When McKinsey Comes to Town: The Hidden Influence of the World's Most Powerful Consulting Firm

by Walt Bogdanich

What could possibly be in those slides that Allstate would ignore court orders and risk millions of dollar...

As part of his investigation into why Allstate rejected their claim, Berardinelli found that McKinsey had helped the insurer overhaul its claims system and that a secret slide deck explained it all. He asked for it. Allstate refused, claiming the slides contained trade secrets. Eventually, Allstate was compelled by the court to release them to Berardinelli, but only on the condition that he not make them public. Allstate even put a watermark on them, rendering scans or photocopies unreadable.

When a New Mexico appeals court gave Berardinelli permission to publicly release the slides, he returned the old ones to Allstate, with the expectation that he’d get more readable copies. But Allstate had sprung a trap. They kept Berardinelli’s old slides and then refused to give him replacements.

Not ready to give up, Berardinelli entered into the court record a three-hundred-page summary of the slides that he had compiled earlier. Allstate tried to have the summary placed under seal, but the court said no. Meanwhile, word of these internal documents—more than twelve thousand pages, and slides—spread throughout the American legal commun...

Upon hearing of Allstate’s insurance practices, the Florida insurance commissioner began an investigation, and he, too, found Allstate unwilling to produce requested documents. “If Allstate is willing to pay $25,000 per day in fines to a Missouri court for its ongoing failure to provide similar documents, it’s obvious to me that it will take more than a monetary sanction to get them to comply with our subpoenas,” the commissioner said.

The commissioner suspended Allstate’s license to sell auto insurance until the company produced the slides. That got Allstate’s attention because only California and Texas have more cars on the road than Florida. In 2008, Allstate relented, briefly posting the slides on its website.

Why did Allstate fight so long and so hard? The most succinct explanation comes in the title of a book written by Berardinell...

Since 1950, “You’re in good hands with Allstate” has been the slogan of the Allstate Corporation, one of the longest-running and most recognizable taglines in American business. For decades, under the ownership of Sears, Roebuck and Company, those words meant something: Allstate would, year after year, pay out the vast majority of its premium income in claims, usually generating a modest profit. The company’s agents w...

That changed in 1995, after Allstate completed its spin-off from Sears. As a new publicly listed company, its executives eagerly embraced the increasingly financialized economy where massive increases in share-based compensation became a major goal—unimaginable in the staid environment at Sears. In anticipation of the spin-off, a team from McKinsey met with Allstate’s management in late 1992.

In one slide, McKinsey told Allstate to try to settle 90 percent of its claims as quickly and as cheaply as possible. For the other 10 percent, policyholders or third-party claimants who didn’t take the Allstate offer or, even worse, hired a lawyer, the “boxing gloves” treatment was in order. They would fight in courts, for years if necessary, wearing down anyone who dared to sue.

McKinsey designed a system—the Claims Core Process Redesign—that pushed adjusters to make quick, lowball offers rather than allow them to come up with settlements that they considered fair. Adjusters, now tethered to a computerized claims system called Colossus, were reduced to little more than call-center workers reading prepared scripts. Pop-outs became rare. For homeowners’ claims, it was another computer program—Xactimate. But the idea was the same. Push claimants to accept less than the covered amount. Allstate says this characterization is “false and misleading” and that it overhauled its claims system in the 1990s to “pay claims more promptly and accurately.” McKinsey declined to comment.

Most McKinsey slides, at first glance, seem anodyne, filled with phrases such as this: “The way we approach claimants and develop relationships will significantly alter representation rates and contribute to lower severities.” But Allstate employees underst...

Here’s how Maureen Reed, an attorney for Allstate from 1992 to 2003, described a meeting on the topic wi...

We were told at this meeting that McKinsey had concluded that Allstate was “paying too much for claims” which had created a corporate culture of claimants expecting to be paid for claims. This was presented as a bad thing. McKinsey advised Allstat...

Central to the goal of reducing payouts was preventing policyholders from hiring lawyers, she said, because “represented” clients on average got payouts multiple times bi...

“We were told that Allstate was going to change the way claims were handled so that claimants could not get lawyers,” Reed said. In other words, beat down the opposing counsel by fighting every motion in court, making it so time-consuming and expensive that lawyers would reconsider fili...

“More people without representation would mean larger profits for the company,” she said. McKinsey was telling Allstate to turn it...

The words merit italics because what McKinsey did at Allstate fundamentally altered Ame...

McKinsey was telling Allstate to essentially declare war on a sizable proportion of its policyholders. One slide proclaimed, “Winning will be a zero sum game.” In other words, Allstate’s gains come at the expense of its policyholders. Another featured an image of an alligator. Why? Because, like an alligator, Allstate would just “sit and wait” for its victim—the claimant—to give up. “The money came from the only place it could come from—the pockets of Allstate policyholders and claimants,” Berardinelli wrote.

Before McKinsey, there were still angry policyholders. Before McKinsey, insurance companies lowballed claims. But McKinsey systematized it. And because the firm has no qualms about advising multiple companies in the same industry, its ideas metastasized. As competitors saw Allstate’s profit soar and its executives become wealthy, other insurers hired McKinsey. This is the McKinsey way and has been since the firm’s early days. With McKinsey, there’s no promise of exclusivity. It takes on work with multiple companies in fiercely competitive industries, from tobacco to banking to drugmakers.

Following Allstate’s adoption of the McKinsey system, State Farm, the biggest property and casualty insurer, signed up for the same magic elixir. Its McKinsey-designed “Accelerating Claims Excellence” system was first introduced to its field offices in mid-1995. AAA fo...

At Allstate, profit soared more than sixfold in the decade after McKinsey’s program was put in place. Its share price more than quadrupled, handily beating out the broader markets. The pay of Allstate’s top five executives, tied to the share price just as the McKinsey partner Arch Patton had envisioned half a century earlier, shot up. In 1994 their combined compensation amounted to $2.95 million. A decade later it had reached $19.3 million. In 2020 the top five executives made a combined $38.2 million, led by the CEO, Thomas Wilson. By 2021 the average salary of an Allstate worker was about $62,000, barely keeping up with inflation over twenty-five years.

The surge in Allstate’s share price was accompanied by a dramatic fall in the “pure loss ratio,” the measure of claims payouts divided by premium income, before factoring in operating costs. In 1987, Allstate paid out 70.9 cents in claims for every dollar it took in. By 1997, two full years into the McKinsey makeover, the ratio had fallen to 58.2. By 2006, after spiking a year earlier amid huge claims resulting from Hurricane Katrina, it was 47.6.

Even as the company was fighting to keep the McKinsey documents secret, its executives were touting the success of its new claims model to Wall Street. At a 2006 investors’ conference, Allstate’s then chief executive, Ed Liddy, said that from 1993, when McKinsey first proposed its Claims Core Process Redesign, to 2005, the amount of money Allstate had paid out in bodily injury claims had fallen by 10 percent.

Liddy shared in that wealth. In 2006, he was paid $24 million.

Roberts, the former management consultant, estimated that the McKinsey system resulted in the transfer of $94 billion from policyholders to Allstate coffers from 1995 to 2018. Add in State Farm and other companies that adopted the McKinsey system, and the total approaches $374 billion, Roberts calculated. “So much of this is driven by the whole McKinsey mentality and their constant drive to extract more money from individuals while giving them ...

In 2007, Bloomberg Markets magazine published a searing investigation into how Allstate, State Farm, and other insurers, using the McKinsey method, were routinely lowballing offers to homeowners whose homes had been damaged or destroyed by natural disasters. The most famous irate claimant: the Mississippi Republican senator Trent Lott, who sued State Farm when the company wouldn’t pay for damage to his home from Hurricane Katrina. State Farm said the damage was from water (not covered), rather than wind (covered).

Under state laws across the country, insurance companies are obligated to pay the fair value of whatever benefits their policyholders are entitled to. An insurance policy is, after all, a contract. But what makes the duty of insurance companies even more pressing is the fact that many kinds of insurance aren’t optional. Every driver is required by law to have auto insurance. Mortgage companies require people to buy homeowners insurance. An industry where the government compels people to buy their product is especially obligated to carry out its fiduciary duty.

So Brady said she lied to the policyholder. It wasn’t her words; it was from a McKinsey script they called “attorney economics.” “Some people choose to hire an attorney, but we would really like the opportunity to work directly with you to settle the claim,” the script read. “Attorneys commonly take between 25–40% of the total settlement you receive from an insurance company plus the expenses incurred. If you settle directly with Allstate, however, the total amount of the settlement is yours.”

Or, as a McKinsey slide stated in all caps, “WIN BY EXPLOITING THE ECONOMICS OF THE PRACTICE OF LAW.”

Adjusters knew that their greatest ally in meeting their 30/60/90 goals were the poor and uneducated policyholders. The ones with poor English, the elderly living on Social Security, or the ones in desperate need of the money to pay bills. “If you knew they were living paycheck to paycheck, they were a prime target,” Brady said. If Allstate sent them a lowball check in the mail and they cashed it, that was tantamount to settling. “If they cash the check, it is full and final. Kind of scary, isn’t it?”

Under Allstate’s new system, the computer would spit out an estimate. This was Colossus, a program that analyzed hundreds of different injuries entered by adjusters like her. As Brady soon learned, Colossus had been tweaked to lowball claims amounts. It was then her job to persuade the policyholder to accept a claim even lower than the one disgorged by Colossus.

As Enron’s stock kept rising, so did the number of favorable articles, often written by McKinsey consultants who did not disclose to readers that their firm was pulling in tens of millions of dollars from the company they were praising. This undercut the firm’s lofty pronouncements that it would never discuss a client’s business or the advice it rendered. The McKinsey Quarterly praised Enron’s “purported successes and ingenuity no less than 127 times” over a six-year period.

While McKinsey was never implicated in Enron’s illegal activity, many inside the firm and out wondered why such smart people could not grasp the danger of becoming so deeply involved with a company that had difficulty explaining exactly how it earned money. Keeping Enron as a client also raised questions about the quality of the firm’s risk managers, a vulnerability that would surface over and over in the following years.

The following month, another investigation began, this one by Advocate Geoff Budlender, a widely respected human rights activist. With more time, he dug deeper into the contracts. Budlender asked to interview McKinsey, but the firm declined, saying it would only answer written questions.

Budlender demanded an explanation. Benedict Phiri, a McKinsey lawyer, said he would discuss the matter with his colleagues and get back to him. Week after week went by with no reply, despite frequent reminders from Budlender. Finally, two and a half months later, McKinsey said it would be “inappropriate” to respond to Budlender’s “informal” inquiry.

Around the same time McKinsey was working alongside SCL, one of its Dubai-based senior partners, Enrico Benni, was seeking out people across the firm for a new potential Saudi assignment: to perform sentiment analysis in Arabic, one former employee said. McKinsey’s Saudi-based employees highlighted this work on their public profiles. One Saudi-based Elixir employee, Ahmad Alattas, listed “social media monitoring to conduct and study public sentiment analysis” among his jobs. Soon, this new line of work yielded results, but perhaps not the kind McKinsey had in mind.

Abdulaziz, a Saudi national who had been living in Montreal for almost a decade, replied that he was fine. But the person had good reason to be worried. He told Abdulaziz that he had been working with McKinsey on a project for MBS. McKinsey had prepared a report about how the kingdom’s subjects were reacting to government policies. The report identified Abdulaziz, along with some other Saudis, as being highly influential in shaping the public’s opinion, and not in a positive way.

The banal title of the nine-page report, “Austerity Measures in Saudi Arabia,” belies its explosive content. It was sentiment analysis: weaponized. “Omar has a multitude of negative tweets on topics such as austerity and the royal decrees,” read one McKinsey bullet point.

The following month, his phone was hacked, though he was unaware of it for months, according to a report by the Citizen Lab, an organization at the University of Toronto that investigates digital espionage against civil society. In August, Abdulaziz’s two brothers were thrown in jail. Another influential online critic highlighted in the McKinsey report was also arrested, and a third account deemed negative by McKinsey disappeared from Twitter.

The phone hack also compromised Abdulaziz’s communications with a prominent Saudi journalist. The two had been hatching a plan to counter MBS’s emerging techno-authoritarian state, which used armies of internet trolls, called flies, to identify and overwhelm any dissenting online voices.

In September, the journalist had wired Abdulaziz $5,000 to get the project started. The plan was to counter the flies with a swarm of “bees”—peopl...

The journalist’s name was Jama...

On October 2, 2018, Khashoggi, a columnist for The Washington Post, entered the Saudi consulate in Istanbul to pick up some paperwork for his marriage. His Turkish fiancée waited outside for him.

A Saudi assassination squad, alerted that he was set to visit the legation, was in place. Upon entering, Khashoggi was told he was going back to Saudi Arabia. An agent told him to write a message to his son, telling him not to worry “if you don’t hear from me in a while.” He refused. “We will anesthetize you,” he was told. There were sounds of a struggle, Khashoggi saying, “I can’t breathe, I can’t breathe,” then silence after Khashoggi was injected with a drug. Then came the buzzing sound of a saw as his corpse was dismembered. American intelligence agencies concluded that MBS was behind the murder.

The existence of the McKinsey report targeting his colleague Omar Abdulaziz became public in the weeks after Khashoggi’s murder, included in a New York Times story about the Saudi army of online trolls. The story provoked outrage the world over: in the United States, Senator Elizabeth Warren of Massachusetts sent a letter to McKinsey’s managing partner, K...

At the time, McKinsey said it was “horrified by the possibility, however remote, that it could have been misused in any way.” The firm said the report’s “intended primary audience was internal” and that it was put together by a researcher in Riyadh. “Like many other major corporations including our competitors, we seek to navigate a changing geopolitical environment,” the company said, “but we do not support or engage in political activities.”

One former McKinsey consultant gave a very different response. “The firm’s response to the social media mining stuff in Saudi is utter horseshit,” the former consultant said. “I was involved in the conversations that led up to that work with Saudi, and it was much larger and more known about by the leaders in the region than that ridiculous ‘it was only one analyst’ story they released.”

McKinsey had been working with the Saudi government since 2015 on exactly what was in the report—an analysis of how the public would react to cuts in subsidies. It was an intensely political activity, aimed at preserving the Saudi monarchy, working on core political tasks for one of the world’s most repressive regimes.

After Khashoggi’s murder, Saudi Arabia was radioactive. Big names such as Blackstone’s CEO, Stephen Schwarzman, Jamie Dimon of JPMorgan Chase, and Christine Lagarde, then head of the IMF, pulled out of a Riyadh conference championed by MBS—dubbed Davos in the Desert—that happened just weeks after the murder.