance— Regulatory complaints create a record and can trigger market conduct examinations. One complaint may not change a carrier’s behavior, but a pattern of complaints absolutely will.

The Adjuster on the Other Side Is Not Your Enemy

One final point that is often lost in discussions of carrier tactics: the individual field adjuster who inspects your property is not the architect of these strategies. Most field adjusters entered the profession wanting to help people after disasters. Many are frustrated by the very system described in this article — a system that overrides their professional judgment, restricts their authority to pay claims fairly, and evaluates their performance based on how low they can keep payouts rather than how accurately they can assess damage.

The problem is not the adjuster at your kitchen table. The problem is the system above that adjuster — the desk reviewers, the team managers, the corporate claims departments, and ultimately the management consulting firms that designed a process where “Allstate gains … others must lose.” Your frustration is legitimate. Direct it at the system, not the individual.

“Improving Allstate’s casualty economics will have a negative economic impact on some medical providers, plaintiff attorneys, and claimants. … Allstate gains — others must lose.” — McKinsey & Company PowerPoint presentation to Allstate executives, 1994