Buttigieg Is Shocked, Shocked at McKinsey’s Transgressions. But It Was Notorious When He Joined It.

McKinsey was embroiled in a nationwide scandal over helping insurance companies squeeze customers.

Branko Marcetic December 18, 2019

Chicago Mayor Lori Lightfoot presses Democratic presidential candidate and South Bend, Ind., Mayor Pete Buttigieg for answers about his work at corporate consulting firm McKinsey & Co. during a U.S. Conference of Mayors Iowa forum Dec. 6, 2019 in Waterloo, Iowa. (Photo by Win McNamee/Getty Images)

Ear­ly in his polit­i­cal career, 2020 pres­i­den­tial can­di­date and South Bend May­or Pete Buttigieg talked proud­ly of his years at the con­sult­ing firm McK­in­sey & Com­pa­ny — his most intel­lec­tu­al­ly inform­ing expe­ri­ence,” at a place to learn … all the things about busi­ness I didn’t know.” With Buttigieg’s rise to fourth place in the polls, how­ev­er, the firm’s unsa­vory activ­i­ties have come under increas­ing scruti­ny — its work in the past decade with author­i­tar­i­an states like Sau­di Ara­bia and Chi­na, its immi­grant deten­tion cost-cut­ting advice so inhu­mane it shocked even ICE work­ers.

McKinsey cast the claims process as a “zero-sum economic game,” where “Allstate gains” and “others must lose,” as one PowerPoint slide put it.

Under pres­sure for more trans­paren­cy about his role at McK­in­sey, Buttigieg pre­vailed upon the firm to waive his NDA and released his client list. But the cam­paign has dis­missed scruti­ny of his clients on the basis that he was a just one cog with no deci­sion-mak­ing power.

And in response to the firm’s recent scan­dals, Buttigieg has not­ed that he left the firm a decade ago” and called what cer­tain peo­ple in that firm have decid­ed to do…extremely frus­trat­ing and extreme­ly disappointing.”

But McK­in­sey was mired in high-pro­file scan­dals pri­or to Buttigieg’s deci­sion to work there after grad­u­at­ing from Oxford in 2007 — and through­out his time there. It was impli­cat­ed in the 2001 Enron scan­dal (among oth­er things, one of the company’s chief exec­u­tives, Jef­frey Skilling, was a for­mer McK­in­sey man) and had become noto­ri­ous as the brains behind count­less cor­po­rate cost-cut­ting schemes that slashed jobs, such as the 2007 Project X” plan, in which Chrysler closed U.S. plants and laid off thou­sands of fac­to­ry work­ers.

Per­haps the most noto­ri­ous of these was the sprawl­ing insur­ance scan­dal that became known as the McK­in­sey doc­u­ments,” in which McK­in­sey rev­o­lu­tion­ized the insur­ance indus­try to max­i­mize prof­its at the expense of vul­ner­a­ble policyholders.

In the ear­ly 1990s, All­state, then one of the country’s biggest auto insur­ers and look­ing to pare down how much it was spend­ing on claims, hired McK­in­sey to do what McK­in­sey is best-known for doing: cut costs. McK­in­sey duti­ful­ly devel­oped a strat­e­gy to rad­i­cal­ly alter our whole approach to the busi­ness of claims” and boost com­pa­ny prof­its, which All­state imple­ment­ed in 1995. Inter­nal doc­u­ments released years lat­er showed that McK­in­sey cast the claims process as a zero-sum eco­nom­ic game,” where All­state gains” and oth­ers must lose,” as one Pow­er­Point slide put it — the oth­ers” being claimants who had suf­fered the very mis­for­tunes and dis­as­ter their insur­ance was meant to cushion.

The strat­e­gy increased income thir­ty­fold. Rev­enue soared from a year­ly aver­age of $82 mil­lion in the pre­ced­ing decade to an aver­age of $2.5 bil­lion in the decade that fol­lowed. Dur­ing that time, the amount All­state paid out per every dol­lar it charged cus­tomers for pre­mi­ums dropped from around 69 cents to 43.5 cents. By 2007, it had hit a record prof­it of near­ly $5 bil­lion. The strat­e­gy was con­sid­ered such a suc­cess that two years lat­er, the pro­gram was expand­ed beyond auto insur­ance to fire, water and roof dam­age for homes.

Allstate’s surg­ing prof­its meant hard­ship for its cus­tomers. Claimants who had dili­gent­ly paid their pre­mi­ums for years were sud­den­ly aban­doned at pre­cise­ly the moment of cri­sis their insur­ance was meant for. Many received low offers that cov­ered only a frac­tion of the costs. Some were treat­ed as frauds and poten­tial crim­i­nals. Oth­ers were tied up in court until they sim­ply gave up on ever recoup­ing their losses.

A host of oth­er insur­ers also made use of McK­in­sey. Insur­ance giant State Farm hired McK­in­sey in the ear­ly 1990s; like All­state, by 2007, its prof­its had dou­bled over 1990s levels.A 2007 analy­sis by the Sun Her­ald in Biloxi, Miss., found that between 2002 and 2005 alone, even as eight major hur­ri­canes wreaked destruc­tion along the coast and, par­tic­u­lar­ly, in Flori­da, the insur­ance giant’s fire and casu­al­ty sub­sidiary saw its net worth more than dou­ble to $7.7 bil­lion and its pay­outs per pre­mi­um dol­lar drop from 70.6 per­cent to 51.6 percent.

By the time Hur­ri­cane Kat­ri­na struck land in August 2005, prop­er­ty insur­ers across the coun­try were oper­at­ing accord­ing to the McK­in­sey strat­e­gy, as the Bloomberg Mar­kets cov­er sto­ry The Insur­ance Hoax” lat­er detailed. Reports abound­ed of insur­ers low-balling, under­pay­ing, or sim­ply flat-out refus­ing to ful­fill Kat­ri­na-relat­ed claims. In Novem­ber 2005, Louisiana Attor­ney Gen­er­al Charles Foti filed a suit accus­ing McK­in­sey and nine oth­er defen­dants, includ­ing All­state and State Farm, of rig­ging the val­ue of pol­i­cy­hold­er claims and raid­ing the pre­mi­ums held in trust by their com­pa­nies for the ben­e­fit of pol­i­cy­hold­ers to cov­er their loss­es.” The state accused McK­in­sey of head­ing an insur­ance conspiracy.

The McK­in­sey-designed insur­ance strat­e­gy was major news through the 2000s. This was thanks to numer­ous law­suits by both pri­vate attor­neys and state offi­cials like Foti, who went to war with All­state and State Farm on behalf of con­sumers rail­road­ed by the com­pa­nies after not just auto col­li­sions and fires, but nat­ur­al dis­as­ters like tor­na­does and hurricanes.

They were giv­en a boost by San­ta Fe lawyer David Berar­dinel­li, who sued All­state in 2000 for bad faith denial of an insur­ance claim, and tem­porar­i­ly obtained 12,500 pages of Pow­er­Point slides out­lin­ing McKinsey’s strat­e­gy. For­bid­den from copy­ing the doc­u­ments, Berar­dinel­li took copi­ous notes and pub­lished an exposé titled From Good Hands to Box­ing Gloves: The Dark Side of Insur­ance in 2006, the year before Buttigieg joined McKinsey.

Insur­ers went to extreme lengths to block oth­er damn­ing doc­u­ments about McKinsey’s advice com­ing out pub­licly dur­ing law­suits. Ordered to release inter­nal doc­u­ments by a Mis­souri court in 2007, All­state sim­ply refused and was held in con­tempt, rack­ing up $25,000-a-day fines that ulti­mate­ly totaled more than $7 mil­lion. It took an order from Florida’s insur­ance com­mis­sion­er to final­ly bring the doc­u­ments into the light of day, and even then All­state ini­tial­ly refused, relent­ing in April 2008 only after Flori­da sus­pend­ed it from sell­ing new insur­ance poli­cies in the state.

The doc­u­ments made nation­al head­lines in out­lets like the Chica­go Tri­bune and CNN, which pro­duced a Feb­ru­ary 2007 report look­ing at insur­ers’ prac­tice of low-balling claimants. For­mer claims agents admit­ted to the net­work they had offered as lit­tle as $50 to pol­i­cy­hold­ers who had suf­fered bod­i­ly injury and used what employ­ees called the three D’s”: delay, deny and, if it comes to it, defend.

The insurer’s refusal to release the doc­u­ments was under­stand­able giv­en what their con­tents revealed. Inside were McKinsey’s Pow­er­Point slides posit­ing a zero-sum game” between All­state and its pol­i­cy­hold­ers. Leak­age” was McKinsey’s term for pay­ing pol­i­cy­hold­ers more than nec­es­sary. The company’s bet was that when faced with a take it or leave it offer,” most claimants would choose to take it, par­tic­u­lar­ly in the midst of the finan­cial inse­cu­ri­ty in the wake of an acci­dent. McK­in­sey advised All­state that while most cus­tomers could be treat­ed with good hands” (as in the company’s slo­gan, You’re in good hands with All­state”) and get a quick set­tle­ment, those who refused the low-ball fig­ures the insur­er offered should get the box­ing gloves” treat­ment and be made to wait three years or more for a resolution.

If pol­i­cy­hold­ers lawyered up, McK­in­sey coun­seled that the com­pa­ny align alli­ga­tors” — adopt tougher legal action — and then sit and wait.” Clients fight­ing All­state often gave up in the face of years of lit­i­ga­tion, local tri­al attor­ney David Shapiro told the Sara­so­ta Her­ald-Tri­bune. There are many lawyers who won’t take an All­state case,” he said.

[All­state] pay[s] less than every sin­gle insur­ance com­pa­ny, and they cer­tain­ly will spend more on lit­i­ga­tion,” one for­mer All­state lawyer told the paper.

McK­in­sey also rec­om­mend­ed the adop­tion of a com­put­er pro­gram named Colos­sus to remove the dis­cre­tion of claims agents in favor of estab­lish­ing a new fair mar­ket val­ue” for bod­i­ly injuries. The pro­gram could alleged­ly be tuned” to pro­duce low-ball offers from the get-go. McK­in­sey instruct­ed claims agents to stay with­in the Colos­sus range or below it in most cas­es.” The pro­gram would lead to prof­its, McK­in­sey assured All­state, and share­hold­ers will notice.”

The long-run­ning scan­dal rais­es the ques­tion of why Buttigieg, as rival can­di­date and Hawaii Rep. Tul­si Gab­bard put it, chose to work for a com­pa­ny like McK­in­sey.” But it also rais­es anoth­er ques­tion: How much of the firm’s ethos — putting cor­po­rate prof­its over the health and eco­nom­ic secu­ri­ty of the US pub­lic with a ruth­less, amoral zeal — was inter­nal­ized by him?

Accord­ing to Buttigieg, his first client for the firm was the health insur­er Blue Cross Blue Shield of Michi­gan. By his own account, accord­ing to the New York Times, the insur­er had had grown in such a way that there was a great deal of dupli­ca­tion and some peo­ple didn’t even know what the peo­ple work­ing for them were doing.” Two years lat­er, it laid off 10% of its work­force, froze pay for non-union work­ers and increased its rates.

As the Huff­in­g­ton Post report­ed, Buttigieg went on to serve as part of a team that rec­om­mend­ed cuts to the U.S. Postal Ser­vice and the replace­ment of union­ized postal work­ers with pri­va­tized staff. And as the Intercept’s Ryan Grim not­ed, Buttigieg would lat­er cred­it his great expe­ri­ence” at McK­in­sey with expos­ing him to a lot of dif­fer­ent ideas and ways of solv­ing prob­lems,” com­ing to view run­ning the city of South Bend as akin to run­ning a cor­po­ra­tion” and to see its 100,000 res­i­dents as stake­hold­ers.” Buttigieg’s tech­no­crat­ic style of may­or­dom earned him crit­ics in South Bend, includ­ing res­i­dents, the direc­tor of a local char­i­ty for the home­less, and a city coun­cil mem­ber and now may­oral rival, who com­plain of top-down, data-dri­ven poli­cies that made life hard­er for the home­less and accel­er­at­ed the dis­place­ment of communities.

Buttigieg, the Rhodes Schol­ar, is known for doing his home­work. It stretch­es creduli­ty that he was unaware of the mas­sive insur­ance scan­dal engulf­ing the com­pa­ny before and through­out his years there, one that laid bare the heart of McKinsey’s busi­ness strat­e­gy: Max­i­mize prof­its, no mat­ter what the human cost.

Branko Marcetic is a staff writer at Jacobin mag­a­zine and a 2019 – 2020 Leonard C. Good­man Insti­tute for Inves­tiga­tive Report­ing fel­low. He is work­ing on a forth­com­ing book about Joe Biden.
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