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.
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