Can the structured settlement profession “change the conversation”?

In last weeks commentary on the hidden secrets and past issues of the structured settlement profession I posed the following challenge:

“ So the question now is, once these programs( rebating, steering and post case underwriting) are ended, will the newly transparent process that allows the injury victim and their lawyer greater understanding of the structured settlement pricing process, continue to provide sufficient economic benefit to casualty companies to promote structured settlements?”

Until we as a profession answer this one fundamental question, I believe any other initiative to boost sales from the consumer side of the transaction is destined to face a very long, slow road to productivity and sales numbers equal to what our profession is use to enjoying.

Let us first assume that given the current economic, regulatory and legal climate that the days of rebating of commissions, steering structures to internal life markets or using approved lists to point premium to a select group of life companies either has, or will shortly, come to an end. Given the light being shined on the practices, coupled with legal and regulatory pressures, one of the main engines that drove the claims industry’s advocacy of structured settlements is being removed.

What does remain however, is the fact that present value and life time payment benefits of using structured settlements, coupled with their tax free payment status, can still offer a substantial opportunity to provide greater guaranteed benefit dollars to claimants than they can obtain through traditional investment options. I believe this core benefit, which has admittedly shrunk over the past ten years as both interest rates and marginal tax rates dropped, will shortly see a resurgence when both tax rates and interest rates inevitably rise.  

However, claims professionals and structured settlement brokers working on the defense side, have in my opinion failed to drive home and clearly quantify to claims departments exactly how much money this transaction can save on claims. Instead they have focused and marketed the more questionable benefits of rebating, post settlement underwriting and steering as to why claims departments should use structures. I know the mere mention of these to defense brokers and claims professionals will bring the usual denials, but lets get real here and admit just how important those tactics have been over the last twenty years. Instead of denying or defending them, lets get past it and move back to what always has worked on our product, which is using the structured settlement to bridge a gap between what the plaintiff needs and what the defendants wants to pay.

I’m not the right person, given my practices emphasis on working with plaintiffs and trial lawyers, to address and quantify this value proposition for defendants. However, if there has been a serious initiative to educated claims departments on the classic use of the structure in the past ten years, I certainly have missed it. I would love to see one of the big defense firms come out with a legitimate, peer reviewed, white paper that quantifies for claims professionals the actual dollar savings for casualty companies from using structured settlements as a integral part of their claims process. Unless or until someone has it, provides it to claims companies and spreads it across the defense industry, we can continue to see fewer and fewer defense initiated structured settlements as claims professionals question the value proposition for using structures.

So, that said my real objective in this week’s commentary is to drive home, much as last weeks episode of Mad Men did, that instead of staying stuck in the same conversation about the past sins and problems of our profession we need to talk about what is right with our profession. We need, in the words of Don Draper, to change the conversation and get out of the death spiral we have been in for the last three years. Just as the partners at the fictional Sterling, Cooper, Draper and Pryce needed to move past their obsession with losing the Lucky Strikes account and take a bold new approach against smoking, we as a profession have got to change our conversation from the defensive to a bold proclamation of what is right and good about using structures on BOTH sides of the transaction.

Lets face it, if all we talk about is what's wrong with structured settlements, both publicly and privately, then the logical end result is will likely continue doing fewer and fewer of them. Sure low interest rates play a part, but a bigger issue is a fundamentally flawed conversation about their value, both with defendants and plaintiffs, and until we change the conversation from what is wrong to what is right, we can expect more of the same.

I believe that if you can’t in fifteen words or less tell a claims professional, judge or trial lawyer why a structured settlement is the best option for settling a case, you probably aren’t going to see much sales growth in your office or firm.

“It provides guaranteed after tax money you will never out live.”

“It provides a measurable savings, using present value, on the cost of casualty claims.”

“It bridges the gap between what clients need and what defendants can pay.”

See, it’s not that hard is it?

Lets continue working to change the conversation to the amazing value of structured settlements and get off the same excuses we have heard for years now. Rates right now are low, but they aren’t going to stay low,  and clients still need to invest their settlements, and a properly designed and managed structured settlement addresses peoples needs in the vast majority of cases. Don’t use low rates as an excuse, ALL rates are low! Instead focus on cash flow planning, reinvestment of funds and how to secure the plaintiffs needs. Low rates are as much an opportunity to speak to people as high rates, you just need to discuss the strength of the product and use the flexible design of structured settlements to solve their problems in ways other products can’t.

Finally, in this weeks Thursday follow up I will begin to take a look at the failure of plaintiff settlement advisors in the same light I have cast defense brokers over the last week. A lot of the shrinkage in the use of structures can be laid at the feet of the plaintiff brokers, whose misinformation about defense tactics, sloppy sales practices and slavish devotion to trial lawyer groups, has further diminished the value of structured settlements in the eyes of many trial lawyers and plaintiffs.

( Mark Wahlstrom is the host of The Settlement Channel, the President of Wahlstrom & Associates and is widely considered one of the nations leading experts on structured settlements, structured legal fees and settlement planning.)

Mad Men and The Structured Settlement profession, it’s all about the secrets

As anyone who watches the AMC drama, “ Mad Men” knows, the award winning show is focused around the creation of images and sales campaigns on Madison Avenue back in the early 1960’s featuring a group of characters whose lives are riddled with secrets and lies. The primary character is that of the suave, gifted ad man Don Draper, who carries the foundational secret of the show, which is that he stole the identity of a dying soldier in Korea, Don Draper, so that he, Dick Whitman, could avoid going to war and possibly dying himself. The resulting secret of this stolen identity eventually cuts a path of destruction as he needs to go to increasingly great lengths to cover up the secret, but the destruction is greatest in his own soul and mind as he knows his outer life, image and success are all a lie, despite his considerable gifts and talents.

As I watch this drama, I am repeatedly stuck by the similarities between the structured settlement profession and Don Draper, as each is outwardly successful, but at it’s core is harboring a secret that eats away at it’s life and threatens to eventually bring them to either ruin or a diminished state. As I outlined in part one of this commentary, the structured settlement market has two pillars that drove the growth of the profession, one is that the basic product solves a critical planning and financial problem for the vast majority of personal injury victims. The second is that the product also provided a savings off the cost of a claim through the use of present value of money, by bridging the difference between what the victim needs and what the company wants to pay. It was a product and process that worked for both sides.

However, somewhere along the way, and I was there in the middle of it when it occurred in the early to mid 1980’s, the present value edge that provided a benefit to the casualty companies morphed into something more sinister and began the process of rotting that second pillar.

What started as a “win/win” deal for both sides, in what is and will always be a fundamentally adversarial transaction, became a means of hiding the true cost of the annuity through keeping secret the cost, a tool in far too many cases for cheating uninformed, unrepresented plaintiffs out of the fair value of the claim. This lie went so far that structured settlement professionals working for casualty companies would refuse to verify the cost of the annuity that funded the plaintiffs benefits on the grounds that, “ If we tell you the cost the IRS might say you are on constructive receipt of the money and take away your tax benefit.” The fact is there was never any such ruling or legitimate premise to this statement, but this lie permeated the profession so that casualty companies could keep an even larger discount on the settlement then the interest rate spread already created.

Once this first lie was debunked, we then were treated to other fundamentally flawed secrets such as rebating programs on the annuity commissions ( Think Spencer vs. Hartford which just settled for $74 million),  as well as internal “approved lists” which essentially steered money to in house life markets or to select annuity companies, which then steered money back to their partners.

We can endlessly debate who did what over the past and I have no desire to revisit who was to blame. However, the facts are that these programs were established and run so that the casualty company had an additional economic benefit beyond the present value spread, and their economic incentive in continuing to promote structured settlements through their claims process hinged in many cases on these programs. We can argue if these programs are good, bad or indifferent, we all have our opinions, but the fact remains that much of our markets growth was fostered by these fundamentally flawed concepts, many of which are now being revealed in court cases that will in all likelihood further curtail the economic incentive of casualty companies to include structures in their claims process.

I feel the course of history and legal actions that have occurred, and continue to wind through the courts, will eventually end any program that has as it’s foundation the premise that it offers an undisclosed edge over the plaintiff and limits their financial their options in choosing a structured settlement.

So the question now is, once these programs are ended, will the newly transparent process that allows the injury victim and their lawyer greater transparency, continue to provide sufficient economic benefit to casualty companies to promote structured settlements?

I’ll address that in part three of this series next week, but until then it is my belief that the first step in getting healthy is admitting the secrets, dealing with the consequences and then rebuilding on what is honest, strong and good about our profession. We have a lot to offer just using our talents, products and skills, but staying in a perpetual state of denial and living in fear of discovery of the truth is no way to live.

Just ask Don Draper and the staff at Sterling, Cooper, Draper and Price.

Don Draper and his secrets, its time to come clean.

(Watch for part three of this commentary on The Settlement Channel, offered by Mark Wahlstrom, one of the nations leading experts in structured settlements, structured legal fees and settlement planning.)

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.

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.)