Approved lists, the next domino to fall?

I am reminded weekly that there is one last, lingering sick element of the structured settlement industry and that is "the approved list" that is the foundation and basis of many in house casualty claims programs. For the non-industry types or casual readers of this blog, I am talking about a practice at most major casualty insurance firms such as AIG, Hartford, Liberty Mutual, Allstate to name the big boys, and scores of lesser firms, where when you decide to use a structured settlement to resolve your claim, you are informed that you must fund this annuity from a list of "approved life markets".

It sounds innocent enough until it becomes abundantly clear that the purpose of the approved list is not to insure the largest or safest market, or necessarily the best priced market, but instead in many instances to steer annuity premium to a select group of life companies that by amazing coincidence have each other on one another's approved lists. In other markets, businesses and professions this wouldn't be called an approved list, it would be call collusion and a violation of anti-trust statutes, but the structured settlement industry often takes long standing practices that are illegal elsewhere and builds them into the foundational elements of it's profession. ( See undisclosed commission sharing/rebating, see the Weil case, see fraudulent claims that knowledge of costs constitutes constructive receipt, etc. )

Here is a little history on approved lists from a guy who has been around pretty much from the start.

The first "approved list" was the lists that casualty companies created of "approved brokers" so as to limit the number of outside brokers and agents capable of handling in house claims settlement for a particular casualty company. As with all bad ideas, this had a concept that seemed plausible but quickly turns into a form of subtle corruption of the process and a means of protecting brokers who "own an account" as opposed to allowing for representation and fair compensation for plaintiffs and their representatives. I don't see any end in site for broker approved lists as it is certainly the right of any casualty company or self insured to select the broker of their choice to handle their structured settlement claims. My only issue with this practice is when the leverage of "approval" is used to totally exclude plaintiff experts from compensation or direction as to the placement of the annuity that funds the periodic payments. Thankfully, most of the companies that are that heavy handed have slowly abandoned the practice, although on large cases I still see it exerted as a means of squeezing plaintiff brokers out of the deal from time to time.

The second "approved list" is the subject of this commentary, and that is the list of approved life insurance companies selected by the casualty company, self insured, state or federal agency as acceptable to fund periodic payment obligations that are agreed to in settlement and then subsequently transferred away from the defendant via a section 130 qualified assignment. The original concept of the approved list was sound and was largely born out of the failure of Baldwin United, Charter Life and Monarch Life back in the early 1980s. While none of the companies listed, other then Charter, were big players in the structured settlement area, casualty companies realized that they needed a selection tool to weed out shaky players as many of the casualty companies, pre-passage of section 130, actually owned and thus guaranteed the payment of the structured settlements they used in settling claims. The first approved lists utilized the AM Best ratings service and the then recently provided S&P ratings provided as to the claims paying ability of life insurance companies. ( S&P saw a great business opportunity post Baldwin/Charter and ran with it.)

However, as the 1980s went along it became a common practice for casualty companies to not only have approved brokers, but to build in house programs that steered annuity premium from their claims back into their in house or subsidiary life insurance companies. Thus you saw AIG start to steer premium back to AIG Life, Liberty Mutual back to Liberty Life, State Farm back to it's life subsidiary, etc, all with the clear vision that this was the ultimate in corporate cash flow recycling. In it's simplest form it meant that $100,000 in annuity premium that might have gone elsewhere, was now going out of pocket A of the insurance conglomerate and back into pocket B of the company, all with beneficial elements when it came to reserves, tax deductions and sales of new business. A great plan except for one tiny little flaw, the in house company was quite often not as well priced as other life markets writing annuities so the practice could have the effect of charging reinsurance partners, insureds who are claims rated and plaintiffs who were short changed more then they should have been charged.

What was the solution to this problem? The approved list, upon which I will expand in part II of this commentary that I hope will encourage and speed the end of this unhealthy practice.

Part II on Approved lists to appear tomorrow.