Structured Settlements in Today's Climate

By White, Allan; Klingler, Peter | Risk Management, August 1992 | Go to article overview

Structured Settlements in Today's Climate


White, Allan, Klingler, Peter, Risk Management


THE HEADLINES HERALDING THE seizure of Executive Life Insurance Co.'s offices by California and New York regulators raised serious concerns about how speculative investments may impact the ability of insurance companies to meet long-term obligations. Furthermore, the Executive Life fiasco has raised the question of the security of funding structured settlements with life company annuities. Typically, strucured settlements provide claimants with guaranteed, lifetime tax-free payments funded through the purchase of an annuity. This structured settlement tool is often used in cases involving catastrophic injury and wrongful death.

There is little doubt that structured settlements can be an effective and cost-efficient tool for resolving personal injury cases. However, m light of the concerns over Executive Life, it is more important than ever that risk managers understand the funding process associated with structured settlements and know how to select a stable insurer to issue the annuity.

Concerns about an insurer's ability to make annuity payments over the long-term are especially pertinent because the payments are usually made to people who have been traumatized in some way and who have ongoing needs. The benefits received from a settlement replace lost income, make housing payments, pay continuing medical and attendant care, fund college and other forms of education for their children, and generally provide the best quality of life possible to those injured. Thus, the investment risk should be minimized to the greatest extent possible while still generating a favorable rate of return. Overall, the structured settlement tool enables the defendant to settle the claim at a lower total cost than an all-cash setdement, and the claimant receives more benefits over the long run.

In reality, what has happened to Executive Life is an aberration in the industry. Executive Life was the first of a very small number of life companies to invest more than 60 percent of their assets in junk bonds. According to a New York Times article in the 1980s, "the life insurance industry as a whole limited its junk bond exposure to about 5 percent of assets." The American Council of Life Insurance reports that the industry has only about 20 percent of total assets allocated to real estate investment, and of this amount, only 3.25 percent - 0.6 percent of total assets - are non-performing (i.e., where the prindpal or interest payments are more than 90 days overdue). When one compares the relatively small junk bond and real estate exposure of the life insurance industry as a whole with the 60 percent of assets invested by Executive Life, it becomes obvious that the situation of Executive Life is the exception, not the rule.

Certainly these statistics put the condition of the life insurance industry in a much more favorable light. Given the fact that the asset base of the life insurance industry is so dramatically different from the savings and loan industry, no responsible observer could expect a repetition of the savings and loan debacle in the insurance industry, although there may be instances of insolvent companies as with any industry.

Judging Stability

IT IS PARAMOUNT to remember that a structured settlement funded through an annuity, just like any other investment, is only as safe or as risky as the investment vehicle. Consider that the same problems hold true for all-cash settlements, especially when the lump sum settlement is received and invested to provide for the ongoing needs of the injured party. Therefore, the security of the funding vehicle is of vital importance.

The best approach for risk managers when assessing the stability, appropriateness and security of a life insurance company is to turn to the professional rating services. Among those resources are four independent, well-known services that monitor life companies active in the structured settlements business: A. …

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