Growing the Structured Settlement Market - 3

This S2KM blog post is the third in a series titled "Growing the Structured Settlement Market".  Here are links to the prior posts:

• Part 1
• Part 2

According to industry sources, structured settlement annuity premium for 2007 totaled approximately $6 billion dollars. That figure matches, but does not exceed, annual structured settlement annuity revenue totals for the past six years.

Some industry experts say the traditional structured settlement market is actually regressing. The revenue equalizers, according to these experts, are new products (non-qualified assignments) and new markets (structured attorney fees). At the 2008 Structured Settlement Thought Leadership Conference, Michael Goodman, Chairman of J.G. Wentworth, characterized the primary structured settlement market as "under performing" and "opportunistic".

How large is the potential market for structured settlement annuities? This author is not aware of any public studies specifically addressing this question. A 2006 marketing study conducted by the National Structured Settlement Trade Association (NSSTA study) estimated:

• Only 7% of personal injury settlements between $75,000 and $100,000 involve structured settlements; and
• Only 30% of personal injury settlements above $1 million involve structured settlements.

Among the possible reasons: plaintiff attorneys, according to NSSTA's study, prefer trust departments and financial planners over structured settlement consultants for purposes of financial planning for their clients.

A market analysis by Towers Perrin titled "2007 Update on U.S. Tort Cost Trends" provides additional perspective on U.S. structured settlement market potential.  This report is the 11th such study conducted by Towers Perrin affiliate Tillinghast Insurance Consulting since 1985. According to Russ Sutter, a Tillinghast principal and actuary who directs the study, Towers Perrin plans to further update the report during the fourth quarter of 2008.

Among the highlights of the 2007 Towers Perrin report:

• U.S. tort costs totaled $247 billion in 2006;
• That total represented a decrease of $13.4 billion (5.5%) from 2005;
• The report forecasted future growth of U.S. tort costs of 2.5% in 2007 and 4.5% in 2008 and 2009;
• Growth factors identified included:
  • Flat auto insurance costs;
  • Lessening impact of asbestos;
  • Stable medical malpractice costs.

The Towers Perrin report does not mention or directly address structured settlements.

What the Towers Perrin report does analyze

• Three cost components
  • Losses paid to third parties;
  • Defense costs; and
  • Administrative expenses.
• For three tort cost categories:
  • Insureds;
  • Self-insureds; and
  • Medical malpractice.

The results in 2006 totaled $247 billion comprised of:

• Insureds: $171.2 billion;
• Self-insureds: $45.5 billion; and
• Medical malpractice: $30.3 billion.

The five insurance business lines that encompass these tort costs are:

• Commercial multi-peril
• Medical malpractice
• Product liability
• Other liability
• Commercial auto

The Towers Perrin study specifically excludes:

• No-fault auto insurance
  
• Property coverages
• Workers compensation
• Certain extraordinary (one time) costs - example: tobacco litigation

The 2002 Towers Perrin study translated overall tort costs in 2001 into these additional cost categories and percentages:

• Administrative costs: 21 percent
• Defense costs: 14 percent
• Plaintiff attorneys: 19 percent
• Economic loss: 22 percent
• Non-economic loss: 24 percent

Towers Perrin discontinued this portion of the analysis in 2002. It was "devilishly difficult" according to Sutter, "primarily because we lack reliable information from plaintiff attorneys".   The percentages represented Tillinghast's "best estimate" in 2002.

The Towers Perrin "2007 Update on U.S. Tort Cost Trends" provides value and perspective for industry discussions, analyses and strategies directed at growing the structured settlement and settlement planning markets.