The Twin Pillars of structured settlements, one solid and one rotten

As regular readers of my commentary have no doubt noticed, I’ve taken some what of a summer sabbatical this year, under the premise that if I am not particularly inspired to write, tossing lousy commentary up on a site drives readers away.  Part of the thin schedule was lack of inspiration, but a lot of it had to do with another major expansion of our studios at The Legal Broadcast Network.

Yes, our studio and broadcast platform is expanding yet again, and after a summer of R&D, comprehensive testing of new delivery methods and taking on several new clients, LBN is growing and is about to announce a re-branding of our studios to better reflect the broad scope of clients we now work with. However, starting this month my weekly commentaries on settlements, finance, law and new media will resume, and the two shows I host, Speaking of Settlements and Speaking of Justice, will likely be twice a week broadcasts going forward.

With that in mind I will be starting several series this month, the first of which focuses on the fundamental problems facing the structured settlement profession, a market I’ve worked in for almost 30 years now. Structured settlement sales are mired in a 3 year slump, as the combined forces of low interest rates, economic turmoil and financial instability at some of the major casualty firms has conspired to push annuity sales to the lowest level in decades. The numbers don’t lie and simply waiting for rates to go back up isn’t an adequate strategy for a profession that provides valuable planning advice and counsel to thousands of injury victims, lawyers and claims professionals each year.

In order for the profession to rebuild off it’s current level, we have to take an honest look at the foundational product and principals that caused structured settlements to grow over time into what was once a $6-7 billion per year market, and then determine if those same principals apply going forward. If they don’t, we need to craft a new direction that is consistent with the economics, consumer trends and claims practices of 2010, instead of wishing it was 1990 again and that a settlement professional can just sit by the fax machine and wait for structured settlement cases to magically show up every day.

Twin Pillars

So, what's with the title you might ask and what are the twin pillars?

As you can see from the attached photos, pillars have been used in building and architecture almost from the beginning of recorded history, as a means of providing a foundation for buildings both great and not so great, primarily to support a ceiling, roof or structure. They were foundational elements to any large building or structure and if one of them was weakened or rotted, the entire building was at risk of collapse.

In the structured settlement profession, which was founded in the late 1970’s, the two primary pillars were, and to some degree still are, the use of annuities to transfer mortality, market and dissipation risk from vulnerable injury victims to strong life insurance companies, and the use of present value calculations to provide a bridge between what a plaintiff needs vs. what a defendant wants to pay.

This first foundational pillar, which I will entitle “ protection of the vulnerable”, is the use of income tax free structured settlement annuities to protect vulnerable injury victims. This first pillar is still rock solid and has performed exceptionally well over time. The structured settlement annuity and it’s core financial elements of planning and risk transfer is the primary basis of strength of our profession and will be instrumental in restarting the growth of our profession.

However, the second foundational element of the professions growth; using annuities to lower the cost of litigation for defendants through the use of present value calculations, has lost more and more of it’s impact over the years. This is due in no small part to the reduction and near elimination of rebating, as well as the gradual elimination of internal steering and approved broker and life markets at many of the major casualty companies.  This pillar, which we will call “ defendants economic self interest” is the one that has been most eroded over time and has slowly rotted from the inside out, until we now have a flawed “structure” of a building that is at risk of collapse.

It is this fundamentally rotten and flawed pillar that is, in my opinion, at the heart of the current sales malaise and is the one that we are failing to address both as a profession and as individual professionals. Until we are honest about the flaws of our business model and what got us to this point, we aren’t going to be able to create the sales growth necessary to strengthen our market to the point where new life insurance companies look to enter it, as opposed to the steady reduction in life companies who underwrite structures.

In order to understand where we are, we need to look at where we have come from. In 1980’s the settlement profession was 100% dominated and controlled by defense brokers representing large casualty companies. The amazing growth in acceptance of this new concept in claims settlement was driven by two major principals:

1. High interest rates allowed for fantastic present value discounts on future payments to the plaintiff using annuity funding. It was not uncommon back then to be able to turn $200,000 into $1 million or more in guaranteed payments and even more over projected life times. These big discounts allowed claims to settle for less then a cash settlement as the benefit payments of the structure could not be duplicated by similar taxable investments. The structured settlement transaction could demonstrably show that it was in the injury victims best interest, as well as the insurance companies best interest and therefore, insurance companies saved money on claims and plaintiffs didn’t mind as the value of the structure was worth more to them than the potential discount the defendant gained in the transaction.

2. Insurance companies and structured settlement agents who worked for them also had an absolute monopoly on information related to structures and pricing, leading to the much used and now discredited lie of saying to plaintiffs “ that if we tell you how much this costs your tax benefits are in jeopardy.” No bigger and more poisonous lie was ever used as the foundation of a legitimate financial product in US history. ( With the possible exception that pooling mortgages  into securities reduces credit risk…) This monopoly on price information led to pervasive short changing, rebating, post settlement underwriting and other tactics that saved casualty companies money on claims, but grossly misled plaintiffs and their trial lawyers who typically were unrepresented by a settlement broker in those years who could tell them “what the cost was”. If you doubt this occurred, go back and read the June 3, 1985 Forbes article entitled “The Structures Game” in which claims professionals blatantly admit using this ploy as “ just good old fashioned hard bargaining.” Today we would call it something else, fraud, but lets not go there right now.

The point is, and I will expand it on it in part two of this series on Thursday of this week, is that our profession grew dramatically in the 1980’s as a result of what was essentially a big lie and the monopoly on information that was strictly enforced by brokers and life markets. I can hear some of you saying already,       “Why does this matter, it’s ancient history and we have moved past all that?” My answer is, that if the primary value proposition for what was the main engine of structured sales, i.e. the  casualty company saving money on claims by using structures, is no longer valid due to changes in business and claims practices, then you are missing one of the primary engines of growth for the profession going forward. You can’t build a profession on the hope that casualty companies will continue to promote structures out of force of habit or some social good, there has to be value on both sides of the deal or we are going to continue to see the decline in sales we have witnessed the last few years.

I have some ideas as to how we can address this crumbling pillar and restart the growth, which we will cover in this month long series of discussions and commentaries. So, watch for part two of this series, “ The dirty little secret of structured settlements” on Thursday of this week.

( Mark Wahlstrom is the President of Wahlstrom and Associates and the Founder of The Legal Broadcast Network. His is generally considered to be one of the nations leading experts in structured settlements, structured legal fees and multi-claimant litigation in the US.)

Posted on October 5, 2010 .