Beyond Structured Settlements

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

Settlement Consulting - 4

This post continues S2KM analysis and commentary about "settlement consulting" as an alternative business model for structured settlements introduced by Joseph DiGangi at the NSSTA 2009 Winter Meeting.

DiGangi characterized structured settlements as a fundamental settlement consulting product and featured structured settlements in a settlement consulting case example.

DiGangi's discussion identified four stages within the settlement consulting process:

• Analysis - including needs assessment;
• Planning;
• Implementation; and
• Monitoring.

DiGangi raised the issue of whether settlement consulting includes "litigation support" services.

Prior S2KM posts about settlement consulting have:

• Reviewed DiGangi's NSSTA presentation;
• Discussed business definitions and boundaries; and
• Outlined settlement consulting history - from a structured settlement perspective.

This S2KM post republishes and analyzes a structured settlement transaction diagram S2KM developed in 2005 with graphic artist Keith Burtoft. The purposes of the transaction diagram:

• Demonstrate the complexity of structured settlements:
  • In the context of settlement consulting; and
  • From the perspective of an injury victim.
• Provide an analytic framework to:
  • Study the role of structured settlements in settlement consulting;
  • Compare alternative structured settlement business models:
    • Settlement consulting (or planning); and
    • Traditional claim management.
  • Discuss the roles, expertise and work product of various settlement consulting stakeholders;
  • Define "due diligence" and discuss potential professional liabilities;
  • Identify settlement consulting legal entities and improve legal documentation;
  • Improve settlement consulting business standards and performance metrics;
  • Highlight the importance of IRC 468B QSFs;
  • Demonstrate linkage between various settlement consulting components: including
    • Primary and secondary structured settlement annuity markets;
    • Structured settlement annuities and settlement trusts;
    • Settlement trusts and the secondary annuity and life markets.
  • Prioritize legislative and regulatory issues and develop lobbying strategies.

In comparison with 468B QSF settlement consulting, traditional structured settlement analysis (the claim management model):

• Focuses more narrowly on the IRC 130 qualified assignment transaction;
• Assumes structured settlement payees are injury victims - as opposed to trustees and custodians;
• Ignores:
  • IRC 468B qualified settlement funds (QSFs);
  • The secondary structured settlement market;
  • Non-qualified structured settlements.
• Attempts to construct planning strategies and solutions as part of the litigation and negotiation process;
• Encourages "early involvement" by plaintiff and defense structured settlement agents who:
  • Represent the same annuity providers;
  • Collaborate to maximize shared annuity sales;
  • Provide similar "value-added" services (including litigation support) to justify commissions;
  • Lack licensing and training to sell non-annuity products;
  • Fail to disclose their conflicts of interest or their compensation-sharing arrangements.
  • Assume, but fail to address, the "best interests" of injury victims and other structured settlement stakeholders.

Settlement consulting occurs, and will continue to occur, in both the claim management (defense) structured settlement model and the settlement planning (468B QSF) structured settlement model.

• S2KM believes the 468B QSF settlement consulting (and/or planning) model is "vastly superior" to the claim management model for the vast number of settlement consulting stakeholders.
• Settlement Consulting Stakeholders:
  • Injury victims and their families;
  • Federal and state governments including regulators;
  • Judges;
  • Mediators;
  • Guardians;
  • Trustees;
  • Custodians;
  • Defendants and their insurers and re-insurers;
  • Plaintiff trial attorneys;
  • Special needs attorneys;
  • Medicare set-aside professionals;
  • Financial and insurance advisers and intermediaries;
  • Life care planners; and
  • Allocators.
• "Vastly superior" should be (and hopefully will be) defined and demonstrated by industry metrics (including time and money metrics) comparing the claim management and settlement planning models and developing the best alternative with continuing improvements.
• S2KM further believes the 468B QSF settlement consulting model will substantially grow the structured settlement market.

For additional S2KM analysis:

• Structured Settlement Surveys
• Structured Settlement Credo
• Settlement Trust Due Diligence
  
• Knowledge Management and Structured Settlements
  

NSSTA 2009 Winter Meeting

"Protect the business model and prepare for the future" was the unstated theme as the National Structured Settlement Trade Association (NSSTA) hosted its 2009 Winter Meeting in Orlando, Florida January 28-30.

From NSSTA's perspective, the structured settlement model depends upon:

• Helping injury victims and improving dispute resolution;
• IRC sections 130 and 104(a)(2);
• Integrating these tax preferences with other government benefits including:
  
  • Social Security;
  • Medicare;
  • Medicaid;
  • Veterans benefits; and
  • Federally-assisted housing.
• Cooperation among defense and plaintiff intermediaries;
• Bi-partisan political support in Washington, D.C.;
• Controlling negative secondary market conduct and publicity;
• Continuing payment performance by all annuity providers.

The challenges facing NSSTA, and the structured settlement industry, include:

• The impact of the financial crisis;
• Anticipated legislative and regulatory changes;
• Identifying new leaders;
• Growing the market;
• Addressing 468B and the secondary market;
• Reconciling claim management and settlement planning;
• Transitioning to Internet-based technologies and business models.

Directly or indirectly, NSSTA's educational program in Orlando addressed all of these issues.

Educational program highlights:

Injury Victims

• Andrew Imparato - Imparato, President and CEO of the American Association for Persons with Disabilities (AAPD), was NSSTA's keynote speaker in Orlando. Imparato praised structured settlements as one possible model for modernizing other federal entitlement programs. NSSTA and AAPD have collaborated previously on legislative initiatives including IRC 5891. NSSTA participated as an event sponsor at the 2008 AAPD Gala Leadership Dinner. Imparato spoke previously at NSSTA's 2007 Fall Meeting. The 2009 AAPD Gala Leadership Dinner is scheduled for March 4 in Washington, D.C.
• Eric Vaughn - NSSTA's lobbyist summarized existing federal consumer protection legislation and highlighted some of the consumer and investment protection legislative proposals and issues now before Congress. Although he anticipates federal reforms, Vaughn did not predict whether the primary or secondary structured settlement markets will end up inside or outside any legislative and regulatory net.

Washington Reports

• Congressman Kendrick Meek - Congress Kendrick B. Meek, a Democrat representing Florida's 17th district, addressed economic challenges facing President Obama and Congress. TARP has not served the purpose Congress intended according to Congressman Meek. He predicted continued economic problems "for at least 15 months" including the structured settlement industry. To be effective legislatively, Congressman Meek recommended NSSTA feature "real stories and real people". Congressman Meek further stated: "now is the time to come together" legislatively to protect and improve the structured settlement industry. Congressman Meek also confirmed his candidacy for the U.S. Senate seat which will be vacated when Florida Republican Mel Martinez retires in 2010.
• Eric Vaughn - Vaughn's summaries of NSSTA's political challenges and strategies highlight every NSSTA meeting. In Orlando, Vaughn discussed lobbying opportunities for structured settlements both in Congress and within the Obama Administration. Vaughn provided his political analysis of current Congressional committees as well as proposed legislation important for structured settlements. Vaughn urged all NSSTA members to attend NSSTA's 2009 Annual Meeting April 29 to May 1 in Washington, D.C.

Plaintiff and Defense Brokers - NSSTA's educational program featured two panels addressing plaintiff and defense structured settlement cooperation.

• James Early and Ronald Sullivan - Early (defense) and Sullivan (plaintiff) agreed on most issues: their collaborative objectives include facilitating settlements and taking care of injury victims; both plaintiff and defense brokers are needed; clients should not be able to dictate whether and how brokers share commissions; most brokers are "good people"; 468B funds should be limited to multi-claimant cases and not utilized to eliminate defense brokers. Their only stated disagreement concerned "approved lists" with Sullivan asking what is wrong with injury victims selecting their own annuity providers?
• Roger Bernstein; Bruce DeBacher; and Michael Goodman - Bernstein (special needs attorney), DeBacher (defense) and Goodman (plaintiff) discussed how each helps to settle cases by adding value. Bernstein deconstructed a sample life care plan and integrated collateral benefits to reach "reasonable" settlement expectations. DeBacher and Goodman explained how to build a settlement in an adversarial context, emphasized the need for early involvement and agreed upon the advantages of having both a plaintiff and defense structured settlement broker. They expressed shared concerns: trust companies using factoring to sell against structured settlements; and the decline in small cases resulting from defendants' de-emphasis of structured settlements.

Settlement Consulting - Joseph DiGangi addressed problems the structured settlement industry faces with its historic "annuity broker" business model. According to DiGangi, these problems include a stagnant market, negative perceptions of roles and value, limited knowledge base and resources as well as a single product offering. DiGangi proposed an alternative "consultant" business model with multiple products and services providing added value. Using a case example, DiGangi constructed a planning solution matching the injury victim's "needs and wants" for which he utilized a structured settlement annuity as the foundation product. For structured settlement professionals who lack the expertise or licensing to offer comprehensive solutions, DiGangi recommended teaming up with other professionals.

IRC Section 468B - With Henry Strong moderating, William Winslow and James Klapps discussed the use of 468B funds in cases involving multiple claimants. Their presentation objectives included helping brokers use 468B to expand their structured settlement business and highlighting errors that brokers and their clients should avoid. The presentation purposely omitted references to controversial single claimant 468B issues as well as technical tax and administrative issues. Instead, Winslow and Klapps provided a general introduction to IRC 468 plus encouragement for uninitiated structured settlement professionals that IRC 468B business opportunities and issues do, in fact, exist.

Note: for persons interested in understanding the single claimant 468B controversy, see: Robert Wood's article titled "Single-Claimant (468B) Qualified Settlement Funds?" and Richard Risk's article titled "A Case for the Urgent Need to Clarify Tax Treatment of a Qualified Settlement Fund Created for a Single Claimant" ". For information about technical 468B tax and administrative issues, see Wood's new book "Qualified Settlement Fund & 468B". For information about structured settlements and 468B funds, see Section 3.08B of "Structured Settlements and Periodic Payment Judgments" (Release 44) written by Daniel Hindert, Joseph Dehner and Patrick Hindert.

The Secondary Market

• As part of the NSSTA Legal Committee's "All Things Considered" presentation, Illana Hanau and Michael Miller spoke about structured settlement secondary market issues. Hanau summarized historic abuses and continuing bad business practices by structured settlement factoring companies. Her examples: In re Wiggins, a 2001 Idaho case involving Peachtree Settlement Funding, and the Fresno County cases involving 321 Henderson (a J.G. Wentworth affiliate). Henderson is appealing the Fresno County cases. Hanau also summarized results from a "random sample" of factoring cases as evidence of bad business practices by factoring companies. Miller summarized other business activities in which some structured settlement companies engage: the secondary market for life insurance; the purchase of taxable annuity products; and litigation funding.
• During his "Business Ethics" discussion, Rev. Oliver Williams asked the audience to identify structured settlement business conduct that has caused "shocked disbelief" among NSSTA members. As one example of such "shocked disbelief", NSSTA attendees identified structured settlement factoring. More specifically, that factoring has dismantled many "permanent" structured settlement case "solutions" and that NSSTA's "proscriptive" political strategy for factoring (IRC 5891and the state protection statutes) has resulted unexpectedly in substantial secondary market growth.

Internet Transition - Patrick Hindert, S2KM's blog author, led a discussion titled "Web 2.0: How to Improve NSSTA's Online Communication. Learning and Collaboration". Hindert introduced and proposed a NSSTA wiki prototype designed to support NSSTA's committee policies and procedures.

For S2KM reports about prior NSSTA meetings as well as other settlement planning professional associations, see S2KM's structured settlement wiki.

Structured Settlement Credo - 5

In prior blog posts, S2KM identified traditional structured settlement credo and highlighted its importance. S2KM disagrees with fundamental aspects of traditional (claim management) structured settlement dogma and predicts its demise and/or evolution based upon existing laws and business developments.

As a counterpoint, this S2KM post outlines a potential strategy for those stakeholders who hope to preserve, protect and enforce traditional structured settlement credo in a changing market.

Rule 1: Avoid market research that addresses traditional structured settlement credo.

• "Squandering" injury victims
  • Richard Halpern's recently announced discovery of the Holy Grail of structured settlement dissipation studies (see: Structured Settlement Credo - 3) presents a conundrum for the traditional industry.
  • Should the structured settlement industry examine this holy relic - or let sleeping studies "lie"?
  • Although Halpern claims this study confirms traditional structured settlement credo, Halpern's study creates potential credo problems.
  • What if Halpern's announced study fails to define and distinguish "legitimate expenses" and "squandered resources"?
  • Are cash settlement dollars spent for food, clothing, shelter, medical expenses, education, etc. "legitimate" or "squandered"?
  • Recommendations for supporters of traditional structured settlement credo:
    • Stop dissipation research. Accept at face value Halpern's announced discovery as credo confirmation.
    • Ignore alternative explanations such as underfunded settlements or Andrew Imparato's assertion that "existing government benefit programs maintain people in poverty and punish people who try to escape poverty".
    • Continue to recite traditional industry mantras:
      • Studies show nine of ten injury victims squander their lump sum settlements within ten years.
      • Structured settlements enable injury victims to live free of reliance on government assistance.
• Good People and Bad People
  • Do not ask structured settlement recipients (especially recipients who have transferred or seek to transfer payment rights) to comparatively evaluate:
    • The Good People who sold them a structured settlement; or
    • The Bad People who have purchased, or have offered to purchase, payment rights.
  • Do not ask plaintiff attorneys who state they strongly support structured settlements:
    • Why they recommend certified financial planners and trust officers (Bad People) as financial advisers for injury victims more frequently than structured settlement professionals (Good People); or
    • Why relatively few of their injury victim clients select a structured settlement.
  • Do not survey structured settlement professionals (Good People) about traditional structured settlement credo without threatening to expose and punish any Good People whose attitudes and activities violate traditional structured settlement credo. As an alternative approach:
    • Require all Good People to sign loyalty oaths;
    • Encourage "watchdogs" to expose Good People who are really Bad People in disguise;
    • Punish Bad People who disguise themselves as Good People with expulsion from industry associations and eliminate them from "approved lists".

Rule 2: Avoid public discussions, or private discussions with injury victims and their attorneys, about traditional structured settlement credo.

• Injury Victim Advocates - Structured settlements protect the needy from the greedy. Don't discuss:
  • Conflicts of interest - such as:
    • Single product licensing and training;
    • Contractual and legal loyalty to annuity providers;
    • Legal and business relationships with defendants; or
    • Commission sharing relationships.
  • Competing products:
    • Don't dignify competing products with names. Refer to them instead as "cash outs" and recite the structured settlement mantras identified in Rule 1 above.
    • Although proposed tax-free savings accounts may be advantageous for some disabled people, structured settlements already exist and therefore justify an injury victim "carve-out".
  • Settlement planning IRC sections that have altered the primacy of IRC Sections 130 and 104(a)(2):
    • IRC 5891 - Ignore the "structured settlement" definition in IRC section 5891 titled "Structured Settlement Factoring Transactions". Traditional structured settlement credo views the primary (Good) and secondary (Bad) markets as completely separate.
    • IRC 468B (and regulations) - Remember: without additional legal authority: "one or more contested or uncontested claims" actually means "two or more".
  • Transparency - this subject is acceptable so long as there is no discussion of:
    • Compensation disclosure;
    • Informed consent;
    • Qualified settlement funds; or
    • The secondary market.
  • "Win-win" Dispute Resolution - never discuss:
    • How and why structured settlements save money for defendants and their insurers; or
    • Structured settlement issues created by the Deficit Reduction Act of 2005.
• The Internet
  • Thomas Friedman ("The World is Flat") and many other commentators have described the leveling (democratizing) impact of the Internet where anyone can ask questions and express opinions.
  • High priests of traditional structured settlements beware! Web 2.0 creates challenges and dangers for your credo. Ignore the Internet. Keep reciting your claim management mantra.

Structured Settlements in 2009 - 1

S2KM's first reporting and analysis for the structured settlement industry in 2009.

Prior S2KM analysis

• The Future of Structured Settlements
• Structured Settlement Transaction Diagram
• Knowledge Management and Structured Settlements
• Structured Settlements in 2008
  • Part 1 - Historic Context
  • Part 2 - Professional Associations
  • Part 3 - Industry Challenges
  • S2P2J Release 44
• Structured Settlements in 2007
• Structured Settlements in 2006
• Structured Settlement History - up to 2005

Preliminary 2009 Calendar

• January 28-30 - NSSTA Winter Meeting in Orlando
• February 7-11 - AAJ and NATLE Winter Meetings in New Orleans
• March 6-7 - ASNP Annual Meeting in San Diego
• March 31-April 5 - NAELA Annual Meeting in Washington D.C.
• April 27-28 - SSP Annual Meeting in Washington D.C.
• April 28 - May 1 - NSSTA Annual Meeting in Washington, D.C.

S2KM 2009 Knowledge Work - by Patrick Hindert, S2KM's Managing Director:

• NSSTA Winter Meeting - Hindert will lead a discussion titled "Web 2.0: How NSSTA Members Can Improve their Online Communication, Learning and Collaboration Skills".
• ASNP Annual Meeting - Hindert will introduce a wiki to support a presentation by Frank Johns, Kevin Urbatsch and Hindert titled "Special Needs Settlement Planning (SNSP) Case Anatomy".
• S2P2J Release 45 - Hindert will help update existing analysis in "Structured Settlement and Periodic Payment Judgments" (S2P2J) about settlement planning due diligence.
• S2KM Blog - structured settlement industry issues S2KM will continue to report and analyze:
  • Transition from
    • Claim management to settlement planning
    • Web 1.0 to web 2.0
  • Impact of the
    
    • Financial crisis - including insolvencies, guarantee funds, investment performance and rating agencies;
    • Obama administration - including new legislation and regulations.
  • Interaction between
    • Insurers (annuities) and banks (trusts, accounts, funds)
    • Primary and secondary markets
    • Structured settlements and government benefits

Structured Settlements in 2008 - 3

This S2KM blog post, the third of three analyzing structured settlements in 2008, highlights the challenges facing the structured settlement industry as it enters 2009.

Two prior S2KM blog posts evaluated 2008 from an historical perspective (Structured Settlements in 2008 -1) and summarized the conferences S2KM attended throughout the year (Structured Settlements in 2008 - 2).

Who does your client trust? The National Structured Settlement Trade Association (NSSTA) spotlighted the "trust issue" during its 2007 Winter meeting when NSSTA also reported the results of its structured settlement survey of injury victims and attorneys. Structured settlements require trust by injury victims and their attorneys that:

• Structured settlement consultants are qualified professional financial advisers; and
• Annuity providers will pay promised future periodic payments.

Traditionally important to structured settlements, issues of trust have been magnified in 2008 by the widespread financial collapse that required a federal bailout of AIG and called into question the reliability of financial rating assessments as well as the protection afforded consumers and investors by government regulators. A corollary issue for structured settlement consultants is "professionalism" - one of four strategic priorities NSSTA President Chris Diamantis identified during the NSSTA 2008 Annual Meeting.

• Should injury victims and their attorneys trust structured settlement consultants and engage them as financial advisers?
• What are the professional qualifications and services of individual structured settlement consultants?
• Are structured settlement consultants problem solvers or product pushers?
• Do they understand their own product - an increasingly complex transaction as visualized in this structured settlement diagram ?
• Are structured settlement consultants capable of objectively and comprehensively advising injury victims and their attorneys about such fundamental structured settlement issues as:
  • IRC 468B;
  • IRC 5891;
  • State-specific structured settlement protection statutes;
  • The Medicare Secondary Payer Statute; and
  • The Deficit Reduction Act?
• Are individual structured settlement consultants licensed and educated to sell non-insurance investment products?
• Are they professionally capable of recognizing, and do they proactively communicate, their own conflicts of interest?
• Do they proactively disclose their structured settlement compensation arrangements and obtain an injury victim's informed consent for such compensation?

How strong are structured settlements? The structured settlement industry should expect injury victims and their attorneys to demand additional assurances in 2009 about the financial security of structured settlement annuities. If "sophisticated" investors and financial institutions are hoarding cash and/or buying U.S. government securities, why should injury victims and their attorneys accept long term financial promises with limited or no liquidity? Will these traditional industry arguments continue to successfully drive structured settlement annuity sales in 2009:

• Except for United States treasury obligations, life insurance annuities are among the most secure long term investments.
• Fixed annuities are especially secure because they do not depend upon the vagaries of interest rates and securities markets.
• Fixed annuities, however, require the obligating party(s) to remain in business for the duration of the annuity obligation.
• The 30 year performance record of structured settlement annuities (to date) has been close to perfection.
• With strong support from legislators, regulators and judges, the structured settlement industry has survived its worst potential disasters.
• These potential disasters include the failures of AIG, Executive Life; Confederation Life; Capital Life; and Monarch Capital.
• By contrast, the most spectacular structured settlement failures have not involved annuities.
• These failures, which include SBU and Stanwich, involved IRC 130 structured settlement treasury bond trusts - i.e. (poorly or criminally) managed assets.
• Life insurance companies that issue structured settlement annuities are regulated by state insurance departments.
• State insurance guarantee funds provide a safety net for individual company failures.
• Life insurance companies that issue structured settlement annuities, therefore, are among the strongest of the financially strong.
• If injury victims want income tax-free periodic payments with lifetime security, they should include a structured settlement annuity as part of their settlement plan.

Competing business models - two alternative business models will continue to compete in 2009 for the future of structured settlements:

• The traditional claim management (defense-controlled) business model characterized by:
  • IRC 130 as a funding model;
  • Single product (annuity) orientation;
  • Defendant "approved" structured settlement agents;
  • Defendant "approved" structured settlement annuity providers;
  • Defendant "right of last refusal" to match funding alternatives;
  • Defendant "right" to deny structured settlements to injury victims;
  • Opposition to single claimant 468B;
  • Failure to fully inform injury victims about settlement transfers;
  • Failure to promote full disclosure and informed consent of structured settlement compensation.
• The emerging settlement planning (plaintiff-controlled) business model characterized by:
  • IRC 468B and 130 as a two-step, court-approved funding model;
  • Multiple product (annuity and trust) alternatives;
  • Integration of structured settlements with other government benefits;
  • Claimant selection of structured settlement consultants;
  • Claimant selection of structured settlement annuity providers;
  • Claimant's right to a structured settlement;
  • Claimant's right to information about the secondary market prior to settlement;
  • Claimant's right to full disclosure and informed consent about structured settlement compensation.

Primary vs. secondary structured settlement markets

• The National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) cooperated in 2000 and 2001 to draft the Model State Structured Settlement Protection Act and to help enact IRC section 5891.
• Relatively limited educational, marketing and transactional interaction, however, has occurred historically between the primary and secondary markets.
• S2KM's 2006 concept map ("How the Primary Market Views Factoring") highlights the generally hostile attitude many primary market participants continue to express toward the secondary market and factoring companies.
• Among other results, the primary market's attitude has limited:
  • The education structured settlement stakeholders have received about settlement transfers;
  • The advice and assistance structured settlement consultants offer their customers about settlement transfers.
• One of the continuing industry challenges in 2009 will be whether various factions within the primary and secondary markets are able to work collaboratively to improve and expand structured settlements.
• As a positive developments:
  
  • NSSTA, the Society of Settlement Planners (SSP), and the Academy of Special Needs Planners (ASNP) each offered educational programs about settlement transfers during 2008;
  • Representatives of the primary and secondary markets jointly addressed improving structured settlement business practices at both the SSP and NASP 2008 Annual Meetings as well as the 2008 Structured Settlement Thought Leadership Conference.

Structured Settlements and Government Benefits

• A traditional structured settlement industry argument, promoted by defenders of the claim management business model, proclaims "structured settlements enable injured victims to live free of reliance on government assistance".
• This promotional statement is false and misleading. Many, if not most, structured settlement recipients depend upon government benefits in addition to structured settlements to address basic financial needs.
• These government benefits include: Social Security, Medicaid, Medicare, Veterans Benefits and Federally Assisted Housing.
• As David Lillesand, a leading social security and special needs attorney, stated at the SSP 2008 Annual Meeting: Medicaid alone represents a "life or death issue" for disabled persons including structured settlement recipients.
• The challenges of maximizing and successfully integrating government benefits are more complicated with a structured settlement than with a lump sum benefit in part because of a lack of legal authority.
• With anticipated budget cuts and reforms for Medicaid and Medicare in 2009, the structured settlement industry must improve and expand its educational and lobbying strategies if it expects structured settlements to play a vital role in this changing legislative and regulatory landscape.

Growing the structured settlement market

• As evidenced by annuity premium, the primary structured settlement market has not grown since 2001.
• Several structured settlement annuity providers have left the market since 2006. Concurrently, the number of individual structured settlement consultants remains relatively constant while their average age continues to increase.
• Recent structured settlement surveys and market studies by NSSTA, AIG, J.G. Wentworth and Towers Perrin confirm opportunities exist to grow the structured settlement market and suggest the structured settlement market is underperforming.
• Some of the important issues related to structured settlement market growth:
  
  • Managing transition and change
  • Structured settlement advocacy
  • Marketing to plaintiff attorneys
  • Problem solving vs. product sales
  • Building settlement planning teams
  • 468B as a standard funding model
  • Integrating structured settlements with settlement trusts
  • Improving industry Internet applications and skill sets
  • Continuing market research
• In a 2008 S2KM interview, paralympic champion Randy Snow offered the following advice for successfully transitioning and growing the structured settlement industry: listen to the customer; design the best products; surround yourself with the best people; have fun.

Thank you and best holiday wishes to all structured settlement stakeholders who followed S2KM's blog reports during 2008. The New Year should be interesting and challenging for the financial markets generally and the structured settlement industry more specifically.