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Tough times for structured settlements

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For both the claims and life insurance sides of the insurance industry, this is a difficult time to be involved with structured settlements. 

Low interest rates are tamping down claimant interest, making structured settlements less valuable to claims professionals.  From 2008 to 2013, annual structured settlement premium dropped 24 percent in real terms.

On the life side, falling demand and the significant costs of running a structured settlement program have spurred many of the nation’s biggest insurers to leave the market.  The numbers are stark: In 2003, there were 23 life companies issuing structured settlement annuities.  By 2009, that number had shrunk to 11. 

Today there are only 8 life companies issuing structured annuities and two of those (Mutual of Omaha and New York Life) have a combined market share of less than 10 percent.

Assessing the risk

But there’s an even bigger shadow over the industry these days and it threatens one of the product’s perceived key advantages for claims departments: namely, the belief that use of a structured settlement to resolve a claim does not entail additional risk.  This spring, a class action lawsuit was filed against the industry’s largest structured settlement company, Ringler Associates, for its role in setting up structured settlements funded with annuities issued by Executive Life of New York (ELNY).

A year ago, ELNY went into liquidation and nearly 1,500 beneficiaries lost nearly $1 billion in future structured settlement payments.  For many annuitants, this meant losing nearly 60 percent of their future payments.

Many of these beneficiaries who were set up with ELNY structured settlement annuities lived in states where ELNY was not licensed. Worse, the consultants who sold these annuities pocketed huge undisclosed commissions while concealing what they knew about ELNY and its parent, First Executive Corp.

For claims professionals, this litigation threatens to upend the idea that use of a structured settlement does not entail additional claims risk.  As AIG President of Claims Rick Woollams told an insurance audience two years ago, the most important thing for AIG when settling a claim is that once the payment is made, the case is permanently closed.

Referencing ELNY specifically, Woollams stated that AIG would have to pay some ELNY claims twice.  Perhaps not surprisingly, he added that he had no tolerance for double-paying claims.

There’s the key issue this litigation raises for claims departments.  If the ELNY structured settlements that are the focus of the Ringler lawsuit weren’t set up correctly, P&C companies could get dragged back into cases that were closed more than 20 years ago.

Consider the case of Reggie Kelly.  An Alaska resident, he was horribly hurt in a motorcycle accident in California that was not his fault. The defendant’s insurance company, which had clear liability, brought in a prominent structured settlement consultant from Ringler Associates. 

This Ringler consultant set up Kelly’s payment stream, using a single ELNY annuity when prudence would suggest that annuities from more than one company should have been used to reduce the risk. 

After funding Kelly’s payments with a single ELNY annuity, this Ringler consultant pocketed a huge, undisclosed commission and moved on.

Big problem: Kelly was (and is) an Alaska resident and ELNY was not licensed in Alaska, even though his Alaska address was featured prominently on the annuity application.  Now his structured settlement payments have been cut by almost 60 percent.

The claims professional involved in this case either knew or should have known that ELNY was not licensed in Alaska. Given the claim’s size, multiple officials from this P&C company were probably involved in signing off on the settlement.  Given ELNY’s liquidation and Mr. Kelly’s payment shortfall, it is clearly relevant to determine the claims company’s actions and knowledge of this issue.

Calculating the stakes

The prospect that hundreds of ELNY shortfall claims could be reopened has to be unnerving for any P&C official whose company brought in a structured settlement specialist to document a definitive settlement.  These same specialists were instrumental in lobbying for what amounts to a massive tax break for insurers when they use Qualified Assignments under Section 130 of the Internal Revenue Code

With the stakes involving nearly $1 billion in lost payments, it is a good bet that more litigation involving ELNY structured settlements is coming.  Will Section 130 be next?

The Ringler consultant involved in the Kelly case went on to become the President of the structured settlement industry’s DC trade association.  Interestingly, the association knew about the likelihood of an ELNY shortfall for nearly a decade but never warned the structured settlement beneficiaries it claimed to protect.