A prior S2KM blog post (Business Standards and Practices-1) asserted that structured settlement business standards and practices must improve before the industry can achieve its public policy and revenue potential. The prior post also highlighted historical events that help explain the development of traditional structured settlement business and professional models. This post continues S2KM analysis of traditional and transitioning structured settlement business and professional models and their related business standards and practices.
Before the structured settlement industry can improve and grow, the primary market must address these strategic issues:
- What are the traditional structured settlement business and professional models?
- What problems have traditional structured settlement models created that have restricted industry growth?
- What new business and professional models are competing with traditional structured settlement models?
- How will the business standards and practices of these new models differ from traditional structured settlement models?
The traditional primary market structured settlement business model is a "claim management model" including some or all of the following characteristics:
- IRC section 130 Qualified Assignments as the standard funding model;
- Single product (annuity) predominates;
- No requirement to define injury victim (customer) "best interests" or structured settlement product "suitability";
- Defendant "approved" structured settlement agents;
- Defendant "approved" structured settlement annuity providers;
- Defendant "right of last refusal" to match funding alternatives with affiliated annuity provider quotes;
- Defendant "right" to deny structured settlements to injury victims;
- Defendant strategies to appropriate the structured settlement tax benefit to save costs and/or generate profits;
- Opposition to single claimant 468B Qualified Settlement Funds;
- Failure to fully inform injury victims about IRC section 5891, settlement transfers or case-specific structured settlement protection statutes;
- Failure to promote "full disclosure" and "informed consent" of structured settlement compensation and/or conflicts of interest;
- Misrepresentations including (but not limited to) the "cost" and/or "value" of structured settlements.
The traditional structured settlement "professional" typically refers to himself (or herself) as a "structured settlement broker" or "structured settlement consultant". By background, he or she generally is a life insurance agent or insurance claims representative licensed to sell life insurance and typically sells one product: a single premium fixed payment life insurance annuity.
"Advanced training" for those structured settlement broker/consultant/agents who are members of NSSTA ("America's largest association of structured settlement professionals") may include a one-time one weekend "certification" program (CSSC) at the University of Notre Dame plus continuing education credits at NSSTA-sponsored education conferences. NSSTA's Code of Ethics (a Statement of Ethics and Professional Responsibility) was approved by NSSTA in 1997 "to provide guiding principles to its members and member organizations".
For many structured settlement stakeholders, including some NSSTA members and many structured settlement recipients, the problems with the traditional structured settlement business and professional models are apparent if not obvious:
- For example, NSSTA sponsored a Broker Relations Initiative beginning in 2006 to improve the reputation and public image of structured settlements by establishing more effective broker to broker communication and understanding. Despite many featured presentations and progress reports, however, the Broker Relations Initiative has not yet produced any final report or noticeable industry changes.
- During NSSTA's 2009 Winter Meeting, NSSTA member and speaker Joseph DiGangi addressed problems resulting from the structured settlement industry's traditional "annuity broker" business model. These problems, according to DiGangi, include a stagnant market, negative perceptions of structured settlement participant roles and value, a limited knowledge base and knowledge resources as well as a single product offering. DiGangi proposed an alternative "consultant" business model, which he termed "settlement consulting", with multiple products and services providing added value.
- During NSSTA's 2010 Annual Meeting, featured speaker Dan Clark highlighted NSSTA's stagnating revenue growth. As a remedy for structured settlement industry problems, Clark challenged NSSTA to change from within. According to Clark, "to improve industry performance, NSSTA must discuss both sides of every issue and do what is right."
- DiGangi's proposal and Clark's admonition create challenges that NSSTA historically has been unwilling to acknowledge or address. For example, during NSSTA's 2009 Winter Meeting, featured speaker Rev. Oliver Williams challenged the NSSTA audience to identify structured settlement business conduct that caused "shocked disbelief" among NSSTA members. Noone mentioned Macomber v. Travelers or Spencer v. Hartford or allegations by structured settlement recipients of fraud, Rico violations, misrepresentations, and rebating by primary market participants. Instead, the NSSTA members identified "structured settlement factoring" and how factoring companies have "stolen" the structured settlement brand.
- Staying focused on NSSTA, "shocked disbelief" and "structured settlement factoring", what should be surprising is how NSSTA has attempted to ignore (from their business practice and responsibility perspective) and simultaneously demonize the secondary structured settlement market. Consider, for example, the NSSTA website. If you want to "Learn More" about structured settlements:
- NSSTA encourages you "to contact a structured settlement broker or life insurance company in your area".
- However, if someone has offered to purchase your structured settlement payments, NSSTA advises you to contact someone else - "a trusted attorney" or "the office of your state's attorney general" - adding that "advocates for consumers and the disabled have publicly called attention to the practices of firms engaged in the purchase of structured settlement payments".
- NSSTA's identification of structured settlement tax rules highlights IRC 104(a)(2) and 130 while omitting IRC 5891 - which includes the only Federal tax definition for a structured settlement.
- Consider also NSSTA's Code of Ethics and Professional Responsibility, which provides the following guiding principles for NSSTA member companies, their employees and individual members: integrity, fidelity, honesty, candor, competence, faithfulness, fairness, disclosure, due diligence, knowledge, skills, honesty, dignity, courtesy, professionalism and compliance with applicable federal and state laws.
- How do NSSTA's "guiding principles" square with:
- Allegations of primary market illegal activities by structured settlement recipients in the Macomber v. Travelers and Spencer v. Hartford class action lawsuits;
- A stagnant primary structured settlement market with negative stakeholder perceptions of participants' roles and value, a limited knowledge base and resources plus a single product offering; and/or
- Peripheral markets such as special needs attorneys, life care planners, Medicare set-aside professionals and the structured settlement secondary market that are growing?
- The answer is they don't square. A fundamental mismatch exists between NSSTA's Code of Ethics and Professional Responsibility and traditional structured settlement business practices and standards. The reasons include:
- NSSTA's Code of Ethics and Professional Responsibility does not contain any enforcement procedures and NSSTA has made no attempt to enforce its Code of Ethics and Professional Responsibility.
- NSSTA adopted its Code of Ethics and Professional Responsibility in 1997. More recent structured settlement laws and related market developments have substantially changed the structured settlement market. NSSTA's Code is outdated and largely irrelevant for the transitioning structured settlement market.
- The traditional structured settlement "claim management" business model and "annuity broker" professional model include flaws and conflicts as outlined above. Those flaws and conflicts are being exposed and punished in class action lawsuits.
For S2KM's continuing analysis of structured settlement business standards and practices, see S2KM's structured settlement wiki.