Beyond Structured Settlements

Life Care Planners

The increasing number, importance and roles of life care planners represents one of the most significant developments S2KM has observed while attending 2014 structured settlement and settlement planning stakeholder educational conferences .

Historically, many structured settlement consultants and personal injury settlement planners have partnered with life care planners and incorporated life care plans into their reports.

In its Standards of Practice , the International Association of Life Care Planners (IALCP), which represents one section of the International Association of Rehabilitation Professionals, offers the following descriptions for:

• Life Care Planning: "a transdisciplinary specialty practice. Each profession brings to the process of Life Care Planning practice standards which must be adhered to by the individual professional, and these standards remain applicable while the practitioner engages in Life Care Planning activities."
• Life Care Plan: "a dynamic document based upon published standards of practice, comprehensive assessment, data analysis and research, which provides an organized, concise plan for current and future needs with associated cost for individuals who have experienced catastrophic injury or have chronic health care needs."

The first published reference to life care planning appeared in "Damages in Tort Actions" (1981), a multi-volume text written by life care planning pioneer Paul M. Deutsch Ph.D. and economist Fred Raffa Ph.D. according to an "Introduction to Life Care Planning" which appears on the Paul M. Deutsch & Associates website. Deutsch's "Introduction" further states that life care planning resulted from the integration of three distinct fields of practice: experimental analysis of behavior, developmental psychology, and case management.

Although life care planning originated within, and still primarily focuses upon, the field of personal injury litigation support, its expanded applications now encompass elder care, chronic illness, and discharge planning.

The strategic relationship among structured settlement consultants, settlement planners and life care planners has been further enhanced by Medicare set-aside arrangements (MSAs) which represents a strategically important sub-market for all three professional communities. Life care planners increasingly participate as, or work for, MSA allocators and administrators in addition to providing MSA life care plans and/or medical cost projections.

Life care planners predominate the membership of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), "the only non-profit association exclusively addressing the issues and challenges of the Medicare Secondary Payer Statute and its impact on workers’ compensation and liability settlements". Multiple life care planners were among the featured speakers at NAMSAP's 2014 Winter Regional and Annual Meetings.

Individual life care planners have also expanded their profession's public profile during 2014 as featured speakers at other structured settlement and settlement planning stakeholder conferences including: AAJ (Susan Riddick-Grisham), ASNP (Ann Koerner), SSP (Christine Melancon), and NAELA (Beth Prather). Multiple life care planners exhibited at the AAJ 2014 Annual Conference.

Community Scope and Diversity

Most life care planners have a nursing background and many are members of the American Association of Nurse Life Care Planners (AANLCP). In addition to providing Standards of Practice and a Code of Professional Ethics, ASNLCP offers its members a certification program (CNLCP) and publishes a life care planning Journal. AANLCP's 2014 Educational Conference will take place October 24-27 in Atlanta.

Correction (8/18/2014) - A knowledgeable source has informed S2KM that most life care planners (a plurality) are not registered nurses, but rather vocational counselors, and/or educational consultants, psychologists, and social workers.

IALCP, a separate professional association, promotes itself as "an umbrella organization that supports all life care planners" working with other associations such as ASNLCP and the Foundation for Life Care Planning Research (FLCPR). In addition to its Standards of Practice, IALCP publishes the Journal of Life Care Planning , and sponsors the 2014 International Symposium on Life Care Planning scheduled for September 20-21 in Minneapolis.

Additional resources and diversity within the life care planning community:

• The International Commission on Health Care Certification offers professional credentialing to certify life care planners (CLCP) and Medicare set-aside consultants (MSCC)
• The Care Planner Network provides "an online community in which life care planning and case management professionals can share information about practice management, professional development and challenging case issues."
• "Life Care Planning and Case Management" - a textbook edited by Roger Weed and Deborah Berens is considered "The Bible" of life care planning according to industry representatives.
• Separate organizations featuring physicians and attorneys market life care planning products and services.

Impact of the Affordable Care Act

Although commentators generally agree the Patients Protection and Affordable Care Act (ACA) will impact life care planners and life care plans utilized in personal injury cases, their analysis and conclusions differ. Compare, for example:

• A paper titled "Potential Effects of the Affordable Care Act on the Award of Life Care Expenses", in which economists Joshua Congdon-Hohman and Victor A. Matheson predict life care planners will play an increasingly important role in personal injury damage analysis.
  • Prior to the ACA, life care planners were tasked with identifying medical and living expenses not otherwise required "but for" the accident.
  • Under the ACA, the authors maintain life care planners must also identify which health care and living expenses will, and will not, be covered by the ACA's minimum insurance requirements. And, despite certain minimum federal standards, these requirements may differ by state.
• A paper titled "How Obamacare May Limit Projected Expenses in Personal Injury Life Care Plans" in which attorneys Mark Yagerman and Max Bookman highlight the question of whether ACA implementation should override the collateral source rule and cause the courts or legislatures to allow direct presentation of the plaintiff’s health insurance coverage to the jury.
  • If yes, the authors believe "such evidence should significantly curtail the persuasiveness that life care plans’ projections represent actual future medical expenses that are supposedly to be paid completely out-of-pocket by the plaintiff."
  • The authors acknowledge, however, that certain future expenses in life care plans (“permanent confinement issues” such as long term care, nursing care, and homecare) are rarely covered by health insurance and will still be worked out pursuant to each state's collateral source rule.
  • Other expenses (“frequency issues” such as continuous physical therapy and occupational therapy) are capped under most health insurance plans so recommended visits beyond the frequency cap could likewise be unaffected by the ACA.
• A power point titled "The Affordable Care Act: Taking a New Approach to Damages" in which presenters Caryn L. Lilling and Thomas R. Shimmel offer (beginning page 32) a critical "defense-oriented" view of life care planners and recommend ACA-enhanced strategies for attacking life care planners' professional credibility, testimony and work product.

Regardless of how future ACA-related litigation and legislation play out, life care planners and life care plans can be expected to continue to play an important role in personal injury negotiations and settlements. As a result, life care planners are likely to remain strategic analytic collaborators and work product contributors for structured settlement consultants and personal injury settlement planners.

AAJ 2014 Annual Meeting

Increasing use of structured settlements by plaintiff attorneys and their clients requires a more "unified marketing strategy" by stakeholders according to multiple brokers who exhibited at the recent American Association for Justice (AAJ) 2014 Annual Conference in Baltimore.

Seven primary market brokers, one structured settlement annuity provider and two secondary market companies were prominent among the 141 sponsors and exhibitors at the AAJ conference which also included as exhibitors multiple companies offering lien resolution, MSA compliance, life care planning, legal finance and economic consulting services.

Other marketing advice from AAJ structured settlement exhibitors offering insights into how to grow the primary market:

• "Our industry needs more educational marketing.
• "The secondary market has stolen our brand and we need to get it back.
• "Many plaintiff attorneys do not discuss structured settlements with their clients.
• "We need to educate plaintiff attorneys to stop thinking of their clients as 'investors' and to recognize the benefits of structured settlements.
• "Most plaintiff structured settlement brokers are too narrowly focused on product.
• "Future success requires 'full service' not just annuities - financial planning, settlement trusts and lien resolution.
• "Plaintiff brokers need to be more holistic and offer plaintiff attorneys a 'brain trust' of strategic relationships.
• Offering non-structured settlement products and services to plaintiff attorneys 'has taken the lid off' our company's original view of the size of the settlement planning market."

Underperforming Market

Many industry observers view the United States structured settlement primary market as a strategic, underperforming segment of the larger personal injury settlement planning market:

• Primary market structured settlement annuity premium increased approximately seven (7%) percent to $5.134,380,855 in 2013 (compared with $4,819,124,617 in 2012) according to industry estimates compiled by Melissa Evola.
• Total structured settlement cases in 2013 also increased to 26,533 from 25,038 a year earlier for an average case premium of $193,495.
• The 2013 annual premium totals, however, fell substantially short of the historic 12 month industry high ($6,226,578,725 in 2008) after consistently averaging close to $6 billion annually from 2001-2007.
• Evola's 2013 compilation also reported an annual decrease in annuity premium for non-qualified structured settlements (from $170.1 million in 2012 to $164.9 million in 2013) despite earlier industry projections of a large and growing market .
• Non-qualified structured settlements represent transfers of periodic payment obligations that do not meet the requirements of IRC sections 130 and 104(a)(1) or (2) including deferred plaintiff attorney fees.
• Independent industry sources further report a substantial shift in recent structured settlement premium with increasing sales to fund workers compensation Medicare set-aside arrangements (WCMSAs).

For comparison, based upon Towers Watson's 2011 Annual Study of "United States Tort Cost Trends" and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates that more than $170 billion of United States tort costs annually have represented payments to injury victims and their attorneys. The Towers Watson study excluded: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.

Structured Settlement Marketing - to Defendant Insurers

Although primary market structured settlement participants have successfully marketed their products and services to defendants and their insurers, they have been less successful marketing to plaintiff attorneys and their clients.

A 2011 National Litigation Management study, commissioned by the Council on Litigation Management (CLM) and conducted by Revere Advisory, identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

The success of structured settlement marketing to defense insurers was further evidenced by a 2014 study of "how senior claims executives perceive the value of structured settlements and the value that structured settlement consultants bring to the table" commissioned by the National Structured Settlement Trade Association (NSSTA) and conducted by CLM Advisors. Among the findings - ninety percent of respondents:

• Indicated their organizations maintain a “formalized structured settlement program”; and
• Reported their belief that, when a structured settlement consultant is involved, claims are “more likely to settle.”

 Structured Settlement Marketing - to Plaintiff Attorneys and Injury Victims

Earlier in 2006 (before interest rates crashed), NSSTA sponsored a survey of plaintiff 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." Among the results, as reported at NSSTA's 2007 Winter and Annual meetings:

• 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.
• Plaintiff 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.

Based upon the 2006 survey results, however, NSSTA estimated 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.

Growing the Primary Market

What explains the apparent differences in marketing success by the primary structured settlement industry to 1) defense insurers; and 2) plaintiff attorneys and personal injury victims?

Several explanations are possible. They deserve and require greater analysis by the primary market. As one example, while defense brokers essentially sell a singular structured settlement product to their clients without direct competition from other financial/insurance product providers, plaintiff brokers must compete with settlement trustees, financial planners and other providers of asset management services.

As a result, plaintiff structured settlement brokers increasingly are evolving into alternative business models that offer structured settlement annuities as one of multiple products and more fully participate in a larger, more complex business (personal injury settlement planning) than structured settlement defense brokers.

Growing the primary structured settlement market therefore requires its proponents to ask themselves these fundamental questions: "what business are we in?", or, stated somewhat differently, "in what markets do we, or should we, participate?"

Failure to sufficiently address these issues has perpetuated both "inside-the-box" strategic thinking and traditional marketing strategies responsible, in part, for recent sales declines of the structured settlement product - a product which offers multiple, unique advantages and benefits from public policy endorsement, multiple tax preferences and statutory consumer protection.

The Settlement Planning Market

Despite an abundance of related professional associations, participants and conferences, as well as legislative and regulatory developments, personal injury settlement planning remains an evolving concept and market with competing definitions, standards and business models and many unanswered questions.

Many recent and continuing legislative and regulatory developments impact personal injury settlement planning, including:

• Affordable Care Act
• CMS WCMSA Reference Guide
• The SMART Act
• Defense of Marriage Act
• Dodd-Frank Uniform Fiduciary Standard
• Bipartisan Budget Act of 2013

Settlement planners consist, or represent a blend, of several professionals in addition to traditional personal injury litigation participants. These professionals include: tax attorneys, special needs attorneys, trustees, financial planners, structured settlement specialists, life care planners, economists, Medicare set-aside (MSA) specialists and damage allocators.

Professional associations, in addition to AAJ, whose members engage in settlement planning include: NSSTA, SSP, NAELA, ASNP, SNA, NAMSAP, AANLCP - and NASP assuming the definition of settlement planning includes adjustments during an injury victim's lifetime.

To grow the primary market, structured settlement proponents must learn how to better market the benefits and applications of structured settlements to plaintiff attorneys and these other professional groups and associations in the context of evolving settlement planning marketing, work product, business standards and educational priorities.

This educational and marketing challenge requires all structured settlement participants to fundamentally "re-think" structured settlements and their own roles in personal injury settlement planning. One result should be consideration of a more unified marketing strategy to plaintiff attorneys and their clients among heretofore competing professional associations such as NSSTA, SSP and NASP.

Conversations with structured settlement exhibitors at the AAJ 2014 Annual Meeting indicate some primary market plaintiff brokers already understand this message and are transitioning their business models accordingly.

For S2KM's report about the AAJ 2014 Winter Meeting, see this prior blog post.

NAMSAP 2014 Annual Meeting

The National Alliance of Medicare Set-Aside Professionals (NAMSAP), the only national professional association whose singular focus is Medicare Set-Aside arrangements (MSAs), celebrated its 10th anniversary last week in Las Vegas with a congratulatory acknowledgement of past accomplishments, a comprehensive educational program and a confident look at the future.

Incoming NAMSAP President Leslie Schumacher and Immediate Past President Douglas Shaw complimented NAMSAP's founding members for their innovative spirit and sustaining priorities: education; best practices; and certification - the Medicare Set-Aside Consultant Certified (MSCC) program.

Schumacher and Shaw highlighted NAMSAP's recent accomplishments and enhanced membership value: expanding membership; regional conferences; educational webinars; a recurring "legal roundtable"; an active website listserv; improved communications with CMS; a new strategic plan; and sponsorship of NAMSAP's first "Take the Hill" Day in Washington D.C.

NAMSAP also seeks and welcomes opportunities to help improve MSA and settlement planning industry standards for documentation, work product and business practices, according to Shumacher and Shaw.

MSP Act and MSAs

NAMSAP's growth has paralleled the expansion of workers compensation MSAs (WCMSAs) to satisfy the requirements of the Medicare Secondary Payer (MSP) Act. Enacted in 1980, the MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”

The Centers for Medicare and Medicaid Services (CMS), the agency responsible for administering Medicare policies, failed to take practical steps to enforce the MSP rules until 2001 when it issued the first of several policy memoranda addressing WCMSAs. These policy memorandums created a format, checklists and procedures for seeking approval for WCMSAs to "protect Medicare's interests" when workers compensation cases are settled.

CMS subsequently published a WCMSA Reference Guide (WCRG) on March 29, 2013 plus a WCRG Version 2.0 on November 7, 2013. The WCRG's intended purpose: to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."

The WCRG explains WCMSAs as follows: "A WCMSA allocates a portion of the WC settlement for all future work-injury-related medical expenses that are covered and otherwise reimbursable by Medicare. When a proposed WCMSA amount is submitted to CMS for review and the individual or beneficiary obtains CMS’approval, the CMS-approved WCMSA amount must be appropriately exhausted before Medicare will begin to pay for care related to the beneficiary’s settlement, judgment, award, or other payment."

Both the CMS policy memoranda and the WCRG address structured settlement issues and provide guidelines for their utilization in funding WCMSAs.

WCMSAs represent one of the few submarkets where structured settlements sales have increased since 2008 - in large part because the method CMS requires for calculating WCMSA present values provides an inherent cost advantage for annuities compared with lump sum alternatives.

CMS has not yet published definitive rules for using MSAs in liability cases (LMSAs). CMS did publish an Advanced Notice for Proposed Rule Making (ANPRM) on June 14, 2012 in the Federal Register which included seven different option to satisfy obligations for future medicals in liability cases. CMS also published RIN: 0938-AR43 in Spring of 2013 outlining a timetable for the proposed rule. No such LMSA rule, however, has yet been published.

Topics and Speakers

Among the challenges in selecting topics and speakers for any NAMSAP conference is the diversity of MSA subject matter expertise. A significant knowledge gap exists between many MSA attorneys and many MSA nurse/life care planner/allocators - with MSA administrators, insurance professionals and structured settlement brokers falling somewhere along this educational axis.

NAMSAP continues to select topics which, and attract speakers who, meet the learning needs of its multi-professional membership during a period of rapid industry change and development. The following S2KM listing of topics ( with speakers) attempts to communicate both the range of NAMSAP's 2014 annual conference educational offerings as well as NAMSAP's success in maintaining and expanding a unified MSA community of professional practice.

Directed Toward All MSA Professionals

• Professionalism in the MSA Industry - Preston Holloway; David Jankosky; Leta Sharkey.
• Problematic Areas in MSP Compliance - Lavonya Chapman; Stephanie Ragsdale; Linda Wolden.
• How Medication Impacts MSAs - Dr. Marcos Iglesias; Kayla Tortorich; Melissa Woitalewicz.

Directed Primarily Toward MSA Allocators

• Evidence Based Medicine - Dr. Shari Ling; Mary Nix; Ken Eichler; Beth Hostetler.
• Transitioning to ICD-10 - Marci Moorhead; Carlos Navarro.

Directed Primarily Toward MSA Attorneys

• Workers Compensation Cases with a Liability Component - William Delaney; Jill Schroeder.
• Dual Eligibility: MSAs within Special Needs Trusts - Kristen Behrens; Shannon Laymon-Pecoraro.
• Developments in the MSA Courtroom - Chelsie Allan; Patrick Czuprynski; Jennifer Santoro.
• Impact of Outside Factors on the Distribution of MSA Funds - Gregg Chapman; Danielle Marone; Daniel Simones.

Congratulations to the speakers, as well as NAMSAP's conference and educational committee chairmen Thomas Matson, Gary Patureau and Thomas Spratt, for maintaining NAMSAP's impressive educational standards.

For S2KM's most recent prior NAMSAP reporting, see "NAMSAP 2014 Regional Conference":

• Part 1 - Topics and Speakers
• Part 2 - WCMSA Market Metrics

For S2KM's summary of structured settlement issues in the CMS WCMSA Reference Guide, see this blog post.

 

SSP 2014 Annual Meeting

"Unification not polarization!" Society of Settlement Planners (SSP) President Neil Johnson espoused this principle in his keynote address as the theme for SSP's 2014 Annual Meeting and Educational Conference.

Current industry polarization as identified by Johnson, and discussed by other SSP conference speakers, arguably encompasses:

• Plaintiff vs. defense structured settlement brokers.
• Primary vs. secondary structured settlement markets.
• Structured settlements vs. settlement planning.
• Settlement annuities vs. settlement trusts.
• Settlement planning vs. special needs planning.

Johnson's SSP keynote speech also highlighted and proposed solutions for industry polarization: 1) recognizing and accepting product diversity; 2) focusing on client and customer service; 3) identifying and pursuing permanent shared interests without necessarily agreeing on all issues; 4) engaging all perspectives to discuss industry problems and issues; 5) improving relationships among stakeholder groups; 6) promoting and practicing settlement planning not settlement selling.

Johnson, and subsequent SSP speakers, addressed one of the most diverse gatherings ever of structured settlement and settlement planning industry leaders. Speakers and attendees included members of NSSTA, NASP, NAMSAP, ASNP, SNA, NAELA and SSP as well as lien resolution experts, mass tort administrators, life care planners, settlement trustees, annuity providers and bloggers.

Except for Johnson as SSP's President, speakers expressed personal opinions and did not appear as representatives of other professional associations.

SPEAKERS - By Category and Listed Alphabetically

• Settlement Planners / Structured Settlement Broker/Agents - Michael Goodman; Donald McNay; Joseph Tombs.
• Structured Settlement Attorneys - Jeremy Babener; Stephen Harris; Patrick Hindert; Earl Nesbitt; Edward Stone.
• Product Providers - Daniel Durbin; David Hickey.
• Special Needs Attorneys - Michele Fuller; Kevin Urbatsch.
• Medicare Set-Aside (MSA) Experts - Christine Melancon; Sally Stalcup.
• Lobbyist - Jack Kelly.
• Social Media - Megan Hargroder.
• Customer Service - Bruce Loeffler.

S2KM Comments

Settlement Planning - S2KM has written previously (see: AAJ 2014 Winter Meeting) about expanding products and services offered by plaintiff structured settlement brokers. Joe Tombs' SSP presentation expanded this list and proposed a "fiduciary standard" for settlement planners. For personal injury settlement planning to emerge as a recognized profession, however, SSP (and/or other settlement planning participants) needs to address these fundamental questions:

• Which professionals and professional skill sets are needed to construct a settlement plan?
• What professional work product results in a settlement plan?
• What are the standard components of, and documentation for, a settlement plan?
• How much does it cost (professional fees, commissions, etc) to produce a settlement plan?
• What would a settlement planning "fiduciary standard" mean in terms of: "best interest", "full disclosure" and "informed consent"?
• What settlement planning licensing and e&o coverage are necessary and applicable to protect customers?
• Which professional associations include "settlement planners" and what certification programs do they offer?
• What settlement planning business models currently exist?

Industry Unification - SSP's 2014 conference represents a strategic milestone and challenge for future educational programs sponsored by structured settlement and settlement planning professional associations.

• SSP spotlighted structured settlement and settlement planning polarization as the foremost industry problem.
• SSP President Neil Johnson proposed sensible solutions which other SSP speakers echoed and effectively endorsed.
• Without endorsing specific speakers or topics, SSP's conference agenda addressed critical and divisive industry issues - and featured speakers offering alternative perspectives.
• SSP conference speakers and attendees represented an unprecedented gathering of settlement planning industry leaders.

Industry Game Changers - Speaker Michele Fuller's list of settlement planning "game changers" did not mention Executive Life of New York (ELNY) or the structured settlement secondary market - two divisive issues of continuing importance addressed by other SSP speakers (Edward Stone and the secondary market panel, respectively). Her Top-10 list, however, provides a baseline for future discussions among industry associations and participants:

1. Affordable Care Act.
2. Lien resolution statutory and regulatory developments.
3. Federal recognition of same-sex marriages.
4. Wrongful death caps determined unconstitutional.
5. State and federal tax reform.
6. Potential reductions in social security benefits.
7. MSAs in liability cases.
8. Settlement planning goes cyber.
9. Increasing need for Qualified Settlement Funds.
10. Increasing number of persons with disabilities.

Congratulations to SSP, and especially conference chairperson Rhonda Bentzen, for maintaining SSP's noteworthy quality standards for its annual educational programs.

For S2KM reporting about prior educational conferences sponsored by SSP and other structured settlement and settlement planning associations, see the structured settlement wiki.

Equity-Indexed Structured Settlements

In a market desperate for innovation, Pacific Life Insurance Company appears to have answered the call with a new, optional "Indexed-Linked Annuity Adjustment Payment Rider" (ILAAPR) for its structured settlement products.

Although life insurance companies first offered equity-indexed annuities during the mid-1990's to compete with indexed mutual funds, Pacific Life's ILAAPR represents the first U.S. equity-indexed structured settlement option.

Pacific Life's ILAAPR is linked to the Standard & Poor's 500 (S&P 500) index which includes a representative sample of common stocks traded on the New York Stock Exchange, American Stock Exchange, and NASDAQ National Marketing System. One of the U.S. Commerce Department’s leading economic indicators, the S&P 500 represents over 70% of the total domestic U.S. equity market capitalization.

Indexed annuities differ from other fixed annuities based upon the method interest is credited to an annuity's value. Traditional fixed annuities credit interest at the rate set in the annuity contract. Indexed annuities credit interest based upon a formula in the index (either equity-based or bond-based) to which the annuity is linked. The formula determines whether and how much additional interest is calculated and credited.

The increasing popularity of indexed annuities is highlighted in this Investment News article which cites LIMRA data:

• Indexed annuities accounted for 46.3% ($39.3 billion) of all fixed annuities sold and 27% of total annuities sold in the U.S. during 2013.
• Indexed annuity sales increased by $5.4 billion (17%) in 2013, more than any other form of annuity.
• Pacific Life ranked thirteenth among U.S. life insurers selling indexed annuities in 2013 with 2.45% of the U.S. indexed annuity market.

By comparison:

• Estimated structured settlement annuity premium totaled $5.13 billion in 2013 and $139.5 billion from 1975 through 2013.
• Pacific Life's 2013 structured settlement premium totaled $848,725,000.
• 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 - based upon Tower Watson's annual studies of U.S. Tort Cost Trends.

Pacific Life's online ILAAPR brochure features hypothetical examples and product information including:

• Structured settlement payments with the ILAAPR option can increase annually based on positive S&P 500 index returns [with a five (5%) percent cap] but will not decrease if the S&P 500 declines or remains flat.
• Unlike a variable annuity, the ILAAPR is not an investment security and does not participate directly in the stock market or the S&P 500 index.
• Like its traditional structured settlements, Pacific Life's ILAAPR payments are backed by the company's financial strength and claims-paying ability.
• ILAAPR payment increases take effect on the anniversary of when payments originally started.

Also note, according to industry sources:

• Pacific Life has received a favorable IRS private letter ruling for the ILAAPR confirming tax exclusion of its indexed payments under IRC section 104(a)(2).
• If the initial ILAAPR benefit payment is deferred, the ILAAPR indexing feature only applies after benefit payouts begin.

Whether Pacific Life's ILAAPR will experience market success and help grow the U.S. structured settlement primary market remains uncertain and subject to debate among structured settlement consultants.

To sell the product, these consultants must convince settlement recipients that potentially higher long-term ILAAPR payouts (based upon S&P 500 performance) will offset lower starting payments compared with traditional structured settlement annuities.

ILAAPR advocates will point to historical S&P 500 results. During the past 30 years:

• The S&P 500 index has increased an average 9.8 percent per year.
• In 12 of those 30 years, the S&P 500 index increased less than five (5%) percent (ILAAPR's cap) or decreased.
• Incorporating ILAAPR's five (5%) percent cap, the annual applicable S&P 500 index increase averaged 3.5 percent per year.
• Also relevant for 30 year historical comparisons: the yield on 30 year U.S. Treasury bonds in April 1984 was 12.65 percent. As of April 21, 2014, the yield was 3.52 percent.

Conclusion

The moribund U.S. structured settlement primary market needs a jump-start. Pacific Life's new equity-indexed structured settlement rider represents a welcome innovation and hopefully will become one catalyst for future market growth.

WCMSA Self-Administration Toolkit

Continuing a series of workers compensation (WC) Medicare set-aside (MSA) regulatory compliance initiatives, the Centers for Medicare and Medicaid Services (CMS) has published a WCMSA Self-Administration (SA) Toolkit.

CMS' stated purposes for this Toolkit are to help WCMSA self-administrators:

• Manage their WCMSA accounts appropriately.
• Satisfy Medicare’s interests related to future medical care.
• Ensure Medicare will pay future Medicare-covered costs related to their WC injuries when the WCMSA is depleted.

MSA Background

MSAs are administrative and funding mechanisms utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. Enacted in 1980, the MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”

CMS, the agency responsible for administering Medicare policies, failed to take practical steps to enforce the MSP rules until 2001 when it issued the first of several policy memoranda addressing WCMSAs. These policy memoranda created a format, checklists and procedures for seeking approval for WCMSAs to "protect Medicare's interests" when workers compensation cases are settled.

Several of these WCMSA policy memoranda address, directly or indirectly, structured settlement issues. One of these policy memoranda (dated October 15, 2004) addresses WCMSA present value calculations and provides an important pricing advantage for annuity funding compared with lump sum funding.

During 2013, CMS published both an 88 page WCMSA Reference Guide (WCRG) and a 13 page supplement (WCRG Version 2.0). The WCRG's intended purpose is to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."

S2KM has written two blog posts summarizing the initial WCRG:

• Part 1 - Non-structured settlement issues.
• Part 2 - Structured settlement issues.
• For highlights of the WCRG Version 2.0, see this blog post written by Douglas Shaw.

Significantly for structured settlements, WCRG Appendix 4 defines "present-day value" as "the cost to fund a WCMSA annuity" and further states: "[t]he WCRG follows all CMS policy memorandums currently in effect."

Neither WCRG Version 2.0 or the WCMSA SA Toolkit address "present value". Therefore, it appears the October 15, 2004 CMS WCMSA policy memorandum remains in effect and annuities continue to offer lower-cost funding alternatives compared with lump sums for many, if not most, WCMSAs.

Although CMS and its field offices have also issued informal guidance about the use of MSAs in liability cases, nothing comparable exists to the CMS WCMSA memoranda, WCRG or WCMSA SA Toolkit. As a result, there currently is no consensus among tort practitioners as to whether and when MSAs are required in liability cases. Anticipating publication of MSA rules for liability cases, however, CMS has published HHS/CMS RIN: 0938-AR43.

Structured Settlements - Comparing the WCMSA SA Toolkit and the WCRG

Although both the MSAWC SA Toolkit (Toolkit) and the WCRG both address structured settlements in multiple sections, the administration (post-settlement) focus (including structured settlements) of the Toolkit is narrower than the WCRG and its treatment of structured settlement issues is generally less comprehensive.

The following Toolkit sections address structured settlement issues. S2KM has added references to related WCRG sections where applicable.

• Section 3: How Your WCMSA is Funded - compare WCRG Section 5.0.
• Section 8: Annual Attestation
• Section 11: Topics Unique to Structured Accounts - compare WCRG Section 19.3.
• Section 13: Letters and Examples - which includes three sample structured account attestation and expenditure letters which do not appear in the WCRG:
  • Annual attestation.
  • Temporary exhaustion.
  • Permanent exhaustion.
• Section 14: Glossary - The Glossaries of the both Toolkit and the WCRG include definitions for "structured settlement". Although consistent, the two definitions are worded slightly differently. Neither definition mentions annuities or references the tax definition for "structured settlement" in IRC 5891(c)(1).

The Toolkit does not address structured settlement issues which appear in the following WCRG sections:

• Section 10.1.1
  • WCMSA cover letter
  • Settlement amount
• Section 10.1.3 - Rated Age Information or Life Expectancy
• Appendix 5:15 - Rated Age Information or Life Expectancy
  • Rated Age Statement
  • Annuity Provider Underwriting Assessment
  • Annuity Broker Statement
• Appendix 5:25 - Settlement Agreement or Proposed or Court Order

Related S2KM reporting

• Medicare Compliance Legislation
• The Medicare, Medicaid and SHIP Extension Act (MMSEA)
• NAMSAP 2014 Regional Conference
• Part 1 - Speakers and Topics
• Part 2 - WCMSA Market Metrics

Settlement Annuities

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?