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John Darer Reviews the NAIC Warning About Unlicensed Companies Selling Non-Insurance Products

by John Darer CLU ChFC MSSC CEFT RSP CLTC

The National Association of Insurance Commissioners provides expertise, data, and analysis for insurance commissioners to effectively regulate the insurance industry and protect consumers.

NAIC Warns of Unlicensed Legitimate Companies Selling Unregulated Non-Insurance Products

In a June 13, 2023 update, the NAIC warns that

"Legitimate companies that are not licensed by the state to sell insurance might lead consumers to think they are selling “insurance” while evading state insurance regulations"

The NAIC uses as an example "a company selling a health sharing plan might call the plan insurance when it is actually an unregulated, non-insurance product".

Factored Structured Settlement Receivables Are An Unregulated Non-Insurance Product Sold by Legitimate Companies as "Secondary Market Annuities"

Factored structured settlement receivables have been marketed to investors, including seniors, injury victims, trial lawyers and fiduciaries as "secondary market annuities", even by people they trust.

The NAIC, in its Statutory Issue Paper No. 160, which was finalized April 6, 2019 made it clear that acquired structured settlement payment rights are not annuities or insurance products.

80% of the US states have adopted the 2017 Revisions to the Life & Health Guaranty Associations Model Act (#520), which expressly excludes acquired structured settlement payment rights from insolvency schemes. The application of the exclusion expressly includes acquired structured settlement payment rights that were acquried prior to the effetcive date that the investor's state adopts the 2017 Revisions to the Model Act.

The NAIC cautionary statement shows an increasing awareness of what is going on in the structured settlement secondary and tertiary markets. The introduction of HB845 in North Carolina, if enacted, puts the regulation of structured settlement factoring under the auspices of the North Carolina Insurance Department effective 2024.

 

Is Investing in Structured Settlement Payment Rights Suitable For Plaintiffs?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The market for structured settlement payment rights and other cash flows and receivables, like lotteries) is no longer a pipe dream for individual investors. The concept became available as the result of the 2008-2009 financial crisis and grabbed the attention of individual investors (including plaintiff attorneys!) and their financial advisers, as alternatives for their IRAs and Pension Plans. Some settlement planners began offering them to tort victims. The question is "are they right for tort victims"? 

I submit to you that not every tort victim is unsophisticated. But, in the words of Elvis Costello "accidents do happen". When they do, the victims are the poor and the rich, young and old, the unsophisticated and sophisticated, the financially adept and the financially inept, as well as the risk averse and those with some appetite for risk.

What are Risks of Investing in Structured Settlement Payments Rights?

1. Health of Insurer The security of the structured settlement derivative is related to the financial health of the life insurance company that issued the annuity and its ability to pay claims on its policies and the terms of the court order that is a prerequisite to each transaction. The purchaser of the structured settlement derivative is buying the payment rights, or a subset of the payment rights to the underlying annuity.
2. Not Deposits Structured settlement payment rights are not deposits and thus not insured by the FDIC.
3. Not Annuities The National Association of Insurance Commissioners has expressly stated in its Statutory Issue Paper No. 160 (finalized April 6, 2019), that acquired structured settlement payment rights are not annuities or an insurance product. Furthermore, acquired structured settlement payment rights  (factored structured settlement payments) are not annuities as defined under the insurance law of many states. Nevertheless you may be solicited by lawyers, settlement planners, accountants and even licensed insurance agents and financial advisers calling them annuities. Don't be fooled!
4. May not be any coverage under statutory insolvency schemes Structured settlement payments rights are not covered under the statutory insolvency streams in a majority of the United State, whereas they might apply to legitimate insurance products. As of March 2022, 34 states had an express prohibition, 2 states were considering it and the NAIC is pushing to have all 50 states fall in line to adopt the 2017 Revisions to the Life & Health Guaranty Associations Model Act (#520) which introduced the exclusion. The scary thing for any investor in structured settlement payment rights is that the Model Act, adopted by 34 states so far, has a retroactive application, so you're not safe if you bought the investment before the eventual effective date of the adoption of the 2017 Revisions (#520) in your state.
5. Exposure to interest rate risk. If market interest rates rise, the rate of return on the structured settlement derivative is locked-in. Longer term purchases are more sensitive, similar to long bonds or traditional structured settlement annuities. This can be mitigated somewhat by hedging through an "structured settlement derivative ladder" by making several purchases over an extended period of time.
6. Transactional Risk There is originator risk (think Access Funding, Linda Cooper and husband among those whose payments were scheduled to begin and never did. They were suspended due to competing claims),  forgery (happened in 200 cases in New York and Florida, forgery by a law firm paralegal in New York and by a lawyer in Florida) and imposters (Wall case-retirees lost $152,000). In 2018, a whole slew of investors in "secondary market annuities" were noticed as creditors in the Woodbridge Structured Funding/Woodbridge Wealth bankruptcy (2018). The Barber case in Allegheny County PA, involved a raid on a minor's structured settlement and forum shopping.  One of the investors was a California settlement planner with retirement funds who found himself competing with an 18 year old for the payments when they came due.  Very unfortunate and it could have been any retiree.
7. Fraud Dan Cevallos and Advance Funding
8. Currency Rate Risk (To Foreign Investors) Payments are made in US dollars.
9. Liquidity Structured settlement derivative investments may need to be held to term and are not liquid.  Complex litigation investors and an intermediary pending since 2020 in Maricopa County Arizona and branching out into other states provides an illustration of what can happen. Genex Capital is litigating against multiple investors who it alleged breached its Receivables Purchase Agreement(RPA) when they sold their receivables and did not obtain Genex's consent or go through Genex. According to a Motion filed by Genex in Castro County Texas

" When Genex discovered that the Leonard IRA had wrongfully attempted to reassign payments to NEAA it issued a default notice, which went unresponded. It is uncontroverted that Genex confiscated the payments and reassigned them to other investors as it was expressly permitted under the Leonard IRA RPA"  In Re: Juan Oltivero  In the District Court of Castro County Texas Cause No. B9545-1211 Genex's Motion to Strike, Motion in Limine...Filed May 23, 2022 441pm

Some of the above risks are similar to the purchase of most fixed income annuities. However, most purchases of fixed annuities do not require a court order to be concluded, have such an exposure to transactional risk.

So is an investment in structured settlement payment rights appropriate for tort victims?  In rare circumstances, and only after very careful deliberation.

Last updated May 30, 2022