Do structured settlement transactions need greater transparency in pricing?

In last weeks commentary on the question of “How much commission does a structured settlement broker get paid” I mentioned two key areas I wanted to expand upon. The first, “Transparency in Pricing” is the subject of this week's commentary.

The event which is driving a lot of this discussion, the class action suit against AIG structured settlements and it’s claims of a RICO level conspiracy with settlement brokers nationwide, raises some key issues related to how structured settlement annuities are priced, who is paid and how pricing and payments should be disclosed to the vulnerable end user of the product, that end user typically being a personal injury victim. The complaint focuses a great deal of attention on the non-disclosure of commissions, pricing and I'm sure it will be an area of discussion in the coming months are structured settlement professional association meetings. 

As I stated last week, the standard commission of 4% on all premium placed is consistent across all markets. You send in premium as the agent and you get paid 4%, what could be simpler? However, nowhere is that compensation or it’s impact on the pricing of the annuity plan disclosed to the annuitant, or their legal counsel, by the structured settlement agent, the life insurance company or the casualty company negotiating the settlement. There is no disclosure in pre-sale literature, applications or in court proceedings, other than requirements in a very small number of states or counties that have disclosure statutes, with those law typically enforced in cases involving minors or incompetents. Consequently, in the vast majority of structured settlements, there is no clear disclosure of how the pricing was arrived at, what the commission is, who the agent actually is and if there are any commission split arrangements between the structured settlement brokers involved in the case.

Settlement professionals at this point are probably throwing up their hands and saying “ What difference does it make?” Their point being that the commission has been “baked in” to the pricing for decades, no one ever asks and the actual client buying the annuity is the casualty company, so as to fund the structure laid out in the settlement agreement and release. The injured party isn’t even the buyer, according to this logic, but is simply the recipient of a cash flow that happens to be provided by an annuity company selected by the defendants in most cases.  According to this logic, the question by most professionals is "Who cares about commission and pricing disclosure?"

Well, as the AIG class action case seems to indicate, as did the Spencer vs Hartford case which ended the Hartford’s commission rebating on structures, trial lawyers, consumer advocates, judges and increasingly regulators, ALL seem to care. Many are in fact taking a dim view of this opaque process that is often filled with potential conflicts of interest. Further, some of our profession’s biggest competitors, such as trust companies, investment advisers and others are making the professions lack of disclosure in pricing and commissions a BIG issue in their presentations to injury victims, highlighting the level of regulatory supervision they need to adhere to and the Fiduciary Standard they are required to uphold when dealing with the injury victim.

I’ll discuss the Fiduciary standard issue next week, but for this week let’s just reflect on the fact that if I, as an agent, sell a NON-Structured annuity to a consumer I am required to:

  • Provide a full, company illustrated term sheet explaining pricing, returns, liquidity costs, surrender charges and ownership/beneficiary rights and this must be signed by the owner and annuitant.

  • I am required to do a full suitability interview with the client to determine assets, income, sophistication, understanding of the product and how we arrived at the decision that this annuity makes sense for them.

  • The client must sign the disclosure agreement, must initial or sign the illustration and I must, under penalty of perjury, sign that the statements, disclosures and information is true to the best of my belief.

Few, if any, of these things are required when we write a structured settlement annuity contract for people who are typically unsophisticated, badly injured or impaired.

My question to the Settlement Profession is How long do you feel that this major and glaring difference in standards is going to continue in a world where disclosure and fiduciary standards are becoming the norm across all financial sales and investments?

In short, our failure to simply follow the same standards that are required of any life or annuity agent when selling these contracts, is coming back to bite the structured settlement annuity profession and it’s time to change voluntarily before change is forced upon us. The AIG Class Action and RICO suit might seem like a distraction to some in the settlement profession. I can promise you that it is much bigger than that, and that structured settlement professionals need to take this head on and change our disclosure, pricing and sales practices to at least match those required of us in non- structured settlement sales.

Will structured settlements be damaged as a brand by the AIG lawsuit?

Earlier this week a tidal wave of what some might deem as shocking news rolled over the structured settlement profession in the form of a lawsuit filed in the US District Court, Boston MA, alleging a RICO type conspiracy by AIG and the structured settlement brokers who are part of their Agency Partners or approved list programs.

The case was filed by the nationally respected class action firm of Hagen Berman and is focused on the contention that the format and business practices of the AIG program were part of a scheme that rose to the level of a RICO type conspiracy. Whether or not this is in fact the case will be determined by the courts in the coming months and years. However, given the sheer size and scope of the AIG program, you can’t underestimate the importance and impact of this news on the settlement profession as well as claims professionals and trial lawyers nationwide.

Over the last few days many different people and organizations in the structured settlement profession have contacted my office to not only see what I thought of the suit, but also to ask how I felt settlement planners, structured settlement experts and others should address what is now a huge elephant in the room any time they are on an AIG case.

I’m not going to comment as of yet on the merits of the suit or the details of the complaint, although I might do so at a future date. Instead I want to discuss how best to handle this from a communication standpoint, which is the immediate problem facing the structured settlement profession.

Crisis management is an art, as is salesmanship and the skill of persuasion. Too often in the past when other cases or crisis have arisen, the settlement profession chose to ignore, minimize or gloss over the matter at hand, believing that by discussing it, they gave it more weight than necessary. That might have worked in a pre-social media, non-Google search era, but now that EVERYTHING is searchable and everyone can express an opinion, different tactics are required or the profession runs the risk of allowing the narrative on this case to spin out of control. Careless attacks on the concept from those who looked to damage the structured settlement profession may could potentially brand many of the major names in our profession as alleged members of a racketeering scheme.

The terms “racketeer” “Conspirator” and “fraudulent enterprise” are powerful and very sticky. They can cling to a lawyer, a company, a professional or firm like stale cigar smoke in a room with out windows. When people have been conditioned by media, movies and writers to assume the worst of large financial companies, they already have a narrative in their heads, subconscious though it might be, that plays like a repeating video clip confirming their bias that “all big banks/insurance companies” are crooks. Whether this suit succeeds or fades away, the branding damage can already be done.

So what to do?

First, ignoring the “Structured settlements are crooked” branding message from those looking to benefit from this lawsuit and the negative publicity it created, simply won’t work. The image is too sticky, evocative and plays to a long standing confirmation bias.

Second, denying the “Structured settlements are crooked” branding won’t work either. That just opens us up to debating details and only serves to harden the association of the term structured settlements with a bad image. Not only that, but broad debate produces a huge volume of internet searched, keyword specific content that further damages the brand when people look up that story. All people hear, as they did in the Freddie Gray/Washington Post stories, is that “Structured settlements are bad and sold by bad people” and denying that we aren’t like THOSE structured settlement guys doesn’t work at all.

So if you can no longer ignore the issue and you can’t effectively deny it without creating further damage, what do you, as a structured settlement professional need to do?

Well, lucky for you, the only option left, going on the offensive, is the BEST option in a new media world, a reality that was on full display during a raucous pre-presidential press conference earlier this week. Just as Donald Trump knows to go on offense against a destructive narrative by flipping the table and making the people who are use to attacking, i.e. "The Press" the bad guys, you as a professional need to do the same. You have to totally scramble your opponents narrative and get them playing defense and denying your attack, instead of you being in a defensive crouch all the time.

While the members of The Settlement Channel professional directory have access to these new media tools and tactics, most settlement planners and brokers don't. Therefore, here are some immediate suggestions you can implement if you don't have a new media platform in place where you can go on the offensive:

1. Contact your clients so they hear about the lawsuit from YOU, rather than a listserv, insurance news web site,online media source or worse, one of your competitors who wants to associate you or your product with the negative elements of this lawsuit. You MUST be the one who brings it to them, not your opposition.

2. To recognize the built in bias of the RICO title which everyone associates with Mobsters and remind people there are CIVIL RICO laws and this isn’t a criminal RICO case. It helps to have a sense of humor on these things so go for a lighter touch. For example, this isn’t John Gotti being cuffed and perp walked, it’s a lawsuit looking into a long standing, well known claims practice that will be decided by the courts, not public debate.

3. Offer to keep them informed and that you will continue to update them on this lawsuit so that your attorney is not put into a situation where they are working on a case and are not aware of the implications of this litigation. Be the one that protects them from professional embarrassment and continues to assist in planning to protect the assets and settlement award of their clients. This also allows you to counter destructive attacks or misinformation by positioning yourself as the expert source of information on this matter. 

In conclusion, the Structured Settlement brand is at risk. The damage from the factoring news of last year on Freddie Gray was harmful, this in my opinion, is much worse. Every firm will need to decide on how they want to either capitalize on this news, or be a victim that allows a valuable planning tool to be forever tainted in the eyes of consumers, lawyers and the courts.

I’ll be back next week with a look at another big topic, the issue of disclosure of commissions, asset management fees and fiduciary duty standards. Many people are wondering if they are going to be imposed on the structured settlement profession. Check back next week or follow us on Twitter or Facebook and find out. Also if you want to learn how you can be part of The Settlement Channel and have access to a powerful new media platform that positions you as an expert in your city, state or region, email us using the contact form and I'll be happy to give you the details.   


AIG named in lawsuit alleging fraud in structured settlement program

Hagens Berman law firm has filed a class-action lawsuit against the nation's largest insurance company -- American International Group, known as AIG and American General Life Insurance Company, which is a part of AIG.

The lawsuit claims the companies defrauded annuitants and injury victims of their rightfully deserved claims. The suit says through their structured settlements, AIG took 4 percent from the cash portion and secretly used it to fund commissions to their own defense brokers.

According to the lawsuit, clients agreed to the 4 percent deduction, thinking it would be used to fund future annuity payments, but instead AIG kept the money for themselves.

The suit claims AIG used plaintiff's funds to decrease their defense expenses and reduce the amount of money they promised to pay clients. The lawsuit seeks more than $5 million and involves more than 100 plaintiffs, of which fewer than one-third are citizens of Massachusetts, where the case was filed in federal court.