Considerations regarding “In House” Programs and Factoring Transactions for the Casualty Insurer

Acknowledging these economics as well as the availability of relevant affiliated resources, many casualty insurers, and some self-insureds, have organized “in house” programs to capture and direct structured settlement claim dollars.  These internal structured settlement programs frequently include partnerships with affiliated and/or external brokers and product providers.  Internal structured settlement programs increasingly view claimants and their families as potential customers for financial and insurance products and services.  The Financial Services Modernization Act has accelerated the development of internal structured settlement programs among casualty insurers.  Few, if any, program specific or case specific performance metrics currently exist for structured settlements.

 

Regardless of their strategic and operational perspective, defendants and casualty insurers should now reconsider how factoring transactions impact their structured settlement programs and case management strategies.  Should they promote structured settlements?  Should they facilitate structured settlement factoring transactions?  Should they encourage and promote alternative structured settlement products?  How should they respond to claimant demands for expanded structured settlement payment rights?  Should they participate with claimants in seeking tax guidance on individual cases?

Cost/Time Savings, Complexity and Risk for the Casualty Insurer in dealing with the Structured Settlement Industry

 

The traditional justifications for casualty insurers to promote structured settlements have included saving claim costs and claim time.  These traditional justifications are counter intuitive and unsubstantiated.  The structured settlement industry, even with the Tax Relief Act of 2001 still struggles with meaningful and articulated standards, metrics and best practices over all.

1. Cost Savings – Structured settlements typically are negotiated on a cash basis.  Few plaintiff attorneys permit their clients to accept a structured settlement costing less than the cash alternative.  Plaintiff attorneys increasingly are assisted by their own structured settlement consultants who have access to annuity rates.  Annuity costs are discussed openly in most structured settlement negotiations.  Justifications for cost savings frequently point to settlement costs that are less than preliminary reserve estimates.  It is questionable whether such “savings” are attributable to the structured settlement or to good claim practices.
2. Time Savings – Many structured settlement participants don’t track their time.  Structured settlements involve additional information, documentation and work processes not required in a lump sum settlement.  The time inefficient process of completing structured settlement closing documentation creates a bottleneck for the entire claim management process.
3. Balanced with these “benefits”, are the complexity and risks of structured settlements that do not occur with lump sum settlements.  Unanticipated liabilities and inefficient work processes result when defendants and casualty insurers fail to understand and properly manage the complexities and risks of their structured settlements.
4. Defendants, including casualty insurers, purchase 100 percent of all structured settlement funding products.  They incur extra costs for structured settlements that increase general claim costs.  When issues occur following settlement, including factoring transactions or insolvencies, they are at risk for additional costs.  Beyond their concern for claimants’ welfare what favor or advantage granted in return do defendants and casualty insurers receive for promoting and agreeing to structured settlements?

Considerations for the Casualty Insurer in Dealing with Structured Settlements

 

Recent trends in property/casualty insurance reflects catastrophic insurance losses from earthquakes, hurricanes, and other natural and unnatural disasters reaching unparalleled levels.  Property/casualty insurers are anticipating even larger losses in the future.  It’s not only the frequency of these natural and unnatural disasters that is debilitating,  it is also the population growth.  For example, the population in the Atlantic and Gulf regions of Florida and in California have experienced a population growth three or four times the national average for the last three decades.

 

Faced with this increased exposure and seeking an alternative to traditional methods of managing their risk load, property/casualty insurance companies have turned to capital markets.

 

The structured settlement market has enjoyed major improvements since the Victims of Terrorism Tax Relief Act of 2001.  For casualty insurers, there is now tax clarification:  defendants (including casualty insurers) who are periodic payment obligors on specific structured settlements, or otherwise qualify as “parties to a settlement” under IRC 5891 (d), have received tax clarification in the event of a factoring transaction.  Provided the applicable requirements of IRC sections 72, 104(a)(1) and (2), 130 and 461 (h) were satisfied when the structured settlement was consummated, these Internal Revenue Code sections remain applicable.  In the event of a structured settlement factoring transaction, payers of the periodic payments are not required to withhold tax.

 

As obligors in specific structured settlements, defendants and casualty insurers also qualify as “interested parties” under the Model State Structured Settlement Protection Act.  As such, they are entitled to receive notice to applications and to participate in Court proceedings seeking qualified orders for structured settlement factoring transactions.

 

As far as future structured settlements go, defendants should reconsider their use of structured settlements as well as their products, protocols and documentation.  What is the strategic and operational justification for using structured settlements?  Why, and under what conditions, should casualty insurers promote or agree to structured settlements?