Structured Settlement Industry Production Numbers Plunge

Hi this is Mark Wahlstrom, here with another edition of The Settlement Channel commentary. 

Today I want to discuss the recently published production numbers for the Structured Settlement profession, which is circulated around this time each year ahead of semi annual SSP and NSSTA meetings. 

The numbers show a substantial drop in structured settlement production from the various life insurance markets from $5,8 billion in 2016 to $5.5 billion in 2017. This despite marginal increases in interest rates, which make the product more attractive and would typically lead to increases in sales. 

While this is still an improvement over the worst year, 2012, which was an abysmal $4.8 billion, it is still far below the peach years of 2001 to 2008 when the profession routinely exceeded $6 billion in annual production. 

What does this seem to suggest? Has the settlement annuity market stagnated, is it a one year blip, or a sign of a longer term secular decline that results not just from low interest rates, but also a drift away from fixed rate structured settlements entirely?

I'll be discussing my ideas on this over the next few weeks, but for now I feel it is safe to say, in my professional opinion. that the primary reason for the decline is a combination of factors, all of which have created a negative image of this foundational  planning tool in the minds of trial lawyers and injury victims. 

First, yes the decline in interest rates over the last 8-10 years has had a huge impact, as it is difficult to get people to invest in a product with yields that often were less than 3% during this economic and market climate we have seen for the past decade. 

However, of greater longer term importance is the emergence of trust companies and investment managers, positioning themselves as superior alternatives to the structured settlement annuity as a planning tool. The sustained bond market and stock market rallies, combined with relatively low tax rates, has made the tax free appeal of the annuity harder to sell, which combined with equity and bond market returns, has pushed more money to asset managers vs the traditional markets. 

I'll discuss in my next commentary if I feel this is a good or healthy thing for the profession, as well as for injury victims, but the point is that the settlement profession now is being seen as a juicy target by asset managers who don't need access to structured settlement annuity product in order to market themselves as settlement professionals. I feel this trend, if measured properly and included in the production numbers, would actually indicate an INCREASE in production and largely accounts for the "LOST" $1.2 billion in production over the last 10 years. 

In summary, the settlement profession, by clinging to a one product solution and doing their best to NOT market the product through the use of non-existent advertising budgets, has made their core product a "second choice" for many planners and attorneys. 

I'll get into this in more depth next week, but for now it's important for lawyers, planners, brokers and others to realize the market has actually increased in size and is about to be significantly impacted by an influx of trust and investment advisors who actively sell against the core product. 

I hope you enjoyed this brief update, watch for my next broadcast where I get into more detail as to the benefits and drawbacks of the asset management influx into the settlement planning profession. 

Pacific Life Offering Structured Settlement Brokers Possible Incentives

Annuity provider Pacific Life may have been offering structured settlement brokers lavish vacations as possible incentives, reveals a report from Yahoo Finance.

According to the report, Pacific Life has been offering certain brokers luxurious trips to places like Bora Bora to learn how to ‘exchange ideas.’ Industry insiders tell Yahoo Finance perks, like luxurious trips, may unduly incentivize brokers to favor Pacific Life products over others and as such are considered a questionable practice by some regulators and financial industry watch dogs.

There is reportedly a trip planned for the Four Seasons Resort in the Maldives for 2018. Pacific Life is the only major settlement industry provider to offer trips like these to brokers.

Structured settlements consultant Mark Wahlstrom said incentives, which were once popular in the industry, are now uncommon. Wahlstrom said he feels it is an unwise practice since structured settlements deal with injury victims and ‘nothing should interfere with that decision process other than the best company at the best price.'

Pacific Life declined to comment.

Managing Family Expectations for Personal Injury Settlements

Beneficiaries and their families often have high expectations concerning personal injury settlements. Edward V. Wilcenski, Esq., of Wilcenski & Pleat, provides information about the settlement process which will help families set realistic expectations about the use of settlement funds.

Personal injury settlements are often preceded by years of litigation.  As a case approaches its conclusion, there’s usually a sudden rush of activity, as families are pressed to meet deadlines set by attorneys, insurance companies, courts and other professionals.  On the one hand, families are relieved to be at the end of a long and difficult road, but on the other, they’re often asked to make some very important, long-term life decisions in a short period of time.  One of the first things that special needs planning attorneys try to do is slow the pace and help the families understand their choices.   

As a preliminary matter, it is important for families to understand that when a lawsuit settles, there may be certain obligations that need to be paid before funds are available to the plaintiff.  If private health insurance, Medicaid or Medicare have previously paid costs associated with the plaintiff’s injury, those entities will typically have “liens” which will need to be repaid from the proceeds of settlement before funds are available to the plaintiff.  

Once all liens and litigation expenses have been identified and paid, the plaintiff is left with the “net settlement” amount.  The question then becomes whether the plaintiff should receive the net settlement in a lump sum, or whether some part of the net settlement should be “structured.”  With a structured settlement, a portion of the net settlement is paid to an insurance company in exchange for fixed and ongoing income payments in the future.  Those income payments can be made in monthly installments, annual installments or some other combination based on the plaintiff’s expected needs.   

The primary benefit of structuring a portion of a settlement is that these future payments are guaranteed, regardless of what may happen with the stock market or interest rates in the future.  The downside of a structure is that the plaintiff must forego liquidity in exchange for the guaranteed income stream.  Once a payment schedule is established, it becomes permanent, meaning that the plaintiff will not have access to the underlying value of the structure if there are large and unanticipated expenses in the future. As a result, with larger settlements, it is often beneficial for a plaintiff to take a portion of the settlement in a lump sum and use a portion of the settlement to purchase a structure.

Regardless of how a settlement is paid, rarely will settlement proceeds be sufficient to allow a plaintiff with a permanent disability to support herself for the rest of her life.  In almost all cases, the plaintiff will need the ongoing support of various means-tested government benefit programs, including Supplemental Security Income (SSI) and Medicaid. These programs establish a “floor” of support.  If settlement proceeds (taken as a lump sum, a structured settlement or some combination) are placed in a properly drafted supplemental (special) needs trust (SNT), they will not impact the plaintiff’s eligibility for ongoing support from government funded programs.  The trustee of the SNT will then be able to use the settlement to pay for other goods and services to enhance the life of the plaintiff with the disability.   

There are many other important decisions that a family must make during the settlement process, including the selection of a qualified trustee and the identification of significant expenditures like housing and transportation which may need to be made in short order.  Given the importance of these decisions, a plaintiff and her family are best served when the personal injury attorney, the special needs planning attorney and the structured settlement professional work together to develop a tailored solution.

Edward V. Wilcenski, Esq., practices in the areas of special needs planning, litigation settlement consulting, trust and estate administration, elder law and long-term care planning.  His firm, Wilcenski & Pleat PLLC, has offices in Clifton Park and Glens Falls, New York. He is a past president of the Special Needs Alliance, and works extensively with litigation attorneys, structured settlement professionals, corporate trustees and families who are negotiating the settlement process. The Settlement Channel is a featured network of Sequence Media Group.