by Structured Settlement Watchdog
Calling Factored Structured Settlement Payment Streams an Annuity, Can't Be Supported by the Reality
All fixed and variable annuities are governed by a comprehensive state regulatory framework. State laws govern the organization and licensing of insurance
companies, and state insurance departments oversee insurance company operations. Generally, annuity contracts and amendments must be filed with, and approved by, each state in which contracts are sold. Insurance agents (often referred to as “producers”) need to be licensed in each state in which they operate. Only licensed insurance agents may sell annuity contracts. Source: Insured Retirement Institute. The Insured Retirement Institute (IRI) is the leading financial services trade association for the retirement income industry. Members represent the entire supply chain of insured retirement strategies, including Insurers, Banks, Asset Managers, Broker-Dealers, Distributors, Financial Advisors and Solution Providers.
1. Insurance Company Licensing
In order to offer annuity products in a state, an insurance company must be licensed in that state. A company needs to be licensed regardless of whether it is a “domestic” insurance company (i.e., organized in the state) or a “foreign” insurance company (i.e., organized in another state). To be licensed, an insurance company must be organized according to specific state laws. Before it is granted a license, an insurance company must demonstrate compliance with strict capital, surplus, and financial requirements. In addition, the state scrutinizes the experience and character of the company’s management. The state issues a license only if it determines that the company is organized in such a way that it will protect the interests of its contract owners. Source: Ibid.
- A factored structured settlement payment stream is not an annuity or an insurance product according to the National Association of Insurance Commissioners.
- A factored structured settlement payment stream is created as a result of a structured settlement factoring transaction that complies with state and federal law.
- The intermediaries and/or merchants of factored structured settlement payment streams are not insurance companies. This does not stop these entities and their employees and/or affiliates from using the term annuity to describe what they are selling.
2. Agent Licensing and Appointment
Insurance agents must be licensed by state insurance departments. Applicants must submit a form to the state providing information about their experience, character, and financial responsibility. They also have to pass a written examination. (Agents selling variable annuities are also regulated by the SEC and FINRA.) Insurance agents also must be appointed by each insurance company for which he or she serves as agent. Source: Ibid
- The travesty of some merchants of factored structured settlement payments is that they hold insurance licenses and should know better, yet call them annuities anyway. The potential for confusion is very obvious.
3. Contract Requirements and Prior Regulatory Approval
Annuity contracts and related forms generally must be filed and approved in every state where they will be sold. An alternative, more streamlined method of obtaining state approval is to file through the Interstate Insurance Product Commission (IIPRC), of which 41 states are currently members. While there is no standard required form for annuity contracts, states and the IIPRC mandate that certain provisions be included in all contracts, such as a free-look provision that allows a contract owner to examine the contract for a period of time and return it for a refund if dissatisfied for any reason. Generally, contracts need to be readable and cover all of the contract’s basic features before the state will approve the contract for sale. Amendments to contracts also must be filed and approved. If the amendment could adversely affect existing contract owners’ rights, prior approval from the contract owners may be required. Source: Ibid.
- If the factored structured settlement payment streams were annuity policies, they would generally have to be filed and approved in every state where they will be sold.
- What is being sold to retirees is not an annuity or an insurance contract.
4. Regulation of Annuity Sales Practices
A. Advertising Rules
Most states have adopted advertising rules governing the marketing of annuity contracts. State insurance departments review advertising materials periodically. Advertising rules are designed to prevent misleading, deceptive, or confusing advertisements, based on the overall impression that the advertisement may reasonably be expected to create upon a person of average intelligence within the segment of the public to which the advertisement is directed.
- Annuities are a term familiar to retirees. "Based on the overall impression that the advertisement may reasonably be expected to create upon a person of average intelligence within the segment of the public to which the advertisement is directed", marketers of secondary market "annuities" hoover up the imprimatur of the term annuity to draw in retirees for a potential sucker play.
- Misleading, deceptive or confusing advertisements are the rule rather than the exception in the structured settlement secondary market, which makes ample use of shiny objects to divert attention from the value proposition of pennies on the dollar for your structured settlement. Annuitants are scammed with mail solicitations from real sounding but scam labeled non existent associations made to look like government agencies or registries. There isn't a means to fine , suspend or revoke authority to transact business. Sorely needed. The structured settlement tertiary market then distributes "product" onto the streets, calling something an annuity that isn't. Where are regulators?
B. Unfair Trade Practices Rules
All states have adopted unfair trade practices acts with provisions that apply to an insurer’s activities. These laws define and prohibit unfair methods of competition and unfair or deceptive business practices, including those involved with the issuance, sale, and administration of annuity contracts.
Read about the AnnuitySold scam that led to a 7 year ban in Maryland for Annuity Sold and related entities.
There is no reason to use the term " annuity" to describe factored structured settlement payments when marketing them to consumers/investors, except for an intent to deceive. That being said the "charlatans" who use the term "annuity" can't have it both ways. If they call it an annuity and the intent is/was for their customers to believe it is an annuity then the remedy should be that they are subject to the same or similar punishment as if it were an annuity.