Beyond Structured Settlements

Dodd-Frank and Structured Settlements

What impact will the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and related international regulatory developments, have on structured settlement annuity providers?

Proposed Amendment to Dodd-Frank

That issue was indirectly spotlighted this week when Senator Susan Collins (R., Maine) announced progress on a bill that would amend Dodd-Frank to permit the Federal Reserve to exempt insurers from new capital rules for banks.

Although the Federal Reserve has not yet published capital rules for insurers, "the Fed maintains it is required to set minimum capital requirements for insurance companies similar to the standards banks face," according to a recent Wall Street Journal (WSJ) article (subscription required).

Enacting legislation to reopen Dodd-Frank will be difficult, the WSJ article states, because many Senate Democrats fear such a bill would include broader changes and the Obama administration has opposed legislation that reopens Dodd-Frank before it has been fully implemented by regulators.

Many insurers believe "bank-centric" capital rules supervised by the Federal Reserve would require them to increase capital and product prices thereby creating a competitive disadvantage. Structured settlement annuity providers MetLife, Prudential, New York Life, and Mutual of Omaha have joined a lobbying coalition of insurers seeking separate capital requirements that take into account their business model, according to various new sources.

A recent LifeHealthPRO article , however, confirms life insurer expectations for increasing federal and international regulatory supervision quoting Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers (ACLI) as stating: “In the very near future, a major segment of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a state insurance regulator.”

Hughes added: "life insurance regulation in the U.S. can no longer be viewed as a purely domestic matter” and highlighted the importance of regulatory cooperation, according to the LifeHealthPRO article.

"If the capital standards of the states, the Federal Reserve (FSB), the International Association of Insurance Supervisors (IAIS) and the European Union are not generally consistent," he stated, "the resulting competitive disparities mainly involving the relative cost of capital will significantly disrupt the U.S. and the global life insurance markets.”

BACKGROUND - Insurance Regulation, Capital Requirements and Structured Settlements

The United States insurance industry historically has been regulated by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act .

Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the National Association of Insurance Commissioners (NAIC) adopted several model reforms including risk based capital (RBC) requirements. RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.

Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies. Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.

Enacted in response to the 2008 global financial crisis, Dodd-Frank created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.

Among those changes, Dodd-Frank established the U.S. Treasury's Federal Insurance Office (FIO) and "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]".

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The IAIS, whose members constitute nearly all of the world's insurance supervisors including the FIO and the NAIC, has committed to develop by 2016 and implement by 2019 the first-ever risk based global insurance capital standard (ICS).

The FIO published a report December 12, 2013 about "how to modernize and improve the system of insurance regulation in the United States." The report concludes:

• "[I]n some circumstances, policy goals of uniformity, efficiency, and consumer protection make continued federal involvement necessary to improve insurance regulation."
• However, "insurance regulation in the United States is best viewed in terms of a hybrid model, where state and federal oversight play complementary roles and where the roles are defined in terms of the strengths and opportunities that each brings to improving solvency and market conduct regulation."

Dodd-Frank also requires the Federal Reserve to regulate and establish capital levels for nonbank companies designated as "systemically important". The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”. The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.

Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".

"But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."

Dodd-Frank and Product Suitability Standards

In addition to the insurance regulatory and capital requirement changes discussed above, Dodd-Frank directed the SEC to study the need for a new, uniform fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary.

This study is potentially important for structured settlements and personal injury settlement planning because:

• Both of these related markets currently lack uniform product suitability standards.
• By comparison, structured settlement protection acts impose a "best interest" standard on the secondary market.
• Broker-dealers and investment advisers increasingly participate in settlement planning.
• Settlement planning increasing integrates structured settlement annuities with other insurance and financial products ("blended products") in settlement trusts subject to "best interest" fiduciary standards.

Although the SEC published a fiduciary standard study in January 2011, it has not yet published any related regulations. S2KM reviewed settlement planning product suitability standards in a four-part 2012 blog series.

Cornell Disability Studies, Research, Statistics

Two publications have recently highlighted the important role of Cornell University in expanding disability studies, research and statistics.

Wall Street Journal Article

A March 5, 2014 Wall Street Journal (WSJ) article (subscription required), titled "Disability Studies: Hot Topic on Campus" and written by Melissa Korn, features Cornell University's School of Industrial and Labor Relations which created a formal disability studies concentration in 2009.

Offering eight courses with more than 300 students, the Cornell program includes classes on disability and employment policies, disability law and a writing seminar on "intersections of disability identity in the law, workplace and society".

Cornell's disability studies program is associated with the Cornell University Employment and Disability Institute (EDI) which "advances knowledge, policies, and practices to enhance the opportunities of people with disabilities through projects, training, technical assistance, research and publications," according to its website.

"Disability Considerations in HR Policy and Practice," one of the Cornell disability studies courses featured in the WSJ article, "addresses the strategic advantages of employing people with disabilities, such as helping companies appeal to new markets."

In addition to guest speakers from the federal government and public companies, reading assignments for this course include academic journals and business magazines. Example topics for final papers: "the impact of the aging workforce on employers, how companies can accommodate returning veterans and what challenges multinational firms might face in implementing nondiscrimination regulations across borders."

The WSJ article correlates this surge in academic interest, in part, to new hiring guidelines for federal contractors with a goal for people with disabilities to represent seven (7%) percent of the employees in every job group.

NAELA eBulletin

The NAELA eBulletin is a weekly newsletter for members of the National Academy of Elder Law Attorneys written by Professor Kim Dayton, Professor Rebecca Morgan, and Elizabeth P. Allen, JD, LLM.

Amplifying the WSJ disability article, the most recent NAELA eBulletin features Disability Statistics, a resource-rich website created and maintained by Cornell's EDI that "helps policy makers, service providers, researchers, educators, the media, and people with disabilities and their families find relevant and timely statistics about disability."

Part of EDI's "Disability Statistical Research" project, the Disability Statistics website is funded by the U.S. Department of Education National Institute on Disability and Rehabilitation Research (NIDRR).

NIDRR, a component of the U.S. Department of Education's Office of Special Education and Rehabilitative Services (OSERS), describes itself as "the main federal agency that supports applied research, training and development to improve the lives of individuals with disabilities." In addition, the federal government maintains this website for people with disabilities.

Upcoming Events - Structured settlement professionals and settlement planners interested in disability community developments should make note of these upcoming events:

• March 18 - American Association of People with Disabilities (AAPD) Leadership Gala - open to non-members.
• March 27-29 - Academy of Special Needs Planners (ASNP) Annual Conference - open to non-members.
• May 15-17 - NAELA Annual Meeting - members only.

Prior S2KM blog posts profiling disabled individuals who have achieved special lifetime accomplishments:

• The Kyle Walsh Story
• Interview with the late Randy Snow

"ObamaCare is Slowing Health Inflation"

"[T]here are three kinds of falsehoods, lies, damned lies and statistics" according to the late Arthur James Balfour, a former Prime Minister of the United Kingdom, as quoted in the Manchester Guardian,  June 29, 1892.

Consequently, when the Centers for Medicare & Medicaid Services (CMS), one the federal government agencies most responsible for Patient Protection and Affordable Care Act (ACA) compliance and administration, publishes new statistical data suggesting "ObamaCare" is helping reduce health care spending, one would expect that statistical data to be reviewed sceptically, if at all, by Republicans.

Surprisingly, however, the Republican-friendly Wall Street Journal featured an oped article (subscription required) this past Monday written by Jason Furman, Chairman of the White House Council of Economic Advisers, and titled "ObamaCare is Slowing Health Inflation".

Furman's article highlights the new CMS statistical data which he attributes, in part, to the ACA: "From 2010 to 2012, health spending grew at an annual rate of just 1.1% in real per capita terms—the lowest rate in the 50 years we have been collecting these data, and a small fraction of the 6% rate that inaugurated the past decade."

Furman also claims "[t]his historic but largely unheralded slowdown in health spending ..... is helping to boost employment, lower deficits and bolster wage growth as the job market strengthens."

Furman believes lack of public attention to lower health care inflation results from the perception it is merely a "transitory byproduct of the Great Recession". As the economy continues to recover, however, he maintains other factors, including the ACA, are contributing to this good news.

Furman's article also challenges critics who claimed the ACA would be a "job killer." He maintains the 7.9 million private jobs added to the U.S. economy since 2010 should by themselves disprove this claim. Furman also references a 2010 study, co-authored by economist David Cutler, which estimates health-care reform could boost job growth by 250,000 to 400,000 a year later this decade and result in higher wages as the anticipated slowdown in healthcare costs are passed through to workers.

As additional evidence of the ACA's positive economic impact, Furman highlights Congressional Budget Office (CBO) projections. CBO has reduced its estimate for Medicare and Medicaid spending in 2020 by approximately 10% since its earlier 2010 estimate, according to Furman, and has also projected the ACA will increasingly contribute to deficit reduction.

"Correcting Misinformed Conservatives"

Furman was not alone this week in publicly proposing ACA reforms are working. In a January 6 blog post , liberal political columnist Jonathan Chait summarily quotes the following health care experts to support his contention that "since Obamacare’s passage, conservatives have gone from arguing that Obamacare will absolutely cause health-care costs to rise to insisting that the decline in health-care costs has absolutely nothing to do with Obamacare":

“The ongoing slowdown in the health-care growth rate defies historical post-­recession patterns and is likely to be ­sustained,” concluded Price­water­house­Coopers in June. “It appears that the reforms will stick and health-care exchanges and other policies will bring competitive pressure to markets,” says Randall Ellis, a professor of health-care economics. “Although the proof for this point of view is not yet definitive,” reports the Health Affairs blog, “the depth and breadth of change suggest that significant transformation in the nation’s delivery system is under way.”

Chait acknowledges: "[i]t's possible the slowdown [in health care inflation] is mostly or even entirely coincidental. But the evidence is certainly consistent," Chait continues, "with the premise that Obamacare’s payment reforms have prompted the changes occurring in American medicine. I have yet to see any conservatives anywhere open themselves even to the remote possibility that Obamacare’s cost controls might not fail."

By publishing Furman's ACA oped featuring CMS statistical data, The Wall Street Journal may have initiated a new Republican paradigm for ObamaCare.

For S2KM's complete reporting about the ACA, see the structured settlement wiki.

Affordable Care Act - 4

The Patient Protection and Affordable Care Act (ACA) represents a comprehensive expansion and restructuring of the United States health care system whose most important and controversial provisions for personal injury settlement planning, including the individual mandate and elimination of pre-existing condition restrictions, will become effective nationally on January 1, 2014.

Among the most fundamental and contentious ACA issues are whether, when and how the ACA will reduce health care costs.

In their Spring 2013 NAELA Journal article titled "Medicare’s Future: Letting the Affordable Care Act Work, While Learning From the Past" (see Affordable Care Act - 3), authors Alfred J. Chiplin Jr. and Bethany J. Lilly analyze various ACA cost-saving components.

Overtime, the Chiplin and Lilly believe the ACA's spending and cost-containment provisions should at least slow the health care spending curve. As this New York Times article points out, there is mounting evidence to support Chiplin and Lilly's belief that a sustainable slowdown in health care costs is possible. 

Health Insurance Exchanges

Chiplin and Lilly acknowledge ACA implementation will be a tough but doable challenge so long as we "let the tools of the ACA work". Among the implementation challenges they highlight are the new health insurance exchanges , which states are authorized to establish for individuals and small businesses. 26 states have refused to establish an exchange, thereby defaulting to a federally-facilitated exchange.

Based on conflicting actuarial projections, many insurance experts and commentators have predicted these insurance exchanges will produce higher insurance rates, especially among younger, healthier participants. Under the new ACA requirements, insurers who participate in the exchanges are not permitted to refuse individuals. Price variations and the right to rescind coverage are restricted and annual and lifetime limits are eliminated. Individuals can select one of four comparable plans (bronze, silver, gold, platinum) with few out-of-pocket expenses.

California Exchange Report

On May 23, 2013, Covered California, California's new insurance exchange, published a Report ("Health Plans and Rates for 2014: Making the Individual Market in California Affordable") that identified premium rates submitted by the participating health insurance companies. Surprisingly, these premium rates appear to be significantly less expensive than most forecasters projected.

"We’ve hit a home run for consumers,” announced Peter V. Lee, the executive director of the California exchange.

Many ACA proponents agree. For example, in his May 24, 2013 New Republic article ("California will be Spared the Obamacare Apocalypse: No Sticker Shock Here - Just Affordable Insurance Premiums"), Jonathan Cohn writes:

"Based on the premiums that insurers have submitted for final regulatory approval, the majority of Californians buying coverage on the state's new insurance exchange will be paying less—in many cases, far less—than they would pay for equivalent coverage today. And while a minority will still end up writing bigger premium checks than they do now, even they won't be paying outrageous amounts. Meanwhile, all of these consumers will have access to the kind of comprehensive benefits that are frequently unavailable today, at any price, because of the way insurers try to avoid the old and the sick."

Conservative Reaction

Perhaps predictably, the conservative political reaction to the California insurance exchange report was dramatically different as evidenced by these headlines:

• "Rate Shock: In California, Obamacare to Increase Individual Health Insurance Premiums by 64-146%" - May 30, 2013 Forbes article by Avik Roy.
• "ObamaCare Bait and Switch" - June 3, 2013 editorial in the Wall Street Journal.
• "Obamacare is Raising Insurance Costs" - June 3, 2013 op-ed article in the Wall Street Journal by Daniel Kessler.

Both Wall Street Journal articles predicate their analysis and conclusions on Avik Roy's article.

How can the same California insurance exchange report produce such radically different interpretations?

Proponents' Rebuttal

Jonathan Chait, an ACA proponent, provides an answer in his June 5, 2013 blog post titled "Is Obamacare a War on Bros?":

"Roy compared California’s plans to the teaser rates available on ehealthsurance.com. Those teaser rates turn out to bear little resemblance to actually available health-insurance rates — they exclude swaths of potential consumers for even minute health problems. Possibly the most misleading part of Roy’s astonishingly dishonest screed is the entry point for his pseudo-investigation...These columns keep citing a healthy 25-year-old man as if they are offering up a randomly chosen example of how the exchanges will work. Healthy non-smoking 25-year-old males have very different health profiles than the average person."

Chait's comments echo similar criticism of Roy's analysis by Ezra Klein in his June 1, 2013 blog post titled "The Shocking Truth about Obamacare's Rate Shock":

• "I ran the same search Roy did.....Click to buy the plan and eventually you’ll have to answer pages and pages of questions about your health history. Ever had cancer? How about an ulcer? How about a headache? Do you feel sad when it rains? When it doesn’t rain? Is there a history of cardiovascular disease in your family? Have you ever known anyone who had the flu? The actual cost of the plan will depend on how you answer those questions.”
• "Comparing the pre-underwriting price of this plan to those in Obamacare’s exchanges is ridiculous. The plans in Obamacare’s exchanges have to include those people. They can’t turn anyone away or jack up rates because of a history of arthritis or heart disease. ...They also have to offer insurance that meets a certain minimum standard."

In a follow-up to his May 24, 2013 New Republic article (cited above), Jonathan Cohn added his own rebuttal ("Anatomy of a Bogus Obamacare Argument: How an Irresponsible Forbes Writer Distorted the Debate") to Roy's article:

"Writers like me who have supported the [ACA] treated [the California exchange report] as a big deal. But I would like to think we were candid about the downsides....and noted that California was just one state—and, in some respects, a best-case scenario, because its officials are committed to the law’s success and enjoy broad support from corporate, medical, and consumer leaders. We also noted—as we had noted before—that some young and healthy people would have to pay more. Again, a health insurance system that no longer discriminates against the old and sick can no longer discriminate in favor of the young and healthy. We also acknowledged that getting the insurance bids is just one step in the process. As many of us have written, plenty of things could go wrong with Obamacare—and at least a few of them surely will."

ACA and Settlement Planning

The future of the ACA - and whether, when and how it will reduce health care costs - remains uncertain in the context of continuing political debate and threats to prevent its implementation. However, as key ACA provisions, including the individual mandate and elimination of pre-existing condition restrictions, are set to take effect January 1, 2014, settlement planning and structured settlement stakeholders should prepare themselves for a vastly different professional landscape.

For S2KM's complete reporting about health care reform and the ACA, see the structured settlement wiki.