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How Tort Victims Who Need Income Can Fix the Structured Settlement Industry

My dad always said don’t fix what isn’t broken. Well, the structured settlement industry is broken, but it’s not irreparable. Tort Victims like the families dealing with the deaths of loved ones at the MGM mass shooting and people like them, to the tune of over 1 Trillion in new money have the buying power, and choice, to make the structured settlement industry whole.

What’s the problem?

The problem is that due to property and casualty companies’ incentives to structure claims payments, 1000’s of people every year end up with low paying structured payouts or structured settlement annuities, and they more than likely have some buyer’s remorse. Combine that with the voracious appetite of Wall Street-funded private equity (who actually value and appreciate the value of a discounted asset), and the “get your cash now” industry is born on the backs of people who didn’t choose to be disabled, or certainly didn’t choose to have a loved one killed due to someone’s negligence. The problem with the industry is the lack of liquidity. If you think about the stock markets in general, the NYSE or any other, you can imagine that valuable assets change hands electronically in milliseconds. So, if your grandparents gave you some Google stock, or some municipal bonds, if you needed to raise cash for an emergency, or even to start a business, there is a “MARKET” where these assets can be sold. This market is efficient, as it delivers immediate execution, and the price of the asset is driven by the market.

So how can tort victims, with a few hundred billion dollars of demand or purchasing power fix the structured settlement industry, they can be buyers of these structured contracts or structured settlement annuities that are being bought and sold every day. Why would they do that? Having spent the last 22 years working with tort victims on the plaintiff side of litigation, the one variable they need post-litigation is steady income, and perhaps a safety net. Structured settlements provide both, but at 80-year lows, a yield of 1.65% doesn’t keep a family ahead of inflation and thereby destroys the use of the annuity (brand new ones) as a viable planning tool. What yield could be expected of a secondary market annuity, or recycled structured settlement annuity? 4.5%-5% is a routine yield that buyers can experience by working with a professional firm that understands the marketplace. Why don’t plaintiffs in litigation consider these assets from former litigants as a source of guaranteed income? They are annuity policies that are issued by the very same insurance companies that all structured settlements are issued or created by? Metropolitan, Prudential, and Berkshire Hathaway to name a few. These insurers must pay these annuities once they have issued them because they are created as a guaranteed fully paid-up annuity policy.

Wallstreet and other life insurance companies think that these assets are very valuable, so much so that the handful of market makers in the “secondary” market of structured settlement annuities securitizes a pool of assets, typically in batches of 50-100 million. What’s good for Institutional investors is also good for main street investors. The good that comes from this is that the value that people who are selling structured settlement annuities is driven up by demand, and because individual people don’t have a cost of capital, or employees or profit margins to worry about, they are very likely willing to pay more for an asset that can give them guaranteed income, versus a corporation who is looking to aggregate or pool as much of these assets to flip for a big profit.

In my opinion, it’s time for settlement planners, trust attorneys, judges, and the disability community to think differently about the utilization of structured settlement annuities that have been retitled. 5891 of the Internal Revenue Code has been a federal law, and state structured settlement protection acts have existed since 2003 for a legal framework for retitling these structured settlement annuity assets, so when will the civil justice system recognize their inherent value for new tort victims, and in so doing, fix the problem.