That isn't what the incentives point too; in a free market the insurers are aligned to accuracy. An insurer who has a reputation of being unreasonable about payouts won't have any customers - what is the point of taking out a policy if you expect the insurer to be unreasonable about paying? It'd take an odd customer to sign up for that.
If they over-approve they will be unprofitable because their premiums aren't high enough. If they under-approve it'll be because their customers go elsewhere.
Secondly, the reasonablity or unreasonability of payouts is linked to premiums.
In other words, one way that the parsimonious insurer would still have customers is that they offer low premiums compared to the liberal insurers.
Even people who know about the bad anecdotes from reading online reviews will brush that aside for the better deal. (Hey, reviews are biased toward negativity and miss the other side of the story; chances are that wouldn't happen to me.)
The free market doesn't optimize for quality. Firstly, it optimizes for the lowest price for a given level of quality. But the price optimization has a second-order effect of a downward pressure on quality.
If you're selling something and the margin is optimized: it's about as cheap as can be, what you can do is reduce quality by some epsilon, and make a corresponding decrease in price. It still looks like about the same quality to someone not using a magnifying glass and fine-toothed comb, and you have temporary price edge against competitors. That triggers a kind of "gradient descent" of declining quality which bottoms out at some minimum level of quality below which viability starts to get eroded past a point where the market still finds the thing acceptable.
But I expect my insurer to be unreasonable about paying today.
It’s just that A) I didn’t choose this insurer, my employer did and on balance the total package isn’t such that I want a new employer and B) I expect pretty much all my available insurance companies to be unreasonable.
I did say "free market"; that is sort of the standard disclaimer to show I'm not talking about madness that is the US healthcare system. Or if you have your employer choosing insurance for you and it isn't health-related then that is kinda weird and I'm not surprised it is going badly.
Medical insurance companies have profits capped by the federal Medical Loss Ratio calculation, requiring them to spend a minimum percent of premiums on care and related activities. That means the more care they approve, the more premiums they can collect if they’re near the cap currently.
If they over-approve they will be unprofitable because their premiums aren't high enough. If they under-approve it'll be because their customers go elsewhere.