This is the third article (Part III) in a four part series of articles that explore the timeline of historical developments that highlight key events for the structured settlement market.
- Period One – Industry Formation
- Period Two – Market Foundation
- Period Three – Conflict, Growth, Transition
- Period Four – Industry Reset and Rebuild
PERIOD THREE – CONFLICT, GROWTH, TRANSITION (2000-2012)
Conflicts that began previously continued during this period with various resolutions: the formation of SSP; enactment of IRC 5891; settlement of the Macomber v. Travelers and Spencer v. Hartford cases. The Patel Memo opened the MSA market. The Grillo case highlighted potential plaintiff attorney liability. A public hearing before the Department of Treasury focused an industry dispute over single claimant QSFs. Nonetheless, annuity premium increased to a record $6.2 billion 2008 only to fall to record low of $4.8 billion in 2012 largely due the 2008 Credit and Liquidity Crisis. The NAIC subsequently issued annuity regulations to protect consumers that conspicuously exempted structured settlements. The final Towers Watson U.S. Tort Cost Trends Study (2011) provided a note of optimism for the future structured settlement market. However, this period ended on a depressing note with the liquidation of ELNY (2012).
- 2000: SSP – Disenchanted with what they considered to be NSSTA’s “defense bias“, a group of primarily plaintiff structured settlement brokers formed the Society of Settlement Planners (SSP).
- 2001: Patel Memo – CMS issues the “Patel Memo” the first of a series of CMS policy memoranda on a variety of topics related to workers compensation Medicare set-asides (WCMSAs), including structured settlements.
- 2001: Grillo Case – Grillo v. Pettiette et al, a Texas case, demonstrated the potential legal liability for plaintiff attorneys who do not advise their clients about structured settlements. Although the Grillos’ previous attorneys denied liability, the judgment against them was $1,600,000.
- 2002: IRC Section 5891- Supported by both NSSTA and NASP, this IRC Section imposes a 40-percent excise tax on any person who acquires structured settlement payment rights in a factoring transaction. The excise tax does not apply, however, if the transfer is approved in advance, a qualified order is issued under an applicable state statute by an applicable state court. Rules are provided to determine the applicable state statute and the applicable state court, as well as the factual and legal findings required in a qualified order.
- 2007: Macomber v. Travelers -This class action lawsuit (filed in 1999 and settled on a confidential basis in 2007) alleged that the defendants, in utilizing structured settlements to resolve personal injury claims, routinely engaged in two types of wrongdoing: rebating and shortchanging. The parties settled on a confidential basis in 2007. Travelers Life denied liability and exited the structured settlement market in 2005.
- 2008: Credit and Liquidity Crisis – The financial crisis of 2008 had a significant impact on both the primary and secondary structured settlement markets. Results included a $85 billion bailout of AIG by the U.S. government (subsequently repaid); the bankruptcy (and subsequent emergence therefrom) of J.G. Wentworth; the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010); the departure of several annuity providers from the structured settlement market; an historic drop in interest rates; and an industry-wide decrease in structured settlement annuity premium.
- 2010: Spencer v. Hartford – Similar to the Macomber case, the Spencer v. Hartford class action lawsuit addressed business practices resulting from the use of an affiliated life company, and also included allegations of illegal and undisclosed commission sharing with a network of approved brokers. The case eventually settled in 2010 for $72.5 million, with Hartford denying liability, following a lengthy chronology of allegations and judicial orders. Hartford’s life company exited the structured settlement market in 2012.
- 2010: Treasury Hearing – The United States Department of Treasury held a public hearing on February 23, 2010 focused on proposed new regulations for Internal Revenue Code section 104(a)(2). Speakers representing NSSTA and SSP also advocated the single claimant QSF issue which the Treasury at the time featured on its Priority Guidance List but has since removed and never formerly resolved.
- 2011: NAIC Regulations – Responding to the impact of the financial crisis, the National Association of Insurance Commissioners (NAIC) adopted two Model Regulations in 2011 addressing annuities: 1) the NAIC Annuity Disclosure Model Regulation; and 2) the NAIC Annuity Product Suitability Model Regulation – each of which subsequently has been adopted by multiple states based upon authority granted to that state’s insurance commissioner under the NAIC’s Unfair Trade Practices Act. Significantly, structured settlements are exempted from both Model Regulations.
- 2011: Towers Watson Study – Towers Watson published its final “U.S. Tort Cost Trends” study and reported $264.6 billion of 2010 U.S. tort costs excluding: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs. Based on the 2011 study and utilizing a Tower Watson’s 2002 “best estimate” of payout percentages, more than $160 billion of United States tort costs represented payments to injury victims and their attorneys.
- 2012: ELNY Liquidation – Following 21 years in rehabilitation, Executive Life of New York (ELNY) was liquidated and restructured. The result, even following contributions from state guaranty funds and voluntary life insurance company contributions, was a $900 million shortfall allocated to approximately 1,550 ELNY payees (including many structured settlement payees) out of a total of approximately 9,700 ELNY payees. As one result of the ELNY insolvency, legislators and insurance regulators have increased risk capital requirements for life insurers and increased coverage under state life and health guarantee funds