The introduction of two non-traditional "structured settlement" products underscores the expanding role of annuities in personal injury settlement planning (settlement planning) but also raises fundamental questions about suitability, due diligence and industry education.
Pacific Life recently announced a new structured settlement product called an "Index-Linked Annuity Payment Adjustment" (ILAPA). Investment performance and annuity payments will be linked to the Standard & Poor's 500 Composite Stock Price Index, according to structured settlement brokers who participated in Pacific Life's online product introduction. Although Pacific Life hopes to launch its new product by April 1, 2014, the launch date depends on whether and when Pacific Life receives a favorable IRS Private Letter Ruling.
Havelet Assignment Company (Havelet), an independently owned company based in Barbados, is now offering non-qualified (under IRC 130) product plans for claimants or contingent fee attorneys to defer receipt of their settlement award or fee on a pre-tax basis. The plans are funded with investment portfolios, selected by the claimants or attorneys, which Havelet "wraps" with variable annuities. Havelet must issue a private placement memorandum to each prospective client. Investment performance is not guaranteed. Minimum investment funding is $500,000.
Outside of the settlement planning market, equity-indexed and variable annuities represent increasingly popular investments. A March 12, 2014 New York Times article titled "Annuities Not for Everyone, but They Have a Place" cites the following LIMRA statistics: "Variable and indexed annuities accounted for 80.8 percent of the $688.2 billion of annuities sold in the three years through 2013, compared with 74 percent in the previous seven years."
By comparison, estimated structured settlement annuity premium totaled $5.13 billion in 2013 (of which $164.9 million represented non-qualified structured settlement annuity premium) and $139.5 billion from 1975 through 2013.
Based upon the most recent Towers Watson Annual Study of United States Tort Cost Trends, and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates more than $160 billion per year of United States tort costs have represented payments to personal injury victims and their attorneys since 2006.
Pacific Life and Havelet's new product offerings add to the growing list of settlement planning products which S2KM noted in its blog report about the AAJ 2014 Winter Meeting. Additional marketing feedback S2KM received from structured settlement brokers who exhibited at the AAJ meeting:
- Structured settlement annuities are one of several product offerings (including single premium immediate annuities (SPIAS), fixed-indexed annuities and managed money) some leading structured settlement brokers are already selling.
- At least one leading structured settlement brokerage company sold more SPIAs and fixed-indexed annuities combined during 2013 than structured settlement annuities - and uses SPIAS almost exclusively to fund Medicare Set-Aside Arrangements (MSAs).
S2KM's AAJ blog report highlights fundamental questions about these expanding product offerings, the resulting "blended products" and emerging business models.
The Pacific Life and Havelet products raise additional issues which S2KM will address in subsequent blog posts:
- Are equity-indexed and off-shore variable annuity products suitable for personal injury victims?
- What product suitability standards should apply?
- What qualifications are needed to sell these products - and/or to perform due diligence on behalf of personal injury claimants and plaintiff attorneys?
- Are structured settlement and settlement planning professional associations providing their members with appropriate educational programs to understand settlement annuities and address related suitability and due diligence issues?