Andres Financial Group

The Secondary Market

Development of the Secondary Market for Structured Settlements

The secondary market for structured settlements is the business in which NASP members participate. The secondary market developed because structured settlement recipients (payees) discovered that structured settlements are inherently inflexible and illiquid. A payee whose personal or financial circumstances changed, such that the rigid, long-term payment stream set forth in the original structured settlement years earlier was no longer beneficial, discovered that they had almost no flexibility with respect to their own financial asset. Because part of the value of any asset, particularly a financial asset, lies with the ability of the owner of same to freely sell and liquidate that asset, some payees suddenly discovered that their structured settlements were not as beneficial or valuable as they once thought.

In effect, the secondary market provides a release valve for those payees who found themselves locked into a long-term payment stream that may no longer be beneficial to them or suitable for their circumstances. Moreover, some payees simply desire and need freedom, flexibility, and control relative to their financial assets and lives. As the use of structured settlements mushroomed, it is little wonder that payees sought liquidity and flexibility from the secondary market relative to their future payments.

NASP members provide payees the ability to monetize their future structured settlements via the secondary market. In a typical secondary market transaction, a payee who is receiving structured settlement payments assigns to a third party (often referred to as a “funding company” or “factoring company”) the right to receive certain future payments in return for a lump sum payment. The amount of the lump sum payment (or the purchase price) is determined by calculating a discounted present value of the future payments, using a discount rate. It is a financial calculation. The higher the discount rate the lower the discounted present value (and thus, the lower the purchase price paid to the payee) and the lower the discount rate, the higher the purchase price.

An example of a secondary market transaction might look like this:

• Mrs. Jones, the payee, is injured in a car accident when she was 19 years old.
• She files a lawsuit and settles her case by way of a structured settlement, which provides for her to receive monthly payments of $ 1,000.00 per month for the remainder of her life, with 420 monthly payments guaranteed.
• The structured settlement is funded with an annuity issued by Big City Life Insurance Company. Ms. Jones does not own the annuity.
• Ten years later, Ms. Jones, now working, married with two children, and living in an apartment, wants to raise some money to put a down payment on a home and purchase appliances and furniture for her home.
• She enters into an agreement with a funding company to transfer and assign 120 monthly payments of $500 each in return for a lump sum payment of $ 33,000.00, calculated using a discount rate of approximately 13.5%.

Thus, Ms. Jones is able to access and monetize her financial asset. Because of the laws that control structured settlements, and restrict liquidity and flexibility, absent a thriving secondary market, Ms. Jones would find her structured settlement to be far less valuable and her options limited.

Prior to the late 1990’s most secondary market transactions were completed by way of contractual agreement between the funding company and the payee.

Court Approval of Secondary Market Transactions

The burgeoning secondary market caused tension between the participants in the primary and secondary structured settlement markets. As the secondary market became more visible, participants in the primary market became concerned that a robust secondary market threatened the continued growth of the primary market. There was concern about potential adverse tax consequences to the parties to the structured settlement upon the conclusion of a secondary market transaction. Some raised concerns about potential overreaching and abuses in the secondary market and the possibility that payees would foolishly liquidate their entire structured settlement payment stream and complete transactions without being fully informed about the transaction. In fact, some sporadic participants in the secondary market did engage in questionable business practices relative to payees as the industry developed.

In the early 1990’s some participants in the primary market pushed for legislation that likely would have destroyed the secondary market. Specifically, legislation was introduced in a number of states that would have, amongst other things, required court approval of a secondary market transaction and required consent of the party obligated to make the structured settlement payments and the annuity issuer.

While NASP and NASP members supported structured settlement legislation and regulation of the secondary market, NASP has consistently resisted legislation that would deprive payees of liquidity options relative to their structured settlement payments and which would bestow an “insurance company veto” over the transaction. For a few years, the primary market endeavored to enact legislation, on a state by state basis, that would eradicate the secondary market, or at least place it within the control of the parties (the structured settlement obligors and annuity issuers) obligated to make the future structured settlement payments.

In 2001, a compromise was finally reached. NASP was at the forefront in the negotiations and actions that led to enactment by the National Conference of Insurance Legislators (NCOIL) of the Model Structured Settlement Protection Act (the Model Transfer Statute).

The main provisions of the Model Act are as follows:

• Requires a disclosure statement be provided to the payee BEFORE a contract is signed. The disclosure statement describes the primary financial terms of the proposed transaction.
• Requires the transferee to admonish the payee, in writing, to consult with a independent professional regarding the transaction.
• Requires the transferee to file legal proceeding to secure court approval of the proposed transfer.
• Requires that the transferee provide a copy of the relevant transaction documents, the court filing, and the proposed transfer to be provided to the parties obligated to make the structured settlement payments (the annuity issuer and structured settlement obligor) and other interested parties.
• Includes statutory indemnities and protections for certain parties.

Most importantly, from the standpoint of NASP and its members, is that a Model Transfer Statute insures that payees will at least have the opportunity to pursue in court a transaction that provides the payee liquidity relative to this important financial asset. What the Model Transfer Statute does NOT do is give the annuity issuer or the structured settlement obligor veto power over the transaction. That was something that NASP and its member companies would not agree to.

Today, 47 states have enacted Transfer Statutes. NASP and its member companies promoted and lobbied tirelessly for enactment of the Model Transfer Statute. While the Transfer Statutes in place in all 47 states do not mirror and adhere strictly to the Model Transfer Statute, they all require disclosures and court approval of structured settlement transfers.

Concurrently with efforts to enact Transfer Statutes at the State level, NASP and others also lobbied Congress to enact legislation that would recognize the secondary market, validate it, clarify that secondary market transactions would not create adverse tax consequences for payees and other parties to the structured settlement, and encourage the enactment of state transfer statutes. In early 2002, Congress enacted 26 USC 5891 (the Federal Statute).

Today, an interlocking Federal and State legislative system provides the basis upon which all secondary market transactions are consummated.

NASP and its Members led the way in promoting the enactment of the Federal Statute and State Transfer Statutes. Today, NASP Members will not pursue or complete a transfer of structured settlement payment rights except by way of a court order enacted in accordance with an applicable State Transfer Statute that also satisfies the Federal Statute.

Any company that advises, proposes, or pursues a transfer of structured settlement payment rights without seeking court (or administrative authority) approval of the transaction in accordance with a Transfer Statute would not be in compliance with the law.