by John Darer CLU ChFC MSSC CeFT RSP CLTC
The structured settlement industry is set for new product introductions in the indexed linked structured settlement and variable settlement settlement segment over the next 1 to 9 months. Naturally structured settlement brokers and settlement planners are chomping at the bit to be able to share these new options with their clients and potential clients.
An example of this was a November 24, 2021 an email with the subject line "Be Among the First To Access the new 6% Structured Annuity", one settlement planner stated he, among others, was "invited to an exclusive, highly-guarded meeting"
on December 7th, "where a revolutionary structured settlement annuity will be unveiled". The product will work for both plaintiff structures and plaintiff lawyer structured fees.
As Apostles John and Paul said in the 1960s (parody)
"He's a big teaser, he took you half the way there
He's a big teaser, he took you half the way there now
He was a day tripper, one way ticket yeah
Didn't take me long to find out, and I found out"
A Leaky Faucet of Information, or Misinformation
Despite the fact that the settlement planner refers to an NDA, the settlement planner revealed enough information in the email to make it easy to determine which insurer it was.
But what strenuously arches the eyebrows is the settlement planner's "click bait" :
" By NDA, and until December 9th, I cannot tell you exactly what this new product is, how it works to deliver back-tested returns of 6% annually with an absolute iron-clad guarantee against loss".
Did the settlement planner sign an NDA? From this information it's easy to deduce that the product introduction is a long anticipated index linked structured settlement annuity. But the statement by the settlement planner in the click bait suggests there is absolutely no risk exposure. Is that really true? Is there really a 100% guarantee against loss? The settlement planner might have qualified the statement, if true, but chose not to. Bit one question worth asking is, has the settlement planner historically recommended split funding structured settlements between multiple insurers for prudent diversification? If yes, ask him why? Doesn't the answer impeach the "absolute iron-clad guarantee against loss" claim?
What is Back-Testing?
Hedge fund managers may use hypothetical back-tested performance results to show how their investment strategies would have performed on an historical basis. However, the SEC and investors strictly scrutinize the use of hypothetical back-tested performance results by hedge fund managers because such results do not represent actual performance data. The concern is that hypothetical results may reflect rosy assumptions as opposed to real results, and potential investors may not be sufficiently apprised of the difference. In an expression of such concern, the SEC entered into a consent order with an investment adviser and its principal in 2018 to settle an enforcement action in connection with the misleading use of hypothetical back-tested performance results. Cras Numquam Noscit [" Tomorrow Never Knows" Source: BeatlesinLatin.com]
On August 31, 2018, the SEC announced that it settled an enforcement action with Massachusetts Financial Services Company (MFS) relating to alleged material misstatements and omissions in connection with the use of hypothetical back-tested performance information in institutional marketing materials. See Order Instituting Administrative Cease and Desist From Proceedings Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 Release 4999/ August 31, 2018 . Administrative Proceeding File No. 3-18704 In the Matter of Massachusetts Financial Services Company, Respondent. Also SEC Reaches Settlement with Adviser Relating to Use of Hypothetical Back-tested Performance Information in Marketing Material National Law Review September 25, 2018.
Indexed Linked Annuities in the Structured Settlement Marketplace
The insurance industry is constantly innovating to meet the individual financial goals of consumers or the public. Index linked structured settlement annuities are part of that.
- In the 1990s, Transamerica received a favorable IRS PLR for a structured settlement tied to the CPI.
- In 2014, Pacific Life introduced its Index Linked Annuity Payment Adjustment Rider (ILAPA), accompanied by its own PLR. With ILAPA, there is never a decline in payments if S&P 500 index performance is negative. Payments can only go up or stay the same, not down. The Pacific Life ILAPA is capped at 5%.
- The latest addition to the fixed index annuity market is the “uncapped” Volatility Control Index Strategy. This crediting method is now offered on many fixed index annuities today and enables the consumer to take advantage of well-performing market indices without an index cap.
- In 2017, Structures SCC, began offering the opportunity to fund periodic payment obligations through its non qualified assignment facility in Barbados with the retail index linked annuities of several insurance companies.
- 2021 You'll have to wait until December 9th!
An important point to keep in mind is that “uncapped” does not mean “unlimited”. A volatility controlled index shifts assets between a risk component and a risk-free component to reach the targeted volatility level.
The Indexed Annuity Leadership Council promotes the transparent marketing of products to consumers. IALC recommends marketing the product as a “volatility controlled indexed crediting method” versus an uncapped annuity, to ensure that consumers understand the product there are purchasing.
In the industry today, IALC says they are seeing the product being marketed as a low-risk, high-reward with unlimited potential for earnings while still being a safe vehicle for savings. The positioning of the product in this manner could set up unrealistic expectations for consumers.
Know your product and know your customer.