How does it work?

Neither insurance companies nor CSC will divulge exactly how they determine the Colossus baseline value. Most of Colossus' calculation of your claim is based on insurance data to which you don't have access, and insurance companies certainly do not want former insurance adjusters to tell anything about it either, see the article from the Seattle Post-Intelligencer.
However we do know that the value of your claim will differ greatly from one region to another and also by the baseline that your insurance company has set. For example, auto insurers using the software select a number of closed, already-settled claims from each region in which they do business to provide the "baseline" settlement value for each type of injury. For example, an insurer might pick 200 back injury cases from a particular region that previously settled for between $1,000 and $5,000 and enter them into the Colossus program. Based on this past settlement data, Colossus calculates a settlement range for similar claims. Therefore the baseline value will be different for each insurer.
But who is there to ensure that the closed claims selected truly represent the norm? Wouldn't it be in the interests of the insurance industry to "pad" the research by holding back reports of high value settlements? There is no assurance whatsoever that Colossus represents anything other than what best serves the interests of the insurance industry. No one has certified that the base from which the data are drawn was fairly and objectively constructed.
By using Colossus, most insurance companies will try to lower the value of your claim, and will not take into consideration stress, or emotional trauma, loss of enjoyment of life, loss of consortium (relationship), inability to participate in activities that you used to enjoy, or any number of other things that a jury will consider. These factors are not accounted for by the Colossus software.