To paraphrase humor columnist Dave Barry, the best thing one can say about the structured settlement market in 2022, it could have been worse.
2022 Structured Settlement Premium Production
Total 2022 structured settlement production during the first three calendar quarters was $3.95 billion which exceeded the 2021 total of $3.08 billion for the same period by approximately $870 million. Using a fourth quarter production ratio comparable to 2021, estimated full year 2022 structured settlement premium might reach, or even exceed, $5.44 billion – which would approximate the average annual structured settlement premium for the years 2007 to 2021.
These results cheered some industry leaders. When the National Structured Settlement Trade Association (NSSTA) hosted its virtual Fall Conference on November 3-4, 2022, the message was positive and optimistic: “Structured Settlements are Cool Again! Production is up, interest rates are up and courts are finally open.”
Is the Glass Half Empty of Half Full?
Following multiple years of historically low interest rates, COVID court lock downs and depressed premium production, perhaps these anticipated 2022 results indeed are worthy of celebration.
Despite signs of innovation and growth during 2022, however, other developments occurred during 2022 raising questions about the potential for sustained future industry growth.
This article highlights some 2022 structured settlement industry developments (both positive and negative) and, for comparison, also sets forth reasons Independent Life was able to continue its success during the past 12 months. The article also questions two basic assumptions about how the industry will generate future premium growth and suggests an alternative mindset for achieving future success.
Structured Settlement Industry Developments
- In-Person Conferences – Both the National Structured Settlement Trade Association (NSSTA ) and the American Association of Settlement Consultants (AASC ) hosted in-person conferences after COVID-related year-long interruptions. Each association supplemented their in-person conferences with virtual conferences and/or webinars. The quality and quantity of available structured settlement education continued to improve during 2022.
- NSSTA CSSC Program – Following a 25-year affiliation with the University of Notre Dame, NSSTA launched a new Certified Structured Settlement Consultant (CSSC ) Program hosted in Austin, Texas in partnership with the University of Texas. The program included pre-session webinars taught by industry leaders as well as classes by Texas professors and 500 pages of course materials. 48 students participated.
- Women Leaders – The Women’s leadership organizations of both NSSTA (Women’s Caucus ) and AASC (Alliance for Women) have generated energy, ideas, mentorship and leadership within their respective associations. As one result, “diversity” has become an increasingly important educational theme and value within the structured settlement industry.
- New Products – Several new products were introduced into the structured settlement market during 2022 including both structured settlement funding products and technology products. Independent Life introduced one of each with additional innovations planned for 2023. This year, we launched iStructure , the first uncapped index-linked structured settlement annuity for which we have already received over $120 million of annuity premium. To enhance and support iStructure, as well as our traditional fixed structured settlement annuity product, Independent Life also introduced Mosaic, our new state-of-the art administrative and quoting system.
- NPRM Withdrawal – On October 13, 2022, CMS withdrew a proposed Notice of Proposed Rulemaking [NPRM] which would have clarified “existing Medicare Secondary Payer (MSP) obligations associated with future medical items related to liability insurance (including self-insurance), no fault insurance, and workers’ compensation settlements, judgments, awards, or other payments.” This four-part Independent Life series – discusses the risks and opportunities for structured settlements presented by MSAs including increasing industry reliance on WCMSAs.
- Gallardo v. Marstiller – In this 2022 decision, the U.S. Supreme Court held “[t]he Medicaid Act permits a state to seek reimbursement from settlement payments allocated for future medical care.” The ruling extends the Court’s 2006 Ahlborn decision. Although its consequences for plaintiffs and structured settlements are not yet certain, the case could encourage states to enact laws allowing state Medicaid reimbursement from settlements of future medical costs that never actually occur. This case and the NPRM withdrawal both emphasize why government benefit knowledge has become increasingly important for structured settlement and settlement planning professionals.
- IRS GLAM – Earlier this month, the IRS released a copy of a “General Legal Advice Memorandum” (“GLAM”), an internal IRS document, attacking structured legal fee arrangements. Since the Childs case was decided in 1994, structured legal fees have offered contingent fee attorneys a method to defer their fees and related income tax liability. Structured legal fees have also represented an important submarket for structured settlements. Although not a statement of law, and perhaps a misinterpretation of the law, the GLAM suggests the IRS may attack deferred attorney fees arguing: 1) Childs was wrongly decided; and 2) the independent contractor exception to IRC 409A does not apply.
- Factoring – Factoring is not a new development, but it continues to negatively impact the primary structured settlement market. Having devoted enormous resources to achieve a proposed legislative solution that has not solved the problem – enactment of IRC Section 5891 and state structured settlement protection acts – NSSTA’s new supplemental solution focuses on educating judges. This Independent Life article – summarizes why neither strategy has worked and identifies alternative strategies including Independent Life’s Payee Protection Policy.
- MICRA Amendment – Thanks primarily to the efforts of attorney Nick Rowley, California in 2022 amended its Medical Injury Compensation Reform Act (MICRA) including portions of MICRA’s periodic payment of judgments act. Since first enacted in 1975, MICRA had been controversial as unfair to medical malpractice victims. MICRA featured the first periodic payment of judgment statute in the U.S. The most significant 2022 amendments impact non-economic damages and attorney fees. However, the MICRA amendments also increase from $50,000 to $250,000 the minimum judgment required to request periodic payments.
Founded in 2018, Independent Life has been the only structured settlement annuity provider to increase its premium production every year for the past four years including the first 9 months of 2022. Although final year results have not yet been tabulated, 2022 will be Independent Life’s best year ever by far.
How have we achieved this accomplishment? How is Independent Life different from other structured settlement annuity providers? How have we successfully competed against eight other life insurance companies who are not only larger and nationally recognized but have been in the structured settlement market longer than us?
Our strategy is simple, powerful and potentially transformative for the entire structured settlement market.
Independent Life began its history as the only annuity provider that specialized exclusively in structured settlements. In this unique and competitive market, we have provided our agents and their customers with deep expertise, unparalleled access, market-leading underwriting and consistently competitive pricing, plus turnaround times for cases that have redefined industry standards.
Second, Independent Life continuously improves and innovates. Past innovations have included Settlement Nation, a top rated plaintiff attorney podcast, our Payee Protection Policy and a Duration Compensation Model. To enhance and support iStructure, we also introduced Mosaic, our new state-of-the art administrative and quoting system.
Third, we are plaintiff focused. In collaboration with settlement professionals, we want to achieve the best outcome for the plaintiff, given the constraints of the overall settlement. We are not anti-defense. In fact, our more effective solutions can produce lower settlement costs for the defense.
Our unique business model and strategy, our continuous growth and our financial strength have allowed Independent Life to attract world-class partners like LKCM Headwater Investments, KKR’s Kilter Finance and Hannover Re USA. As a result, we also anticipate additional innovations plus new product features, market applications and premium growth during 2023 and beyond.
Industry Growth Strategies
What about rest of the structured settlement industry? Within the existing legislative and regulatory framework, what are the strategies for achieving sustained growth of structured settlement annuity premium? Here we will discuss two prominent industry strategies – and challenge the industry to identify alternatives.
Higher Interest Rates – Rising tides are said to lift all boats. Many structured settlement professionals assume (or hope) recent interest rate increases will continue and the “rising tide” analogy will hold true for interest rates and structured settlements. Indeed, interest rates have increased during the past 12 months. The average 30-year Treasury Bond Yield during 2021 was 2.06% compared with 3.10% for 2022 (thru December 28). And this yield increase, in fact, may explain some of the recent structured settlement annuity premium increase during the same period. Do interest rates, however, really represent a dependable gauge and passive strategy for the future?
Consider the following structured settlement premium numbers matched with the average 30-year Treasury Bond Yield for the same year. For the 14-year period from 2008 thru 2021, the directional change in annual premium (increase or decrease) matched the directional change of the interest rate seven (7) times and moved in the opposite direction seven (7) times:
Three conclusions seem apparent: 1) Predicting future interest rates is a fool’s game; 2) historically, structured settlement premium annual directional increases and decreases do not regularly match similar directional changes in interest rates; 3) anticipating that higher interest rates will increase structured settlement premium does not represent a dependable growth strategy.
Medicare Set-Aside (MSA) Arrangements
As detailed in Independent Life’s recent four-part MSA series, an estimated 49% of current structured settlement cases now represent workers’ compensation (WC) MSAs. The premium generated by WCMSAs may approximate only 14% of total annual structured settlement annuity premium.
Regardless of premium amount, the WCMSA submarket has become both a strategic imperative and a strategic risk for defense brokers who write the large majority of these cases.
WCMSAs represent a strategic imperative because they represent the only type of structured settlement where brokers can still demonstrate a predictable (almost certain) cost savings to defendants – as much as 30% on average compared to lump sum funding according to some structured settlement MSA experts.
The primary basis for this WCMSA structured settlement cost savings results from the CMS present value methodology which provides an inherent cost advantage versus lump sum because annuities incorporate their own discount rate.
However, unlike the legislative structured settlement tax exclusions incorporated into IRC Sections 104(a)(1) and (2), the significant submarket defining WCMSA structured settlement cost advantage depends upon CMS internal policy. It could disappear at any time. In fact, the basis for this cost advantage is no longer available in writing.
Therefore, when CMS withdrew the proposed Notice of Proposed Rulemaking (NPRM) on October 13, 2022, the result potentially represented a double loss to the structured settlement market. As discussed in this prior article , the proposed NPRM might have permanently defined an inherent structured settlement funding advantage not only for WCMSAs but also for liability MSAs, a market many industry experts believe could be at least as large as the WCMSA market.
Although NSSTA, AASC and the National MSP Network (MSPN) each recognize structured settlement funding of MSAs as an educational and lobbying priority, industry cooperation now seems imperative.
During 2022, structured settlement annuity premium has increased somewhat but has not caught up with industry optimism – which itself may not be justified by existing industry strategies designed to generate sustained growth in the context of current industry challenges.
These challenges, as well as existing opportunities, need to be more fully and openly discussed so that better solutions can be identified and selectively implemented. New business models, products and market opportunities do exist, as Independent Life continues to demonstrate. Ignoring and/or rejecting new ideas, or new ways to do business, however, is not a formula for future innovation and growth.
Why has success, at least success defined by sustained annuity premium growth, continued to elude the structured settlement industry since 2001? Something must be wrong and needs to change for the industry’s success profile to change.
This earlier Independent Life article suggested that success may depend, at least in part, on mental mindsets (individual and collective) and contrasted the metaphorical mindsets of “soldiers” and “scouts.”
Unlike soldiers, who defend their beliefs against perceived threats, with a scout mindset, there is no such thing as a “threat” to beliefs. This means an individual or group is always open to changing their mind in response to new information or new ideas.
The structured settlement world has changed dramatically since 2001. Consider the possibility that some individual, or even collective, mental maps of structured settlements, which may have been accurate in 2001, are no longer accurate or helpful to achieving industry growth.
With that possibility, and over 20 years without sustained industry growth, consider, as we look forward to 2023: is the structured settlement industry dominated by “soldiers” or “scouts”? Does the structured settlement industry really understand or “see things as they are” in its own market? Is the industry capable of changing its mind in response to new information or new ideas? How else would you explain more than 20 years without sustained industry growth?