Insurance has always been built on trust: a guarantee that when disaster strikes, help will come. Yet history reveals a complicated truth. In the early 19th century, insurers coined the term “moral hazard” to describe how individuals, protected by insurance, might act recklessly. Later, economists like Kenneth Arrow broadened the concept, arguing that insurance could subtly change behavior—making people more likely to take risks or use expensive services simply because they knew they were covered.
But moral hazard doesn’t just lie with policyholders. Insurers themselves are susceptible. Every claim delayed or denied becomes a financial win for the company. This conflict between duty and profit has deep roots and continues to shape the modern insurance landscape. In practice, insurers can exploit the information gap between policyholder and provider, making it hard for consumers to even know when they’ve been treated unfairly.
How Early Insurance Companies Exploited Policyholders
In the nineteenth century, many insurers employed tactics that today seem blatantly unfair. Application forms asked confusing, wide-ranging questions about applicants’ health histories. Even innocent omissions could later be weaponized to deny claims.
Consider Connecticut Mutual Life Insurance’s lengthy questionnaires or the case of August Baumgart, whose failure to mention a minor past illness voided his family’s claim. Even illnesses unrelated to the cause of death could be grounds for nonpayment. In such a system, the burden of perfection rested on the applicant—even when the questions were impossibly broad or misleading.
Such abuses eventually led to reforms, including incontestability clauses, which prevented insurers from voiding policies after a certain period. The idea was to level the playing field: after enough time and payment of premiums, an insurer should no longer be allowed to dig through old paperwork to deny a claim.
Yet while these measures curbed the worst early abuses, they did not eliminate the moral hazard lurking within the insurance industry itself. Over time, insurers developed more sophisticated—and less obvious—ways to avoid fulfilling their promises.
When Strategy Replaces Service
In the 1990s, a new era began. No longer relying solely on legal technicalities, insurers increasingly focused on tactics to delay, minimize, or deny claims outright.
The causes were economic. The “underwriting cycle” of soft markets and hard markets placed enormous pressure on profits. During soft markets, insurers slashed premiums to gain market share, often sacrificing underwriting discipline. When claims inevitably rose, profits fell—and companies responded by tightening claims handling.
Natural disasters amplified this trend. Hurricanes Hugo and Andrew, the Northridge earthquake, and devastating wildfires strained reserves to the breaking point. Companies like Allstate and State Farm faced massive losses, triggering a defensive pivot: protecting capital by scrutinizing, delaying, or denying claims wherever possible.
Internally, claim departments shifted from being service-oriented to becoming profit centers. The idea was not just to verify and process claims, but to extract value by avoiding payments wherever defensible—sometimes even when not. The human cost of these practices, often inflicted on people already facing personal crises, was immense.
From Natural Disasters to Financial Overhauls
Insurers also faced challenges from low investment returns. With interest rates falling, the once-reliable profits from investing premium “float” diminished. Cash flow underwriting became less viable, forcing companies to look inward for savings—primarily by controlling claims costs.
Auto insurance was particularly affected. Medical inflation outpaced general inflation dramatically, squeezing profits even tighter. Programs like Farmers’ “Bring Back A Billion” initiative formalized cost-cutting mandates, turning claims adjusters into profit centers. These mandates often translated into systemic pressure to minimize claim payouts—even if it meant sidestepping fair process.
The pressure intensified as major insurers realized they could boost short-term earnings by controlling the one variable most under their power: claims. Limiting payouts meant more retained earnings, stronger quarterly reports, and happier shareholders. In the short term, the logic was compelling. In the long term, it bred distrust and litigation.
When Shareholders Replaced Policyholders
At the same time, the ownership landscape shifted. Many mutual insurers converted to stock companies, trading their loyalty to policyholders for allegiance to shareholders. Demutualization offered faster access to capital markets and a pathway to rapid expansion—but at a cost.
Executives, now rewarded with stock options, focused on quarterly earnings rather than long-term trust. Delaying or denying claims became not just a tactic but a necessity to satisfy Wall Street. Stock performance was now a daily scoreboard for executive success.
Allstate’s separation from Sears exemplifies this trend. Freed from its retail parent, Allstate embraced aggressive claim management strategies, hiring consulting giant McKinsey & Company to maximize profitability. Across the industry, the message was clear: claims were no longer a sacred obligation, but a cost to be managed, minimized, or avoided altogether.
Even mutual companies that retained their structure began operating with stock-like incentives. The line between policyholder and shareholder blurred, and the customer experience shifted accordingly.
How Marketing Changed the Game
While internal practices hardened, external marketing softened. Insurance advertising, once centered on security and service, pivoted sharply to price. Slogans and imagery no longer promised stability—they promised savings.
GEICO led the way with its humorous gecko ads and “15 minutes could save you 15%” slogans. Progressive, Esurance, and others followed, turning insurance into a price war. Service and trust took a backseat; the cheapest premium won.
Advertising budgets ballooned. Between 2001 and 2006, insurer ad spending doubled. Brands like State Farm and Allstate spent hundreds of millions fighting for consumer attention—and price remained the central hook. In one of the most paradoxical developments, companies advertised trust and fairness while engineering internal systems to resist both.
This shift had consequences. To offer ever-lower premiums while maintaining profitability, companies needed to squeeze somewhere—and claims departments became the obvious target. The result was a system that looked friendly from the outside but could feel adversarial from within.
Restoring Trust in a Profit-Driven System
Insurance was born from community solidarity, a mutual promise to help in times of need. Yet as moral hazard infiltrated the industry’s core, that spirit eroded. When a company’s survival and growth depend on avoiding claims rather than fulfilling them, the ethical fabric of insurance unravels.
Rebuilding that trust requires more than branding. It demands transparency: honest reporting of claims practices, strict enforcement of fair handling standards, and renewed focus on the policyholder as the true customer. Publicly available claim payout ratios, independent review bodies, and mandatory disclosures could all restore accountability.
Regulation must balance innovation with responsibility. Incentives matter, and when those incentives reward nonpayment, the system fails. Consumers must demand not just cheap coverage but fair treatment. Policy comparison tools should evolve to evaluate not only price but claims satisfaction scores.
Ultimately, insurance must return to its roots—a system built on trust, not just transactions. That trust is not just sentimental—it’s economic. When customers believe in the system, they participate willingly. When they don’t, they litigate, churn, or leave. The health of the industry depends on restoring that confidence.
Fair insurance isn’t just about money. It’s about peace of mind. It’s the assurance that in the face of the unexpected, policyholders won’t find themselves battling bureaucracy or justifying their losses to indifferent systems. It means knowing that when disaster comes—whether it’s a fire, a flood, or a life-changing accident—your insurer steps up without delay or evasion. It’s about receiving compassion, not cold calculations. It’s about being greeted with a handshake, not handed a spreadsheet or a phone tree. Only when this commitment is restored can insurance fulfill its true and vital purpose in a just, resilient society—ensuring that people are never left alone when they need protection the most.
