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.

Are Structured Settlements a good deal in a zero interest rate world?

"Should a trial lawyer propose, and should an injury victim accept, a structured settlement to settle their personal injury case in such a low interest rate environment?"

In this weeks commentary on The Settlement Channel, host Mark Wahlstrom looks at the issue of zero interest rates, or even negative rates of interest, being offered on fixed income investments, in particular structured settlement annuity contracts. One of the constant refrains that structured settlement experts hear from trial lawyers and their clients is that structured settlements are a bad idea in a world where interest rates are offering effectively zero rate of returns when you factor inflation into the yield at 2%. On it's face, you would think it's hard to argue with that logic as we are clearly in a historic period of zero to negative yields on fixed income and annuities. 

However, as pointed out in his weekly commentary, Mark illustrates that in practical experience settlement planners and structured settlement experts have been hearing this same narrative for over 15 years now, as we have been in a 25 year bond market rally where rates have gone from double digits to the current negative or zero yields on high quality bonds and notes. It has always been " rates are too low compared to the past" but all along that 25 year curve, the value of a guaranteed, tax free income has been proven to be the key component of just about every successful settlement plan. The rate of return or yield is important for sure, but the consistency of the cash flow, monthly income and security are paramount to injury victims who rely on those funds to live. As pointed out in the commentary, 15 years ago people were rejecting tax free yields of 7% to 8% as "too low", when the evidence of the last 15 years now shows that anyone smart enough to take those tax free deals was getting a yield roughly equal to that of the S&P over that same time frame, particularly when taxes and management expenses are deducted and a net yield is calculated. 

The question now is, what will planners, attorneys and injury victims be saying about their decisions to not structure annuity payments in the current rate environment? Will it be considered wisdom to have declined the option for life time, tax free income that was guaranteed, predictable and couldn't be outlived or outspent by the injury client? Will they look back and say that the low rate environment was actually the precursor to a historic stock market correction, or even more likely, an eventual bond market correction that wiped out huge chunks of principal and crippled their ability to care for their future needs?

As the commentary concludes, no one can know what the economic and financial market futures of the US will be, they can only speculate. However, the one thing any experienced settlement planner or structured settlement expert does know is that guaranteed, tax free, no fee income for a person who can no longer work, care for themselves or needs to support a family, is like GOLD to them. Every plan requires an income strategy and over the last 35 years the structured settlement annuity approach has been proven time and again as the bed rock foundation of most settlement plans. There is almost always a place in the settlement plans of an injury victim for this monthly income and it is the wise attorney, planner or family that elects that option as PART of a comprehensive settlement plan. A structured settlement cash flow provides a safety net, a floor income and planning certainty in an uncertain world. No other investment option offers zero on going fees, administrative costs or taxes like a structured settlement does either. 

Conclusion: That even in a low interest rate world such as we see now, that while it might seem counter intuitive, it's entirely possible in a period of economic turmoil that the certainty and safety of a structured settlement payment stream makes the MOST sense as the people who rely on it can't afford to be with out an income, ever. Don't just focus on rates of return and what you think you might get in alternative investments, instead engage a competent structured settlement expert from the directory to assist you in designing a settlement plan that makes sense. Chances are good you won't look back in 10-15 years with buyers remorse if you do.