Earlier this week the NAIC announced a major policy shift related to the rules and regulations for life insurance companies as it relates to their reserve and surplus requirements. These modifications, first reported in the Wall Street Journal, could have a dramatic impact for the better on the capital requirements that companies such as Met Life, Prudential Insurance, American General, Hartford Financial and Genworth are struggling with.
One of the least reported elements of the recent capital crunch for life markets is the pressure caused by these annuity reserve requirements. Many of the negative financial reports of the last 90 days for life companies were directly related to their necessity to move huge amounts of current earnings or surplus into reserves to account for requirements to reserve variable annuity guarantees and future market yield calculations.
The proposed modifications will greatly reduce the pressure on life markets to pour huge amounts into reserves for this product line, free up current reserves and significantly lessen the need for capital at a time when raising capital is both expensive and difficult.
This is clearly very good news for life markets, and as I outline in my commentary, still provides for a high degree of safety for the annuity holders and life insurance beneficiaries.
Once again today we can open our papers, or browsers if you are an online reader, and be treated to a big story on the life insurance industry and it's request for funds from the TARP program. TARP being an acronym for Troubled Asset Relief Program.This story, and the reaction of congress and media groups makes clear once again just how incredibly foolish these life companies are to take this devils deal of funds from the federal government.
The reward for asking to access this capital is now going to be incredible scrutiny and media distortion as to the business practices, uses of capital and operations of these organizations. As anyone who works in the life insurance industry knows, this is not a business that typically welcomes the bright light of the media as to it's finances, operations, business practices and tactics. In fact we could say, and I have said on many occasions, that the structured settlement industry is the ultimate under the radar, shadow business of it's size in the entire country.
Take a look at this article, read the commentary from "consumer watch dog groups" and the sure to come congressional grandstanding and "oversight" and ask yourself if taking these funds is worth what is sure to follow.
Personally, I commend New York Life for some clear thinking in their earlier decision to turn down TARP funds, as well as other markets who have made similar decisions. Not that I fear disclosure of our business, in fact I welcome it, but it sickens me to see congressmen and women grandstanding and trying to score points on the backs of the one stable financial industry left in the US and the drain on company management talent isn't worth the "free" money from the Feds.
Keep Congress out of your business life markets, and woe to the companies on the list. I don't think their agents and stakeholders have any clue what they are in for if they take those funds.
In an earlier blog post I tossed out the concept of The Golden Age of structured settlements, and how I believe we are about to enter a period of incredible growth in the settlement profession. I got such an exceptional response to that blog post that I took the time to create a two part video presentation on the topic of the future of the structured settlement profession, settlement planning and the need for structured settlement annuity contracts for injured plaintiffs.
This two part edition of "Speaking of Settlements" goes into that post and the theory of a coming boom in structured settlements in greater detail. Obviously I'd like you to view the videos, but if you want the short hand argument as to why I think we are about to see a surge, the five points are as follows:
1. Tax rates are about to rise given the government deficit and Democratic control of the House, Senate and White house. High tax rates make tax free annuity payments such as offered under structured settlements more attractive and as such we will see a relative advantage to using tax free annuity payments over alternative investments that don't enjoy the same tax status.
2. Interest rates are going to rise substantially over the next 3 years as the massive government debt leads to inevitable declines in the value of the dollar and relative increases in interest rates on debt obligations. Again, when compared to alternative investments such as bonds and bank CD's, the high rate of return on structured settlement annuities will compare favorably with other choices that lawyers and plaintiffs have before them, making the structured annuity a favored choice for many.
3. Life insurance companies are going to come out of this financial crisis as one of the few entities that didn't fail and in fact stood strong during the turmoil. The performance of structured settlements in this crisis is going to contrast very favorably with money market funds, banks, stock brokerage and mutual funds, not to mention real estate. People will begin to realize the superior safety of life insurance companies which is going to make our selling job easier when we discuss safety, stability, etc. All one needs to do is look at the 100% gain in the price of Hartford Life's stock last week in a single day once it became clear the insurance industry is still making money, is not going to vanish and that the major life markets such as Met Life, John Hancock, Genworth, Prudential, Hartford and others are not going away, but in fact are going to get stronger. Even AIG looks to be a candidate for a successful work out at this point.
4. Tort reform is dead as a political issue on both the national and state level, which will ultimately lead to a stronger settlement market. The distraction of tort reform, the heavy handed claims and litigation tactics and other clubs used to push people into smaller settlements, poison jurys and reduce the number of cases filed will slowly begin to receed. Nothing huge at first but the pendulum that swung so far to the right over the last 10 years will begin to swing back to the middle as the political climate shifts to a more pro-plaintiff market.
5. The Structured Settlement industry cartel is in it's last days as the information age sweeps over our business and creates greater awareness of pricing, negotiation and access to markets by consumers looking to decide how to settle their claims. The last 25 years has seen complete dominance by defense interests and a few powerful brokers that limited information, access and entry to the structured settlement business. I can't think of any other major financial market that is so totally insulated and sheltered from outside competition, however, with the information age, the intrusion of other financial professionals and increased sophistication of consumers is going to continue to force greater transparency and cooperation on our business.
Take a look at both segments of Structured settlements, the coming Golden Age and watch for some other big news this week related to new marketing opportunities about to be made available to structured settlement professionals nationwide.
