Beyond Structured Settlements

Settlement Planning 2012 Conferences

During the past two months, S2KM attended and reviewed three national conferences that featured settlement planning issues:

• ASNP 2012 Annual Meeting
• Risk Settlement Planning Practicum - see also: Structured Settlements and Settlement Planning
• SSP 2012 Annual Meeting
  • Part 1
  • Part 2

 In addition to many technical and product presentations (identified and/or summarized in the above links), what did attendees learn about fundamental settlement planning issues?  And what fundamental issues still need to be addressed more directly at future conferences before settlement planning becomes a recognized profession?

Definitions - Three conference participants offered definitions for "settlement planning" and/or "settlement planner":

• Joseph Tombs - "Settlement planning is a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life. Settlement planners represent a blend of several professionals: part tax lawyer, trial lawyer, special needs lawyer, financial planner, annuity specialist, social worker, and medical case worker."
• Timothy Morbach - "Settlement planning requires due diligence and informed consent. In that context, settlement planning provides a framework within which settlement stakeholders are able to craft case-specific terms and conditions, legal documents, financial instruments, plus related work product, to resolve claims and achieve safe harbor reflecting their respective best interests."
• Patrick Hindert - "The primary difference between special needs planning and settlement planning is that special needs planning includes clients whose disabilities result from many causes including but not limited to personal injury or workers compensation accidents."
• Note - "Rule 1: Terminology" in the SSP Standards of Professional Conduct provides multiple definitions related to settlement planning including the following for "settlement planner": "a representative who provides advice and other services to a person participating in the design, negotiation or implementation of a settlement or satisfaction of judgment for the benefit of a person claiming a legal entitlement to an award of damages or other compensation. A settlement planner may represent a plaintiff, a defendant, an insurer, a guardian ad litem, an heir of a claimant, an attorney or another person participating in the settlement process."

Emergent Profession - Several conference speakers who discussed settlement planning from a structured settlement perspective described settlement planning as a larger and more complex successor business and profession:

• Joseph DiGangi - "Today we find our industry at a crossroad. In order to move forward, our only choice is to build great business models around the planning first approach. Settlement planning represents a needs-based consultative business model based on benefits, not products."
• Joseph Tombs - "Selling structures is easy. Expectations are low. Any primate can run quote software. A fixed annuity is one of the most simple financial products in the world. We are building a new profession that requires constant education and practice standards. Settlement planning increases expectations and potential liabilities. The more we study and practice settlement planning, the more we realize its complexity and understand its challenges."
• Charles Schell - "The Claims Management model benefits the settlement planning industry and Settlement Planners should acknowledge the benefits which include product marketing and continued protection of IRC sections 104(a)(2) and 130. Concurrently, defense brokers should recognize the benefits of collaborating, rather than competing, with Settlement Planners. These benefits include access to and trust of the customer, an awareness of financial needs and family issues plus multi-product financial solutions that feature structured settlements and enhance their sale."
• Jack Meligan - "SSP and its members have been promoting the practice of Settlement Planning as a more comprehensive solution for the financial issues facing personal injury victims and their families, and the profession of Settlement Planning as the next evolutionary step for members of the financial and legal communities that serve these injured Americans."
• Patrick Hindert - "The structured settlement business models that seem "normal" today began with a choice that made sense in the late 1970s and early 1980s. They have survived despite changes impacting the justification for that choice. Settlement planning is an emergent system in which many different elements interact. Settlement planning is producing a new business model that is influencing all of its constituent elements including structured settlements."

Multi-Professional - The professional backgrounds of conference participants provides some indication of an emerging community of professional practice and its collective knowledge base:

• Special Needs Attorneys - Michele Fuller, David Lillisand; Kevin Urbatsch; Rene Reixach; Jason Lazarus; Annette Hines; Linda Brown; Vincent Russo; Michael Amoruso; Harry Margolis.
• Tax attorneys - Robert Wood; Jeremy Babener; David Higgins.
• Miscellaneous attorneys - Professor Carl Pierce; Richard Risk; Daniel Hindert; Patrick Hindert; Karen Meyers; Mark Popolizio; Steve Riley.
• Settlement Trustees - Travis Finchum; Frank Maguire; Christi Fried; Wesley Cosgriff; James Creel.
• Financial and insurance professionals - Jack Meligan; Charles Schell; Joseph Tombs; Joseph DiGangi; Mark Wahlstrom; Mal Deener; Timothy Morbach; John Woolway; Robert Noack; Paul Hansen; Major General James W. Comstock; Anthony Prieto; Robert Birney; Jerry Hulick.
• Medicare Set-Aside Specialist - Douglas Shaw.
• Lien Resolution Specialist - Daniel Alverez.
• Note: none of the conferences featured guardian ad litems, life care planners or damage allocators as speakers.

Unanswered Questions - From S2KM's perspective, future settlement planning conferences need to more directly address the following issues:

• How large is the United States settlement planning market?
• Who comprises (and selects) the settlement planning team?
• What criteria and process (e.g. request for proposal) are appropriate for selecting members of the settlement planning team?
• What professional licenses and certifications are applicable?
• What primary laws and regulations apply to settlement planning?
• What work product does each settlement planning team member provide?
• Who integrates their individual work product into a settlement plan - and how?
• When is a settlement plan appropriate?
• What are the standard components of a settlement plan?
• What are the product suitability and disclosure standards for settlement planning?
• What does a settlement plan cost?
• What other metrics (besides cost) are appropriate for evaluating the success of a settlement plan?
• How are settlement planning team members compensated?
• What alternative compensation methods and/or business models would allow settlement planning to become more efficient and/or reduce costs?
• Once implemented, who has responsibility to monitor and/or amend the settlement plan?
• What are the Defendant’s responsibilities and duties in settlement planning?

For professionals and product providers interested in learning more about settlement planning, see:

• The Society of Settlement Planners (SSP) website.
• The Registry of Settlement Planners (RSP) website
• The structured settlement wiki - settlement planning page

S2P2J Release 51

Publisher Law Journal Press anticipates an April 2012 distribution date for hardcopy supplements for Release 51 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated April 2012 to include Release 51 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 51 Highlights

Release 51 for "Structured Settlements and Periodic Payment Judgments" features a comprehensive Executive Life update including expanded and updated coverage for the Executive Life of New York (ELNY) liquidation proceedings now in progress. In related reporting, Release 51 also:

• Expands and updates prior reporting for life insurance insolvency procedures and state guaranty association laws;
• Offers advice to plaintiff attorneys about how to address the risk of non-payment by annuity providers; and
• Summarizes recent case developments impacting Aurora, the successor company to Executive Life Insurance Company of California (ELIC),

Release 51 also updates Medicare Secondary Payer (MSP) developments and conditional Medicare payment requirements. Contributing author Peter H. Wayne IV provides current analysis and advice about Medicare Set-Aside (MSA) arrangements in liability cases discussing new and related case law, new CMS pronouncements and new CMS field office guidance with practice tips for structured settlement and settlement planning consultants, attorneys and claim supervisors.

Release 51 expands existing coverage of structured settlement business standards and practices including analysis of the following legislation impacting settlement planners:

• The NAIC Suitability in Annuity Transactions Model Regulation;
• The NAIC Annuity Disclosure Model Regulation;
• Dodd-Frank's impact on fiduciary and suitability standards; and
• The Uniform Prudent Investor Act.

Other topics addressed in Release 51:

• Structured settlement metrics for defendants and liability insurers.
• The Treasury's final regulations for IRC section 104(a)(2) incorporating amendments resulting from the Small Business Job Protection Act of 1996.
• The new IRS Lawsuits, Awards and Settlements Audit Techniques Guide.

"Structured Settlements and Periodic Payment Judgments" is now available in both hardcopy and online versions. For summaries of prior Release Highlights, see the structured settlement wiki.

SNTs and Structured Settlements

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. By substantially expanding Medicaid, Federal health care reform potentially increases the market for structured settlement annuities used to fund special needs trusts (SNTs).

Congress created special needs trusts (self-settled; pooled; and third party) as part of the Omnibus Budget Reconciliation Act of 1993. When properly designed and administered, special needs trusts can receive settlement proceeds, including structured settlement payments, without disqualifying the trust beneficiary from SSI or Medicaid.

Whether a special needs trust is advisable in a specific case requires analysis of many factors including the extent of disability, the availability of government benefits, as well as the nature and amount of available personal and family assets. One complicating factor is shared regulatory authority. Medicaid is a joint federal state program. In addition to two federal agencies (SSA and CMS), state Medicaid agencies and state Medicaid plans also provide state-specific rules for special needs trusts. State and county Medicaid case workers interpret and apply federal and state Medicaid laws to individual cases.

The growth of special needs trusts has coincided with a corresponding increase in the number of special needs attorneys. Three national professional associations (ASNP, SNA and NAELA) now exist for special needs attorneys and several legal textbooks have been written about special needs trusts. Most of these textbooks, however, are generic and do not provide detailed state-specific analysis. One exception is a two volume treatise published in 2008 (with updates) by the California CEB titled "Special Needs Trusts: Planning, Drafting and Administration" (CEB SNT). Edited by Kevin Urbatsch, CEB SNT features 17 chapters separately written by leading California special needs attorneys plus detailed appendices with applicable legal forms plus federal and state statutes, regulations, case citations and other references.

Because California represents a large and strategically important state for both structured settlements and special needs trusts, S2KM recently reviewed CEB SNT to evaluate how this legal treatise addresses structured settlements and what opportunities it suggests for improving and growing the national structured settlement market. Most of the structured settlement discussion in CEB SNT appears under a Chapter 8 section titled "Use of Structured Settlements with First Party SNTs" authored by Donna Bradshaw and Leslie Ann Barnett.

Settlement Planning Team

For personal injury cases involving a special needs trust, Bradshaw and Barnett propose a collaborative settlement planning team consisting of a special needs attorney, a structured settlement broker, a SNT trustee, an independent financial planner and a life care planner. Neither Bradshaw and Barnett, nor other CEB SNT authors discuss this proposed planning team in detail. Arguably, such a discussion goes beyond the scope of this CEB SNT treatise.

The concept of a collaborative professional team, however, is critical for settlement planning and the future of structured settlements. Unfortunately, with only a few exceptions (most notably the ASNP 2009 and the SSP 2011 Annual Conferences both of which featured CEB SNT editor Kevin Urbatsch as a speaker), the following issues have to date received insufficient industry discussion:

• What is a settlement plan?
• Who are the necessary team members and what issues should they address?
• What is the settlement planning role, if any, for the plaintiff trial attorney? for the defense structured settlement broker?
• What work product(s) do each of the team members contribute?
• How are the various work products consolidated and by whom?
• How are conflicting recommendations reconciled and by whom?
• What does a settlement plan cost?
• How are the team members compensated and by whom?
• What disclosures should be made to the injury victim?
• What metrics are needed to evaluate the effectiveness of a settlement plan?
• How important are 468B qualified settlement funds for settlement planning?
• Who is liable, and how are damages apportioned, for settlement planning errors and omissions?

Structured Settlements

In the two volume CEB SNT treatise, structured settlements are the only SNT "funding product" that receives detailed coverage. Chapter 8 authors Bradshaw and Barnett justify devoting 12 CEB SNT subsections to "structured settlements" by stating: "special needs planners need to understand how structured settlements work with first party SNTs to best advise personal injury attorneys, persons with disabilities, and their families."

Acknowledging the need to understand how structured settlements work, however, does not mean Bradshaw and Barnett fully endorse structured settlements. To the contrary, they provide several warnings and cautionary notes:

• "Plaintiff's trial attorney may mistakenly believe (or be misled into believing) that a structured settlement annuity is the only effective tool for the major part of the settlement funds."
• "At times a structured settlement is funded for a person with a disability without consideration of the unique needs to that individual."
• "The most common issue is too much cash in the structured settlement and not enough cash outside the structure."
• "It is insufficient to retain just enough cash to purchase a home and a van; there also must be a financial plan to maintain the home and van and consider replacement costs"
• "When a settlement has been funded primarily in a structured settlement annuity, there is little protection from inflation."
• "Annuities purchased in a time of low interest rates are likely to grossly under perform when compared to a well-balanced portfolio of stocks and bonds."
• "If the SNT beneficiary has an emergency or needs cash quickly, the settlement annuity will not advance payments."
• "It is imperative that practitioners insist on a commutation rider whenever there is a possible estate tax situation."
• "Once the structure is funded, [the structured settlement broker's] job is done. It is then left to the SNT trustee and special needs practitioner to work with the structured settlement for the rest of the person with the disability's life."

Without explicitly criticizing structured settlement business standards and practices, these warnings and cautionary notes highlight structured settlement issues S2KM discussed in a recent blog series about "product suitability standards" including the need for full disclosure and informed consent.

Despite 12 CEB SNT subsections discussing structured settlements, Bradshaw and Barnett barely mention three structured settlement-related topics that are important for special needs attorneys:

• Periodic Payment of Judgments - California was the first state to make periodic payment mandatory in certain (medical malpractice) judgments "at the request of either party". Because California's medical malpractice periodic payment statute also influences settlements that include special needs trusts, California special needs attorneys should be familiar with its provisions.
• Structured Settlement Transfers - Structured settlement transfers represent a strategy option for SNT trustees and special needs attorneys to consider if and when they confront some of the potential structured settlement problems Bradshaw and Barnett identify above. California amended its state structured settlement protection statute in 2010 adding factors for the court to consider when determining whether a proposed transfer is fair, reasonable and in the payee's best interest.
• Qualified Settlement Funds (QFS) - Similar to structured settlement transfers, QSFs are controversial within the structured settlement industry. Arguably underused in single event cases, QSFs provide a valuable settlement planning tool that all special needs attorneys should understand and promote.

Conclusion

For a regressive structured settlement industry, first party special needs trusts represent a growing market segment and special needs attorneys provide expanding networks of potential professional allies. Although CEB SNT focuses on California special needs trusts, the subsections discussing structured settlements offer a useful learning resource for all structured settlement stakeholders. Bottom line: the structured settlement industry needs to expand its strategic dialogue with special needs attorneys. The objectives should include better marketing and product feedback plus improved educational programs, business models and business practices.

For additional information about special needs trusts and structured settlements, see the structured settlement wiki and Section 15.04[7] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

NSSTA 2011 Education Meeting

The National Structured Settlement Trade Association (NSSTA) hosted one of its best-ever educational programs November 2-4, 2011 in Austin, Texas. The conference primarily showcased NSSTA members and NSSTA member executives and encompassed a variety of important industry topics.

Speakers and topics:

NSSTA President Dan Finn - Finn summarized NSSTA's current projects, emphasized NSSTA's improved structured settlement marketing and announced the 2012 NSSTA Annual Meeting which will take place in Washington, D.C. and feature Congressmen Dave Camp and Paul Ryan as Keynote Speakers.

NSSTA Executive Director Eric Vaughn - In addition to reviewing the 112th Congress and Super Committee, Vaughn discussed the following NSSTA challenges and priorities:

• Protect IRC sections 104(a)(2) and 130.
• Defend structured settlements.
• Promote the expanded use of structured settlements.
• Expand the markets for structured settlements.
• Enhance the CSSC designation.
• Provide state court judicial education about structured settlements.

AIG Chief Economist Ardanvan Mobasheri - Mobasheri's economic overview highlighted China's emerging leadership, outlined a "very healthy non-financial business world" and predicted low interest rates for the foreseeable future.

American General Life President Mary Jane Fortin - Describing AIG as "a strong, stable and resilient company dedicated to keeping our promises", Fortin dispelled several "myths" about AIG, summarized AIG's recovery and expressed optimism about the future of life insurance industry and structured settlements.

John McCulloch and Michael Miller - Reprising NSSTA "Tax Posse", McCulloch and Miller introduced the new IRS audit guide for lawsuits, awards and settlements and reviewed recent tax cases addressing employment, factoring and Qualified Settlement Fund issues.

Peter Vodola, Stephen Harris and Amy Ravitz - The co-chairpersons of NSSTA's Legal Committee participated in two separate panels moderated by James Ebel and Michael Kelly and discussed non-tax cases and issues including state structured settlement protection statutes, issues arising from transfer petitions and minors statutes and settlements.

Len Blonder and NSSTA General Counsel Craig Ulman - Blonder and Ulman reported the status of the Executive Life of New York (ELNY) liquidation, discussed the consequences for structured settlements and reviewed hypothetical case examples from the proposed ELNY Restructuring Agreement.

Karen Meyers, LeAnne Sprague, Doug Brand and Kathy Moghadas - In addition to discussing changes to the CSSC designation that will require annual CE credits, NSSTA sponsored a special four hour annuity education session designed to meet the requirements of the new state annuity transaction suitability laws.

CNA Commercial Liability Claims Vice President James Martin - Championing structured settlements as an "important competitive advantage" for liability insurers, Martin also emphasized the importance of linking structured settlements and structured settlement sales to claim department goals and metrics.

Ringler Radio Broadcaster Larry Cohen - When announced co-interviwer Mark Wahlstrom proved a "no show", Cohen glibly volleyed Eric Vaughn toughest questions. Three memorable Cohen quotes: "a lot of a little is a lot"; "vision without execution is hallucination"; and (applying his grandfather's wisdom to Executive Life's annuity rates ) "there is something wrong with this tuna fish."

Liberty Life Chief Underwriter Kevin Smith - Speaking about "Life Company Operating Metrics", Smith pointed out the dearth of structured settlement metrics and announced a collaborative project among multiple NSSTA life company members to develop a preliminary set of structured settlement operating metrics.

Attorney William C Chriss - Author of the new book "The Noble Lawyer", Chriss discussed legal and structured settlement ethics. Among his observations while discussing NSSTA's Code of Ethics:

• "We cultivate beliefs that justify our behaviors, not the other way around.
• "Unconscious bias, as opposed to intentional venality, cannot be deterred by criminal laws or post hoc sanctions.
• "The more people involved, the easier it is to defuse moral responsibility."

Congratulations to NSSTA's speakers and leaders (especially Education Chairpersons Toni Warbington and Don Engels as well as Finn, Vaughn and Associate Director Peter Arnold) for substantially upgrading NSSTA's educational program.

For S2KM reports about prior conferences of NSSTA and other structured settlement and settlement planning professional associations, see the structured settlement wiki.

Structured Settlement Metrics - 6

The online "Claims Journal" features an October 31, 2011 article (Claims Journal article) written by Denise Johnson titled "The Benefits of Using Structured Settlements in Claims Negotiations".

The Claims Journal article promotes the National Structured Settlement Trade Association (NSSTA) and incorporates structure-friendly quotes from NSSTA President Dan Finn, Chartis Vice President Ismael Acevedo and Jim Martin, CNA Vice President Commercial Liability Claims. Martin is also scheduled to speak this week at NSSTA's 2011 Fall Meeting in Austin, Texas on the topic of "Structured Settlements from a P&C Company's Point of View".

The Claims Journal article predictably provides a defense perspective of structured settlements based upon traditional (claim management) business models and business practices. For a summary of traditional structured settlement business model characteristics and the problems these business models create, see this prior S2KM blog post. For a discussion of traditional structured settlement business standards and practices, see "Structured Settlements and Periodic Payment Judgments" (S2P2J) section 6.02 [3].

The intended audience for the Claims Journal article can be assumed to be liability insurer claims personnel (executives, managers and adjustors) and perhaps also their outside litigation counsel. This intended audience therefore overlaps and includes members of the Council on Litigation Management (CLM).

CLM recently sponsored a National Litigation Management Study (CLM study) that highlighted structured settlements as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives. Among the CLM study's key findings: "Litigation executives are not happy with the metrics and analytics available to them."

What stands out in the Claims Journal article, especially in the context of the CLM study's assertion about the need for improved metrics and analytics, are several statements about the benefits of structured settlements and the questionable rationale (or lack thereof) provided for such benefits. Structured settlement stakeholders have a history of promoting unsubstantiated and/or false statements. Two infamous examples:

• Injury victims squander lump sums. Nine out of 10 lump sum recipients squander the entire amount within five years.
• Structured settlements enable injury victims to live free of reliance on government assistance.

Here are three examples of unsubstantiated and/or misleading statements from the Claims Journal article:

• The Claims Journal article: "At zero expense to the carrier ..... structured settlements are a powerful tool claims personnel can use when resolving claims."
• Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." (see correction below)
• Acevedo: structured settlement consultants: "understand the tax code and how to generate the benefits in the settlement context relative to the tax code,”

What is wrong with these statements?

One assumption appears to be that because "structured settlement consultants" are agents of, and paid commissions by, annuity providers, structured settlements generate "zero expense" for liability insurers. This assumption represents a non sequitur. It fails to consider the time and cost required for multiple claims adjustors and outside legal counsel to review multiple structured settlement proposals generated by structured settlement consultants or the related meetings and telephone conversations.

How should the structured settlement industry, liability insurers and the legal profession react to statements that structured settlement consultants "prepare settlement documents" and "understand the tax code and how to generated the benefits in the settlement context relative to the tax code"?

To quote the title from one of Mark Wahlstrom's blog posts: "Structured settlement brokers drafting settlement documents. Are you guys nuts?" In other words, does a routine structured settlement business practice that presumably saves expenses for liability insurers (life insurance agents drafting personal injury settlement documents) represent the unauthorized practice of law?

And exactly how are structured settlement consultants (life insurance agents) qualified, legally and/or educationally to "understand the tax code" and generate settlement benefits relative to the tax code? Especially when, to quote the Claims Journal article, the "tax-free" structured settlement option "has been applied to employment, personal injury, construction defect, directors & officers’ liability, and even copyright infringement claims."

Consider another misleading or unsubstantiated statement from the Claims Journal article - Martin describing how defendants can utilize a structured settlement to resolve a disagreement over the cost of a life care plan: “So, if the plaintiff believes it’s ‘x’ and the defense says no it is only going to cost ‘y’, that issue can be taken off the table for the plaintiff by investing the ‘y’ number which will pay out the ‘x’ number they claim they need for the remainder of their lives."

What is wrong with this statement?

First, it appears that Martin's "x" represents both the plaintiff's present value number and the expected payout which confuses his example. Second, in today's low interest rate environment, Martin's structured settlement example won't accomplish his defense objective unless the case involves a substantial age rating, which the Claims Journal article never mentions.

Consider a 10 year old female with a normal life expectancy of approximately 69 years (to age 79) whose life care plan projects:

• Annual medical costs of $10,000 for life;
• A present value cost of approximately $690,000 (assuming a 5% discount and 5% inflationary growth rate) to pay
• A projected $5,500,000 of total lifetime medical costs.

The cost of a structured settlement annuity to pay $10,000 per year increasing at 5% per year (without any age rating and with or without a guaranty period) is approximately $1,100,000 compared with the plaintiff's present value figure of $690,000 for the same projected damages. How does a structured settlement help Mr. Martin and CNA in this case? In non-age rated cases, with today's low interest rates, structured settlements generally will not help defendants argue or defend damages.

Related questions the Claims Journal article does not adequately address:

• Why does CNA "flag claims for structures when they exceed $50,000 in exposure to our insured and involve bodily injury?"
• What is CNA's expense resulting from its claim adjustors and outside legal counsel reviewing structured settlement proposals for those cases?
• What is CNA's success ratio for resolving those cases with structured settlements?
• How exactly can structured settlements "help drive the total claim outcome for [CNA's] claim operations"?
• Does CNA reduce its claims costs using structured settlements? And if yes, how?

In another questionable statement, Martin maintains: "there are three things claimants seek in a settlement: 1) financial security; 2) guaranteed income; and 3) instructions on how to take advantage of any tax benefits." What about "qualifying for or maintaining government benefits" (Social Security; Medicaid; Medicare)? Is Martin's omission merely inadvertent or does it echo the false declaration that "structured settlements enable injury victims to live free of reliance on government assistance"?

For defendants and liability insurers who believe that structured settlements represent "good public policy" and who want to encourage its appropriate application for suitable injury victims and their dependents, it is time to re-think traditional structured settlement business models and practices. Despite (or perhaps because of) its faults, the Claims Journal article promoting structured settlements provides a valuable starting point for any such re-evaluation.

S2KM's "Structured Settlement Metrics" series is featured on the structured settlement wiki.

CORRECTION (November 7, 2011) - This blog post includes the following quote from Denise Johnson's Claims Journal article that S2KM incorrectly attributes to Dan Finn: structured settlement consultants represent a "free resource to claims departments ...and even prepare settlement documents." S2KM apologizes to Dan Finn.

Structured Settlement Metrics - 5

How satisfied with their structured settlements are injury victims (and their attorneys) who have opted for structured settlements instead of, or in addition to, lump sum alternatives?

As part of S2KM's series discussing structured settlement metrics and analytics, this blog post addresses that question by summarizing selected results from three structured settlement surveys related to customer satisfaction:

• NSSTA 2006 Survey - as summarized during both the National Structured Settlement Trade Association (NSSTA) 2007 Winter Meeting and 2007 Annual Meeting;
• AIG 2007 Survey - as reported on the AIG website and summarized during the NSSTA 2008 Annual Meeting.
• J.G. Wentworth 2008 Survey - as reported in a press release on October 29, 2008 and a media report on November 5, 2008.

In prior blog posts, S2KM examined structured settlement "quality" and "performance" metrics and analytics in the context of a 2011 National Litigation Management Study sponsored by the Council on Litigation Management (CLM). That study identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

In a subsequent blog post, S2KM will provide commentary and suggest conclusions about customer satisfaction with structured settlements based upon the results of the three surveys.

NSSTA Survey - The National Structured Settlement Trade Association (NSSTA) survey consisted of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys). Titled: "A Study of the Structured Settlement Process Conducted on behalf of the National Structured Settlement Trade Association", the survey was directed by Robert E. Hoyt, the Dudley L. Moore, Jr. Chair of Insurance at the Terry College of Business at the University of Georgia. Among the results:

• Structured settlement recipients:
  • 65% said they had not heard about structured settlements prior to settlement.
  • Most were uncertain whether a structured settlement consultant was involved with their case.
  • 34% recalled receiving educational information while 75% of this 34% said the information was helpful.
  • 66% first learned about structured settlements from their trial attorney.
  • 75% said they were very happy their settlement included structured settlement annuities.
  • 75% said they would recommend a structured settlement.
• Attorneys involved in structured settlements:
  • 95% said they are proponents of structured settlements.
  • 70% said they retain a structured settlement consultant at least for some cases.
  • When asked: "Whom do you prefer to use for purposes of financial planning for your clients?", the attorneys responded:
    • 30% - Trust company/department.
    • 28% - Financial planner.
    • 23% - Structured settlement consultant.
    • 19% - No response.

AIG Survey - Conducted by Esearch.com, Inc., the AIG survey included 1000 U.S. participants. 80% of the participants had no connection with any personal injury case while 20% had previously been involved directly or indirectly through a family member in a personal injury case. Participants who had no connection to a personal injury case were asked to read two hypothetical scenarios and answer questions on how they would react. Those with a direct connection to a personal injury case were not only asked to read the hypothetical scenarios, but also to answer questions based upon their real life experience.

• In AIG's first survey hypothetical, AIG provided no information about structured settlements. Results:
  • 65% of respondents said they would elect a lump sum of which
  • 49% said they believed they could make their own long term decisions and
  • 26% said the lump sum was more appropriate to pay bills and pay off debt.
• In AIG's second survey hypothetical, AIG provided survey respondents with information about structured settlements - presumably this "AIG Backgrounder" which AIG features on its website. Results: 73% of respondents said they would elect a structured settlement.
• 206 of 1000 participants said they or their family had been involved with a personal injury case. Results for those 206 participants:
  • 86% had elected lump sum.
  • 57% said they were unaware of structured settlements.
  • 64% said their attorneys did not inform them about structured settlements.
  • 57% of those that elected a lump sum said their settlement funds were already depleted.
  • 71% of respondents who said they favored a structured settlement did so "to provide a regimented stream of income designed to cover expenses".

J.G. Wentworth Survey - The J.G. Wentworth survey consisted of 115 participants who had previously sold some or all of their structured settlement payment rights to Wentworth and focused upon the reasons they: 1) agreed to a structured settlement; and 2) subsequently sold (transferred) some or all of their structured settlement payment rights. According to a J.G. Wentworth marketing executive, the survey resulted from recommendations made at the 2008 Structured Settlement Thought Leadership Conference. Relevant questions and results:

How many years ago did you settle your original lawsuit?

• 70.9% - More than 10 years ago.
• 14.5% - 5 to 10 years ago.
• 13.6% - 1 to 5 years ago.
• 0.9% - Past 12 months.

When you settled your original lawsuit, why did you accept payments over time rather than a single lump sum of cash?

• 23.4% of the participating structured settlement recipients said they never were given a lump sum option.
• 38.3% had been minors whose settlements were approved and/or selected by judges and guardians.
• 38.3% of the respondents offered the following reasons for accepting a structured settlement:
  • 23.4% - Payments over time seemed like a better deal.
  • 7.4% - Not sure I could manage a large amount of cash.
  • 6.4% - To pay future medical expenses or special needs.
  • 1.1% - Faster way to settle.

How satisfied are you that you accepted a structured settlement?

• 25.0% - As a minor, a structured settlement was considered the best option.
• 24.1% - Mostly satisfied.
• 21.3% - Neither satisfied nor dissatisfied.
• 18.5% - Completely satisfied.
• 6.5% - Slightly dissatisfied.
• 4.6% - Completely dissatisfied.

Do you wish you and your attorney had negotiated for a single lump sum settlement?

• 31.5% - No.
• 27.8% - As a minor, I was unable to negotiate my settlement terms.
• 20.4% - Maybe.
• 10.2% - Yes.
• 10.2% - I don't know.

When you settled your original lawsuit, how well informed were you about structured settlements?

• 30.5% - Due to my status as a minor, I was not informed.
• 27.6% - Very well informed.
• 24.8% - Not well informed.
• 17.1% - Well informed but still had questions post-settlement.

Why did you sell all or part of your structured settlement?

• 60.2% - Pay bills.
• 8.3% - Start a business.
• 8.3% - Home improvement.
• 5.6% - Pay for education.
• 5.6% - Cash made more sense than waiting.
• 4.6% - Buy a house.

Did selling your structured settlement help solve your financial problem?

• 40.7% - Mostly.
• 32.4% - Yes.
• 21.3% - Only helped a little.
• 5.6% - No, it did not help.

Would you sell payments again?

• 36.3% - Maybe.
• 30.1% - No.
• 18.6% - Yes.
• 8.0% - Probably.
• 7.1% - I have already sold all of my payments.

If you sold only part of your settlement, do you plan to keep the rest of your payments as a structured settlement?

• 42.3% - Yes.
• 35.1% - I don't know.
• 9.0% - No, I plan on selling all of my payments.
• 8.1% - I already sold all of my payments.
• 5.4% - No, I plan on selling some of my payments.

For complete S2KM reporting and commentary about structured settlement metrics and analytics, see the structured settlement wiki.

Structured Settlement Metrics - 4

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.

Structured Settlement Metrics - 3

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.

What metrics and analytics should litigation management executives utilize to justify and evaluate their structured settlement programs?

In two prior blog posts, S2KM summarized findings from CLM's Litigation Management study and highlighted historic justifications, characteristics and metrics for defense structured settlement programs. This blog post and two subsequent posts will examine historic structured settlement performance analytics and discuss those analytics in the context of the "quality, performance and satisfaction levels" litigation management executives should be seeking.

Recognizing no official or accepted industry records exist for total historic structured settlement annuities written and/or annuity payment rights transferred, S2KM offers the following estimates based upon industry input and sources including "Structured Settlements and Periodic Payment Judgments" (S2P2J), Melissa Evola's primary market compilations, and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1:

• Primary market (1976-2010)
  • Total annuities written: 716,500
  • Total Premium: $124 billion
• Secondary market (1986-2010)
  • Total number of annuity (or partial annuity) transfers: 98,300
  • Total recipients who have sold payment rights: 65,600
  • Total aggregate payment streams purchased: $7.5 billion

S2KM welcomes continuing industry input and reserves the right to revise these estimates and/or future estimates based upon industry input.

Regardless of how many structured settlement annuities have been written, or transferred, or how much structured settlement annuity premium has been generated, or payment streams purchased, the key issue for evaluating the "quality" of structured settlements concerns structured settlement payout performance. Most specifically, how many annuity-funded structured settlement recipients or transferees have or have not received 100% of their promised periodic payments?

For annuity funded structured settlements, the payout performance to date has been excellent though not perfect. Overall, even when structured settlement annuity providers such as Confederation Life, Monarch Life and Capital Life have entered receivership, the protections provided by state life and health guaranty associations have proven to be an important safety net - at least for the purchaser/obligors and original structured settlement recipients.

The only exception to date, of which S2KM is aware, for some annuity-funded structured settlement recipients not receiving 100% of their promised periodic payments is Executive Life Insurance Company of California (ELIC) which became insolvent in 1991 and involved approximately 5500 structured settlement annuities as well as many other life insurance products. Note also, however:

• New York's Insurance Superintendent has petitioned for Executive Life Insurance Company of New York (ELNY), to enter liquidation and undergo restructuring. Although all ELNY structured settlement annuities have been paid in full to date, the exact impact of the ELNY liquidation and restructuring plan on individual structured settlement payees and transferees will not be known at least until the state life and health guaranty associations finalize the amount of their ELNY contributions.
• The DBRS report cited above indicates that J.G. Wentworth, and/or investors of J.G. Wentworth's securitized structured settlement payment rights, have suffered losses of 0.11% from the 59,000 transactions J.G. Wentworth has consummated since 1995 without identifying the specific source of these losses.

Selected highlights from ELIC's receivership and rehabilitation plan - Sources: Sections 3.05[10] of "Structured Settlements and Periodic Payment Judgements" (S2P2J) and the structured settlement wiki.

• Beginning in 1991, California insurance regulators and courts addressed the 5,500 structured settlement annuities issued by ELIC in a series of actions, stretching over two years and culminating in the sale of ELIC in late 1993.
• During this time, most structured settlement recipients received 70% of their scheduled periodic payments. The supervising Los Angeles Superior Court permitted approximately 600 “hardship” claimants to petition for and receive continuation of full scheduled payments.
• Recipients who experienced a 30% shortfall were of two categories: assigned and non-assigned cases. Approximately 800 ELIC structured settlement recipients had agreed to a qualified assignment using ELIC's parent, First Executive Corporation (FEC), as assignee. FEC entered bankruptcy in 1991.
• For the 4700 ELIC structured settlement recipients who had not agreed to a qualified assignment, the original obligor (defendant or liability insurer) continued to be liable. Many of these original obligors made direct arrangements with individual ELIC structured settlement recipients to pay the 30% difference. Others waited until the overall shortfall could be determined.
• In 1993, the supervising court approved an ELIC sales agreement and rehabilitation plan under which a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) assumed ELIC's structured settlement obligations.
• ELIC's former policyholders and structured settlement recipients were given the opportunity to either opt out of the rehabilitation plan and receive the liquidation value of their existing ELIC contracts or opt in to a new restructured contract with Aurora.
• Structured settlement recipients choosing to opt out of the Aurora plan were promised a cash payment of 56% of their ELIC annuity's value when ELIC became insolvent (without any state guaranty association enhancement) plus subsequent payments depending upon future events which could provide an additional estimated 28% of their annuity value.
• The other choice was to accept a revised annuity from Aurora which for most former ELIC structured settlement payees would be enhanced by payments from state life and health guaranty funds. Most of the former ELIC structured settlement payees who selected this option (approximately 4000) received 100% of the value of their ELIC policies plus 5.34% interest for past shortfalls.
• For the remaining 1500 ELIC structured settlement payees (including Aurora opt outs) shortfalls, which S2P2J's authors originally estimated to average 10%, exist.
• The future (post 1994) enhancements for former ELIC structured settlement payees, however, received an unexpected bonus source in 1998 when an anonymous whistle-blower alleged that Crédit Lyonnais was the real buyer of ELIC and controlled Aurora through secret agreements. Because banks were prohibited from owning U.S. insurance companies in 1993, the California Insurance Department sued Credit Lyonnais and other parties alleging violations of the federal Bank Holding Company Act, the California Insurance Code and other California statutes.
• The results of these lawsuits:
  • A 2003 settlement with Credit Lyonnais for $730.5 million of which $211 million was distributed to opt out policyholders and former structured settlement payees and $403 million to Aurora to supplement payments for opt in policyholders and continuing structured settlement payees; and
  • A 2005 verdict against the other defendants including $700 million in punitive damages which awaits retrial following appeal and remand on the issue of damages.

The Executive Life insolvencies, both of which originated in 1991, represent exceptions that prove the rule: the payout record ("quality" metric) of structured settlement annuities has been excellent - based upon the performance record of annuity providers who have issued an S2KM-estimated 716,500 structured settlement annuities since 1976.

The quality of structured settlement annuities was further highlighted during the 2011 Annual Meeting of the National Structured Settlement Trade Association (NSSTA) by:

• Jim Morris, Chairman, President, and CEO of Pacific Life Insurance Company, who accentuated the current financial strength of U.S. life insurance companies and explained why structured settlement annuities represent an excellent strategic product for life companies; and
• Thomas Ronce, a member of the NOLHGA Board of Directors, who highlighted lessons learned and industry improvements resulting from the Executive Life experience:
  • Risk-based capital testing - more sophisticated systems to measure insurance and investment risk in life insurers.
  • Coordinated, sophisticated, national regulatory consultation for troubled companies doing business nationally.
  • Skilled, professional leadership and stakeholder participation in the processes to resolve insolvencies of nationally significant insurers.

For S2KM's complete reporting and analysis about: 1) Executive Life and 2) structured settlement metrics, see the structured settlement wiki.

Structured Settlement Metrics - 2

Why should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Although this question may seem counter intuitive to current structured settlement stakeholders, it represented a fundamental issue when structured settlements were introduced in the late 1970s and early 1980s.

The historic sales rationale for defendants and liability insurers to endorse, promote and fund structured settlements:

• Studies show 9 out of 10 lump sum recipients "squander" their entire settlement within five years.
• Structured settlements enable recipients to live free of public benefits.
• Structured settlements reduce claim costs.
• Structured settlements help defendants settle cases that would otherwise go to trial.
• Structured settlements represent good public policy.

Although still marketed by some sales persons, the first two justifications for defendants and liability insurers to promote and fund structured settlements have been exposed as "myths" by Jeremy Babener and David Lillesand respectively. No studies exist that show 9 of 10 lump sum recipients dissipate their lump sums within five years. Worse, frequent use of the pejorative term "squander" in the context of this dissipation study myth attaches an unfair and unwarranted stigma to injury victims. Even assuming injury victims dissipate lump sums, the reasons could be as varied as payment for justifiable expenses with inadequate settlements (compared with actual lost wages, medical expenses and inflation) or pay down strategies to qualify for Medicaid.

The idea that seriously injured structured settlement recipients can survive without public benefits is nonsense - a Tea Party pipe dream. At least prior to health care reform, no insurance company would offer medical insurance at any price for brain damaged babies, serious burn victims, or quadriplegics. Medicaid represents the only medical insurance available for seriously injured (special needs) claimants whether they settle with a lump sum or a structured settlement. As underscored by Lillesand, "without Medicaid, seriously injured accident victims die" because they cannot gain access to our medical system without an insurance card. Completely contrary to this public benefit myth, how best to integrate structured settlements with Medicaid and Medicare represents an increasingly important focus for personal injury settlement planning.

Based upon the above sales rationale, however, most U.S. liability insurers and self-insured defendants have developed structured settlement programs. According to a 2011 "National Litigation Management study" commissioned by the Council on Litigation Management (Litigation Management Study), structured settlement represents the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

Many structured settlement programs endorsed and promoted by liability insurers and self-insured defendants (defense structured settlement programs) share certain common characteristics including:

• Approved lists of annuity providers (life companies).
• Approved "brokers" who also serve as agents for the approved life companies.
• Proactive case identification of "good candidates" for structured settlements.
• "Early involvement" by the defense structured settlement broker.
• Defense broker attendance and participation at negotiations and mediations.
• Structured settlement funding by defendants or their liability insurers utilizing annuity financing ("buy and hold') or qualified assignments.

Some defense structured settlement programs also feature:

• Defense funding utilizing an affiliated annuity provider;
• Commission sharing by the defense broker with the defendant or liability insurer. Note: such commission sharing generally utilizes a life insurance agency affiliated with the defendant or liability insurer and may or may not be disclosed to injury victims, their attorneys, mediators and/or judges.

The National Litigation Management Study also found that "litigation executives are not happy with the metrics and analytics available to them." When asked "how effective are your metrics in measuring the effectiveness of your litigation program", more than 74 percent of the study's participants rated their available metrics as "Fair" or worse. In the words of Mike Saltman, President of Esquire Corporate Solutions: "to be truly successful, national service programs must be able to deliver the very metrics and analytics that participants said they are seeking: quality, performance, and satisfaction levels. These are the metrics that a national service provider must be able to give to its clients in today's environment."

Many defense structured settlement programs do include performance metrics of which the most common are:

• Annuity premium generated by the structured settlement program; and
• Success ratio - the percentage of targeted structured settlement cases that ultimately settle with a structured settlement.
• Note: some defense structured settlement programs also attempt to measure the cost savings resulting from the use of structured settlements.

Why, when and how should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Bottom line: to answer that question and to evaluate the "quality, performance and satisfaction" of their structured settlement programs, defendants and liability insurers should analyze (and perhaps re-think):

• Program justification
  • Structured settlements reduce claims costs.
  • Structured settlements help defendants settle cases that would otherwise go to trial.
  • Structured settlements represent good public policy.
• Program characteristics
• Program metrics
  • Annuity premium generated by the structured settlement program.
  • Structured settlement success ratio.
  • Cost or cost savings.

S2KM will continue to discuss "structured settlement metrics" in subsequent blog posts which also will be featured on the structured settlement wiki.