Structured Settlements

Question 1

who pays for the structured settlement?

Answer 1

the defendant or insurer pays the single premium. the benefits are tax free

Question 2

why do government/policyholders like structured settlements?

Answer 2

• reduces reliance on govt programs
• less likely for plaintiff to squander it all
• plaintiff does not have to manage so much money at once

Question 3

How is setting the mortality assumption when pricing structured settlements difficult?

Answer 3

• settlement annuitant population tends to be younger and not retirement age
• no anti-selection risk like regular mortality
• not enough credible experience
• annuitants usually have some kind of physical trauma

to combat this, age rate-ups, or setting issue age higher, are common

Question 4

How are the benefit payments discounted in a structured settlement?

Answer 4

Insurer must set a discount rate curve to PV benefit payments based on their investment mix (portfolio of short and long duration assets)

They can also subtract margins from the yields for expected defaults, investment expenses, and profit margins.

Question 5

What are the three main pricing considerations when pricing a structured settlement?

Answer 5

1. Mortality
2. Interest
3. Expenses and Premium Taxes

Question 6

What is a benefit escalator?

Answer 6

Benefits that increase at a fixed annual rate per year

Question 7

What AG provide guidance on structured settlements?

Answer 7

AG9A - provides guidance on substandard cases
AG9B - provides guidance on durational interest rates used for structured settlement benefit streams

Question 8

What is factoring?

Answer 8

When the annuitant sells some of the benefit payments to another company in exchange for an immediate payment.

Question 9

Do structured settlements protect against inflation?

Answer 9

Some are indexed to CPI, but the most popular method is the benefit escalator.