Beyond Structured Settlements

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.

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 - 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.

Structured Settlement Metrics - 1

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

CLM membership includes: corporations, insurance companies, government agencies, defense attorneys and law firms plus individuals "who participate in litigation and the management thereof (Corporate Counsel; Risk, Claims and Litigation Managers; Adjusters and Service Providers etc.)."

CLM's litigation management study results are summarized in the cover article (titled "The Fab Four") of the Fall 2011 issue of CLM's "Litigation Management Magazine" which highlights four "key findings" that "emerged from the answers to the more than 160 questions covered in the study:

• "Litigation management effectiveness has CEO-level visibility like never before.
• "Litigation executives are not happy with the metrics and analytics available to them.
• "Organizations are taking a more active role in procuring and managing litigation management service provider relationships.
• "Litigation management ROI quantification is both difficult and valuable."

Among the 30 litigation-related service areas analyzed, the "most penetrated" external exclusive or preferred service provider programs were:

• Structured settlement - 63%
• National reporting program - 48%
• Surveillance - 48%
• Outsourced processing - 21%
• Records retrieval - 20%.

The CLM article quotes Mike Saltman, President of Esquire Corporate Solutions, who describes the "shift in thinking" about national service provider programs:

"These programs are about much more than cost savings, although the savings can be substantial and can be in and of themselves a primary motivation to create these programs. 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, satisfaction levels. These are the metrics that a national service provider must be able to give to its clients in today's environment."

When asked "How effective are your metrics in measuring the effectiveness of your litigation program", however, 74 (plus) percent of the study's participants rated their available metrics as "Fair" or worse:

• Very effective - 13%
• Effective - 13%
• Fair - 38%
• Poor - 34%
• Very poor - 3%.

Although the CLM article summarizing the litigation management study highlights structured settlements, it does not identify or suggest specific metrics or analytics for liability insurers, self-insured defendants or government entities to determine the effectiveness or success of their structured settlement programs.

As defendants and their insurers continue to re-think structured settlements in the context of legal and financial developments, here are some questions they might consider:

• What performance metrics do you utilize to evaluate the effectiveness of your structured settlement program?
• Which metric is most important?
• Which metric is most difficult to obtain or confirm?
• Do structured settlements increase or decrease your claims costs?
• How do you measure the impact of structured structured settlements on your 1) current and 2) future claims costs?
• What is your structured settlement success ratio?
• How effective are your metrics in measuring the success of your structured settlement program?
• What changes in your program would improve your structured settlement performance?

For additional S2KM analysis to help stakeholders re-think structured settlements, see the structured settlement wiki as well as future S2KM blog posts about structured settlement metrics.