How McKinsey and Climate Change Wrecked Insurance

Editor’s Note: This is excerpted from a much longer story from the excellent investigative reporters are ProPublica. The big take-away from this long read is that you may not believe in climate change but your insurers do. Florida has done everything it can to squash any mention of climate change and to blame rising property insurance costs on a lack of tort reform. However, as the article points out, Florida did tort reform and the situation has gotten no better. Florida may be uninsurable at some point in the not-to-distant future. Many of us have our life savings invested in a home here. There is a gubernatorial race underway and one of the essential questions for our next governor is “Do you believe in climate change?” The issues surrounding home insurance are going to go from bad to worse unless our leadership acknowledges the truth that the insurance companies already understand. Climate change is here and it is real.

A decidedly unglamorous business that mostly draws attention when it fails, property and casualty insurance, or P&C, has for decades quietly powered the economy and bolstered the American picket-fence dream. “Insurers are the foundational layer for most homeownership,” Abrahm Lustgarten, author of On the Move: The Overheating Earth and the Uprooting of America, told me, “and thus for most American middle-class wealth.”

In recent years, however, the insurance industry has begun to look notably shaky, staggering from one crisis to the next on its way to what some observers say could become a meltdown. As extreme weather events—an apocalyptic laundry list including but not limited to floods, windstorms, hailstorms, wildfires, droughts, mudslides, and heat waves—grow more frequent and intense due to the heedless destabilization of the climate, premiums are rising, payouts are shrinking, and, increasingly, carriers are bailing on markets deemed too risky. Millions of policyholders received nonrenewal notices in recent years, and many are now taking their chances without any protection.

Before too long, they may have no other choice. Some locations are already becoming essentially uninsurable, according to a report by the climate risk nonprofit First Street Foundation—forcing state governments to step in with so-called insurers of last resort, like Florida’s Citizens or California’s FAIR Plan. More than 30 states now have such plans, and most flood insurance is provided through FEMA. But government-backed plans are subject to the same unforgiving scientific principles as their private counterparts. After all, among the fundamentals of the property insurance business is the long-standing premise that, however unpredictable the weather, it adheres to certain probabilities, allowing us to make reasonable guesses about its behavior, and costs, over time. Unfortunately, a heating climate is swiftly upending that logic, as the more frequent occurrence of “100-year floods” amply demonstrates. And risk assessment will only become more difficult as atmospheric “feedback loops” kick into action. (Recent budget cuts to the National Oceanic and Atmospheric Administration and other research programs—even as annual spending on climate-related damage approaches $1 trillion—will presumably exacerbate the problem.)

“I don’t think we’re in imminent risk of the whole system collapsing tomorrow,” said Carolyn Kousky, the acting chief economist at Environmental Defense Fund and founder of the nonprofit Insurance for Good, “but risk is growing dramatically year on year, and we have not done any of the necessary decarbonization to stabilize that increasing risk.” As Whitehouse put it in a recent interview, “There’s no Band-Aid big enough to paper this over if you don’t deal with the fundamental underlying danger.”

In March, Günther Thallinger, who serves on the board of Allianz, one of the world’s largest insurance companies, published a LinkedIn post describing the bleak future that awaits us. “The economic value of entire regions—coastal, arid, wildfire-prone—will begin to vanish from financial ledgers,” Thallinger predicted. “Markets will reprice, rapidly and brutally. This is what a climate-driven market failure looks like.”

Given that banks generally decline to issue mortgages on uninsured property, it’s not hard to imagine the potential economic impact on high-risk regions. Tighter credit means fewer buyers. Faced with a shrinking tax base, municipalities will cut their budgets. Some will privatize utilities and other core functions in a bid to head off bankruptcy. Alarmed by unfilled potholes, ballooning class sizes, and other indications of disarray, wealthier residents will relocate, creating what Lustgarten calls “a spiral of economic decline.”

Or as Whitehouse put it in the hearing, “Climate risk makes things uninsurable. No insurance makes things unmortgageable. No mortgages crashes the property markets. Crashed property markets trash the economy.”

The early stages of such a scenario may already be taking shape in Florida’s storied condo market, where, in the wake of the 2021 collapse of a condominium due to deteriorated structural supports, owners have been hit not only with higher insurance premiums but with new assessments for maintenance and repairs and skyrocketing homeowners’ association fees. Many are now “desperate to sell,” per The Wall Street Journal. “I do think that the Florida insurance system is extremely rickety and insubstantial, barely even able to be properly called an insurance system,” Whitehouse told me. “It’s like a simulacrum of an insurance system. It looks like one until there are claims.”

Of course, governments will inevitably step in. But this, too, has its perils. Per Thallinger, “If multiple high-cost events happen within short time spans—as climate projections expect—then no government can realistically cover the damages without either austerity or collapse.”

 In 2010, journalist Paige St. John dubbed Florida’s housing stock “the largest catastrophe risk in the insured world.” Her Pulitzer-winning reporting in the Sarasota Herald-Tribune brought the challenges—and the petty corruptions—that characterize the local market to widespread attention. The series’ impact was likely softened, however, by a run of miraculously placid weather; between 2006 and 2015, the state wasn’t hit by a single hurricane.

Insurers collected premiums nevertheless and should theoretically have banked billions in reserves. But even before Ian, more than a dozen had become insolvent, and major carriers were exiting. With rates rising to four times the national average in some areas, policymakers were eager to identify a culprit—ideally, one that didn’t place too much emphasis on the changing climate. They found it in one of the few professional classes more reviled than insurance executives: lawyers. Carriers were being sued out of business, it was explained, by a network of shady law firms and unscrupulous roofers. The state insurance commissioner at the time, David Altmaier, bolstered the claim with a much-cited study suggesting that Florida had accounted for 8 percent of the nation’s insurance claims in 2019 and 76 percent of lawsuits against insurers.

A good number of those suits carry Mordechai Breier’s signature. “This firm, by definition, would be what was being demonized,” Breier told me when I visited him at the modest North Miami office of the Insurance Litigation Group, where he is managing partner. “When they’re talking about abusive attorneys, they’re talking about me.” Breier is a colorful figure, a spirited, compact Orthodox Jew who wears his side curls tucked behind his ears. “I walk into a courtroom, and the first question is ‘Who’s that wacko?’” he told me. “I tend to make a splash, just my personality.” In some rural backwaters, Jews are a rarity, which is one reason why, as he put it, “I also carry wherever I go, openly and proudly.” Another possible reason: Being smeared as one of the supervillains of Florida’s insurance crisis can have safety implications.

Breier acknowledges that some of his competitors took advantage of the system. “Any process where there could be abuse, you’re gonna have bad actors stepping in and abusing,” he said. “That’s true in any industry.”

The state legislature responded with a bundle of tort reform measures that, among other things, did away with one-way attorneys’ fees. It also made it harder to sue an insurer for acting in “bad faith,” or prioritizing its own financial interest over its obligations to claimants. The new legislation was signed into law on December 16, 2022.

Not everyone applauded the new rules, however. Donald Trump excoriated Governor Ron DeSantis on Truth Social for “delivering the biggest insurance company BAILOUT to Globalist Insurance Companies, IN HISTORY.” Trump was then gearing up to battle “DeSanctimonious” for the Republican presidential nomination and eager to downplay his rival’s apparent triumph, but he had a point. It didn’t help that just the day after the bill passed the state House, Altmaier, the insurance commissioner who’d championed it, tendered his resignation, eventually announcing a new job helping “insurance and insurance-adjacent entities navigate the complex world of regulation and regulatory policy,” per his LinkedIn. (It was a well-timed move. Days after he left the post, Florida’s new “revolving door” standards, which would have forbidden him from lobbying for six years, took effect.)

Meanwhile, as months went by without a decrease in premiums, Floridians began to wonder if they’d been had.

The problem with the tort reform legislation, critics say, is not only that it represented what one Florida state rep called “the holiday wish list of the insurance industry,” but that it seems to have failed in its central goal. “They first started saying, give us a year, premiums will go down,” Quinn told me. “And then they said, ‘Give us 18 months.’ And then they said, ‘Give us two years.’ And they haven’t gone down.” They haven’t gone down because insurance fraud wasn’t actually the primary cause of high prices.

The real reason for Florida’s skyrocketing premiums, Quinn said, was hiding in plain sight all along. Indeed, it was outlined in a 2022 report—a $150,000 study commissioned by the state’s Office of Insurance Regulation, then quietly buried for years.

In mid-March, former state Insurance Commissioner Alt­maier was reunited with some of his old friends in the state legislature. The occasion, a meeting of the House Insurance and Banking Subcommittee, was not a cordial one. Lawmakers had some pointed questions about a blockbuster exposé that had recently appeared in the Miami Herald and the Tampa Bay Times. Via a public records request filed two years previously, reporter Lawrence Mower had obtained a copy of a “secret study,” as the headline put it. Entitled “Affiliated Fee Analysis Executive Summary,” the document runs to just seven pages, but its contents were explosive.

The study found that even as Florida’s insurance companies were dropping policyholders, increasing rates, complaining about losses, and in some cases going into receivership or becoming insolvent, they were transferring enormous sums to sister companies, known as affiliates. According to the report, between 2017 and 2019, insurers claimed a net loss of $432 million while somehow paying out $680 million in dividends to their stockholders. During the same period, their affiliates pocketed roughly $14 billion in profits.

“There’s a hole in the bucket,” Quinn said. “They’re leaking all this money out. Nobody’s begrudging them a profit. But don’t be shifting billions of dollars out the back door and then claim poverty and triple people’s premiums.”

The report, labeled a draft, had never been made available to lawmakers, let alone consumers. Nobody seems to know whether DeSantis was aware of it. And despite a clear recommendation by the author, the study was never updated or repeated in subsequent years. It wasn’t even finalized. During the hearing, Altmaier was asked about the findings. “I think what we said was, ‘There’s a lot of smoke here, and we need to make sure we go and see if there’s a fire burning or not,’” he replied. “And that was the effort I thought was underway when I left the office.”

This answer wasn’t particularly satisfying, given that nine months had transpired between the receipt of the draft report and Altmaier’s departure—nine months during which he, DeSantis, and lobby groups continued hyping tort reform as the solution to Florida’s insurance crisis. In any case, no such effort to see if there was a fire burning was undertaken.

If Altmaier and his successor, Michael Yaworsky, intentionally buried the report, they arguably had good reason to do so. Underwriters’ fees are overseen by state regulators, but if they aren’t able to make a significant profit, nothing obliges them to keep writing policies. Increasingly, Florida and other high-risk states are confronted with an almost impossible choice: keep the carriers happy, at the expense of consumers, or kiss insurance goodbye altogether and set off the kind of “climate-driven market failure” predicted by Allianz’s Thallinger.

Yaworsky said as much during the hearing. “The fundamental fact of our marketplace is that it is not one that companies inherently, naturally want to be involved with,” he explained, adding that “this current structure” was the only way regulators had managed to keep investors interested.

“If I asked for a call of hands, if anyone here in this room had $100 million, how many of you would like to invest that in a Florida domestic property insurance company that you may never get back,” he said, “not a lot of hands would go up.”

The covenant at the heart of insurance is simple: The customer pays in regular installments, often with the sincere hope they will never see their money again, but confident that, should it become necessary, the insurer will cover their loss. Unfortunately, not every insurance company benefits from the investing acumen of a Warren Buffett, and a few decades ago, carriers discovered a more reliable profit center—in the claims department. In the late 1980s, Allstate, for instance, paid out 71 cents for every dollar collected in premiums. But by 2006, in the wake of Hurricane Katrina, less than half of customer premiums went to cover claims. The rest, for the most part, was gravy.

Credit for the shift goes to McKinsey & Co. Allstate hired the business consultancy in 1992, perhaps impressed with its work helping to turn Enron into a global energy powerhouse. As detailed in David Berardinelli’s 2008 book, From Good Hands to Boxing Gloves, McKinsey’s advice, although presented in technical jargon, was very simple: quietly break the covenant. According to thousands of pages of internal documents that came to light under court order, McKinsey proposed a new business model, dubbed Claims Core Process Redesign, which reframed the paying of claims not as an essential function of the company—the actual product, in fact, that its customers were purchasing—but as “leakage.” After all, every dollar that went to policyholders, the consultants pointed out, came off the bottom line.

In a way, McKinsey’s strategy makes perfect sense, observed Tom Baker, an expert in insurance law at the University of Pennsylvania. “You’re used to running a shareholder-maximization, by-the-numbers type of business, and then you come into the claims department, and you see all this money going out, right? I mean, the money going out is the whole idea! But it has to be tempting to kind of control that part of it.”

Under the new model McKinsey proposed, claimants would be offered just 60 percent of what they were entitled to. Nine out of 10 would take the deal, McKinsey estimated. Those who fought for fair recompense would be worn down through litigation—what the consulting firm called “boxing gloves”—inducing “the very anguish and distress policyholders were trying to avoid when they bought insurance in the first place,” Berardinelli wrote. And since only a fraction of customers actually make a claim in any given year, only the unlucky few would ever realize they’d been paying for inferior coverage.

McKinsey identified one major obstacle to the plan’s success: Allstate’s employees, who were justly proud of a reputation for good service. So it introduced a computer model, branded ­IntegriClaim, which would replace the long-standing method for determining a payout—sending a trained adjuster to determine the genuine cost incurred—with an estimate based on similar claims, one that could of course be tweaked by the home office as desired. Employees were directed to suspend their own judgment in favor of IntegriClaim’s recommendations. (Many companies have since further refined this model by farming the work out to third-party contractors.)

The plan worked as advertised, ultimately helping Allstate increase its average annual pretax operating income by more than 3,335 percent in a decade. And in subsequent years, as one major carrier after another hired McKinsey to redesign their business models as well, it became the industry standard. “It’s the new norm,” plaintiff’s attorney J. Drew Houghton told me. “Just business as usual. They fully integrated it.” (The American Property Casualty Insurance Association opted not to comment for this story.)

Insurers understood perfectly well that by offering what Berardinelli called “an inherently defective insurance product,” they’d be inviting lawsuits. But McKinsey had a solution for that as well. In one slide produced for Allstate, it proposed that the company undertake a campaign to “shift advantage away from claimants and plaintiffs’ attorneys.” Among its suggestions: “modify bad faith laws” and “targeted tort reform.”

If you want to make things awkward in southwest Florida, ask folks how they feel about climate change. 

Scientists were disheartened last year when Governor DeSantis erased most references to climate change from state law, but for the Environmental Defense Fund’s Kousky, that kind of old-school climate denial is just a small part of a more widespread societal challenge. “I don’t think that our public or private institutions, or just our individual psychology, has really grappled with what it means to be in an environment of constantly increasing risk,” she told me. “Like, it’s not going to ever get better, right? And so that requires massive investments in risk reduction and climate adaptation to maintain insurability, but also to keep people safe and lower all the uninsured losses. And those investments can’t be done quickly. We’re talking about major infrastructure, changing our building stock, changing our land use patterns. We need to be making all those decisions now. But we can point to a million examples of where we are really bad at thinking long term as a society or as an individual.”

Whatever the fate of the planet, the Florida insurance market at least has been looking up. A dozen new regional carriers have launched since the reforms were implemented. Last year, more than 400,000 policyholders were “depopulated” from Citizens, the state-backed insurer, in favor of private carriers—a clear sign, it was claimed, that the crisis was over and that tort reform had delivered. (Indeed, prodded by the insurance industry, other states are contemplating similar legislation.)

Despite the dearth of raised hands in that March committee hearing, launching an insurance startup in Florida has become a highly attractive proposition. For one thing, you don’t need to pass the rigid economic stress tests and other financial evaluations administered by trusted ratings agencies like S&P or AM Best. Demotech, a ratings company with considerably looser standards, has become the new industry leader, with nearly 60 percent of the Florida market. According to a 2024 academic study, insurers rated by Demotech were nearly 25 times more likely to go insolvent than those rated by a more established competitor.

Meanwhile, you won’t need to hire a sales team, since under the takeout program, the state of Florida will simply hand you a stack of paying customers from its massive Citizens stockpile and let you choose the least risky among them. Policyholders have no choice in the matter. As Bruce Lucas, the CEO of one of Florida’s biggest insurance startups, Slide, put it in a 2022 podcast interview, “You send out these notices, and it gets mixed in with everybody’s junk mail in the trash can. And next thing you know, you’ve got 200,000 customers.” And should you want to pocket a bit more money, you might consider fraudulently altering field reports by third-party adjusters—an accusation leveled by several whistleblowers in 2024. (Heritage Insurance, which Lucas ran until 2020, is among the carriers alleged to have edited adjuster reports as a way of lowering claims; it recently filed a libel suit against one of the adjusters who appeared in a 60 Minutes segment about the allegations.)

When these smaller insurers go out of business, as they regularly do—often after handsomely compensating their officers and shareholders and letting affiliates bank the profits—consumers are shuffled back to Citizens, and the cycle continues. It will come as little surprise that, according to The Washington Post, Lucas and his companies have given millions to Florida Republicans, including $350,000 to the state’s former CFO and freshly minted U.S. representative, Jimmy Patronis. (Also, fun fact: Lucas previously did legal work for Enron.)

Politics aside, property insurers have long understood that the climate is changing. It’s their business to know. And if they don’t, the reinsurers—well-capitalized multinationals, usually based in tax havens like Bermuda, that indemnify insurance companies against major catastrophes—are happy to explain. (While insurers’ rates are often capped by state officials, reinsurers charge what they like.) Indeed, it’s hard to think of another sector of the economy that is better attuned to the cascade of disasters the oil and gas industry has virtually guaranteed by mindlessly pumping ever more CO2 into the atmosphere.

And yet, it turns out that some of these same insurers are actively making the problem worse. Many invest their “float” in major oil producers, and underwrite fossil fuel development projects that couldn’t happen at all without insurance. “By underwriting and investing in new and expanded fossil fuel projects,” Whitehouse said in a press release announcing a 2023 investigation, “U.S. insurers are helping Big Oil bring us closer to the worst runaway climate scenarios, which threaten lives, livelihoods, and the federal budget.” In 2023, Allianz announced it would cease underwriting or funding such projects in line with commitments made with the Net-Zero Insurance Alliance, a group of insurers convened by the U.N. to address climate change issues. A month later, after 23 right-wing U.S. attorneys general challenged the alliance on antitrust grounds, it was disbanded. (A new group, the Forum for Insurance Transition to Net Zero, launched in the interim.)