A 2011 National Litigation Management study sponsored by the Council on Litigation Management (CLM):
- Identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives;
- Determined that more than 74 percent of the study's participants rated their available litigation management metrics as "Fair" or worse for measuring the effectiveness of their litigation management programs; and
- Concluded that, to be successful, national litigation management service programs must deliver metrics and analytics that justify the quality, performance, and satisfaction levels litigation management executives are seeking.
S2KM addressed structured settlement "quality" metrics and analytics in a prior blog post and highlighted the historic payout performance of structured settlement annuity providers which has been excellent though not perfect. Fulfilling the promise to pay future periodic payments has represented a primary mission of the United States structured settlement industry for more than 30 years.
This blog post addresses structured settlement "performance" metrics and analytics from the perspective of litigation management executives and focuses upon three issues:
- Structured settlement premium;
- Structured settlement "success ratios"; and
- The cost or cost savings structured settlements generate for defendants and liability insurers.
Structured Settlement Premium
Based upon industry input and sources, S2KM estimates the structured settlement industry has produced approximately $124 billion of annuity premium from 1976 to 2010. For the past five years (2006-2010), the total average annual structured settlement annuity premium has been approximately $5.8 billion per year.
To help evaluate these numbers, compare the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:
- Calculate tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto.
- Exclude: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.
- In 2002, Towers Watson also translated overall tort costs for 2001 into the following categories and percentages: 1) administrative costs (21%); 2) defense costs (14%); plaintiff attorneys (19%); economic loss (22%) and non-economic loss (24%). Towers Perrin discontinued this portion of its analysis in 2002. It was "devilishly difficult" according to Russ Sutter, a Towers Watson principal and actuary who directs their annual tort cost studies, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represented Tower Watson's "best estimate" in 2002.
Based upon Towers Watson's most recent 2010 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that since 2006, more than $160 billion (65%) of United States tort costs annually have represented payments to injury victims and their attorneys.
Structured Settlement "Success Ratios"
In 2007, the National Structured Settlement Trade Association (NSSTA) reported the results of a survey titled "A Study of the Structured Settlement Process Conducted on behalf of the National Structured Settlement Trade Associations".
- The survey was directed by Robert E. Hoyt, the Dudley L. Moore, Jr. Chairman of Insurance at the Terry College of Business at the University of Georgia.
- It consisted of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys).
- Among the conclusions and estimates: only 7% of personal injury settlements between $75,000 and $200,000 include structured settlements; and only 30% of personal injury settlements above $1 million include structured settlements.
Another perspective for structured settlement "success ratios" is provided by the 2011 report of the Joint Committee on Taxation (JCT) which the House Ways and Means Committee and the Senate Finance Committee use for determining the relative merits of achieving specific public policy goals through tax benefits or direct outlays. This 2011 report (which represents the first time the JCT has ever provided a specific category for structured settlements) estimated the Federal tax revenue loss resulting from structured settlements was "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year. Compare these numbers with S2KM's estimate of 716,500 structured settlement annuities sold between 1976-2010.
Structured Settlement Costs or Cost Savings
Since structured settlements were first introduced in the late 1970s, proponents have highlighted "claims cost savings" as a primary justification for defendants and liability insurers to promote and fund structured settlements.
In a 2011 research paper, Jeremy Babener did not discover much empirical evidence to support this premise. Babener's research, however, did uncovered plenty of historical anecdotal evidence providing industry estimates of defense structured settlement savings which Babener summarized as follows:
- From between 50% and 75% in 1974;
- To between 20% and 40% in 1978; and
- More recently to between 20% and 25%.
Based upon this historic anecdotal evidence, Babener concluded defendants and their liability insurers have proven themselves capable in the past of utilizing three structured settlement strategies to reduce their personal injury settlement costs:
- Negotiating with nominal terms rather than real value;
- Profiting from the purchase of a structured settlement; and/or
- Negotiating to benefit from the tax subsidy.
A prior S2KM blog post examines these three defense strategies in the context of the Spencer v. Hartford class action settlement and questions whether and how many defendants and liability insurers can actually save money promoting and funding structured settlements with current business models and traditional business practices in today's interest rate environment.
Compare the average yields on 30-year U.S. Treasury bonds for two five year time periods:
- 1980 to 1984 - 12.21%
- 2006 to 2010 - 4.47%
The impact of drastically reduced interest rates completely reverses the advantageous leverage defendants and liability insurers previously obtained from negotiating with structured settlements. Assuming good business practices (full disclosure, informed consent and no misrepresentations), how do litigation management executives:
- Expect to save money promoting and funding structured settlements?
- Justify the added claim costs generated by defense attorneys and claims adjustors reviewing structured settlement proposals prior to claimants agreeing to resolve a case with a structured settlement?
Perhaps it is time for litigation management executives to re-think structured settlements including the metrics and analytics they use to define success and measure performance as well as alternative structured settlement business models.