Do structured settlement transactions need greater transparency in pricing?

In last weeks commentary on the question of “How much commission does a structured settlement broker get paid” I mentioned two key areas I wanted to expand upon. The first, “Transparency in Pricing” is the subject of this week's commentary.

The event which is driving a lot of this discussion, the class action suit against AIG structured settlements and it’s claims of a RICO level conspiracy with settlement brokers nationwide, raises some key issues related to how structured settlement annuities are priced, who is paid and how pricing and payments should be disclosed to the vulnerable end user of the product, that end user typically being a personal injury victim. The complaint focuses a great deal of attention on the non-disclosure of commissions, pricing and I'm sure it will be an area of discussion in the coming months are structured settlement professional association meetings. 

As I stated last week, the standard commission of 4% on all premium placed is consistent across all markets. You send in premium as the agent and you get paid 4%, what could be simpler? However, nowhere is that compensation or it’s impact on the pricing of the annuity plan disclosed to the annuitant, or their legal counsel, by the structured settlement agent, the life insurance company or the casualty company negotiating the settlement. There is no disclosure in pre-sale literature, applications or in court proceedings, other than requirements in a very small number of states or counties that have disclosure statutes, with those law typically enforced in cases involving minors or incompetents. Consequently, in the vast majority of structured settlements, there is no clear disclosure of how the pricing was arrived at, what the commission is, who the agent actually is and if there are any commission split arrangements between the structured settlement brokers involved in the case.

Settlement professionals at this point are probably throwing up their hands and saying “ What difference does it make?” Their point being that the commission has been “baked in” to the pricing for decades, no one ever asks and the actual client buying the annuity is the casualty company, so as to fund the structure laid out in the settlement agreement and release. The injured party isn’t even the buyer, according to this logic, but is simply the recipient of a cash flow that happens to be provided by an annuity company selected by the defendants in most cases.  According to this logic, the question by most professionals is "Who cares about commission and pricing disclosure?"

Well, as the AIG class action case seems to indicate, as did the Spencer vs Hartford case which ended the Hartford’s commission rebating on structures, trial lawyers, consumer advocates, judges and increasingly regulators, ALL seem to care. Many are in fact taking a dim view of this opaque process that is often filled with potential conflicts of interest. Further, some of our profession’s biggest competitors, such as trust companies, investment advisers and others are making the professions lack of disclosure in pricing and commissions a BIG issue in their presentations to injury victims, highlighting the level of regulatory supervision they need to adhere to and the Fiduciary Standard they are required to uphold when dealing with the injury victim.

I’ll discuss the Fiduciary standard issue next week, but for this week let’s just reflect on the fact that if I, as an agent, sell a NON-Structured annuity to a consumer I am required to:

  • Provide a full, company illustrated term sheet explaining pricing, returns, liquidity costs, surrender charges and ownership/beneficiary rights and this must be signed by the owner and annuitant.

  • I am required to do a full suitability interview with the client to determine assets, income, sophistication, understanding of the product and how we arrived at the decision that this annuity makes sense for them.

  • The client must sign the disclosure agreement, must initial or sign the illustration and I must, under penalty of perjury, sign that the statements, disclosures and information is true to the best of my belief.

Few, if any, of these things are required when we write a structured settlement annuity contract for people who are typically unsophisticated, badly injured or impaired.

My question to the Settlement Profession is How long do you feel that this major and glaring difference in standards is going to continue in a world where disclosure and fiduciary standards are becoming the norm across all financial sales and investments?

In short, our failure to simply follow the same standards that are required of any life or annuity agent when selling these contracts, is coming back to bite the structured settlement annuity profession and it’s time to change voluntarily before change is forced upon us. The AIG Class Action and RICO suit might seem like a distraction to some in the settlement profession. I can promise you that it is much bigger than that, and that structured settlement professionals need to take this head on and change our disclosure, pricing and sales practices to at least match those required of us in non- structured settlement sales.