Both self insured corporations and workers compensation insurers may have the opportunity to benefit from significant administrative and financial gains from transactions in the area of Workers Compensation permanent partial and permanent total claims, assisted through specific structured annuity/insurance products made available to you by 4structures.com, LLC.
The basic premise of this approach is taking an existing statutory benefit and funding it with a structured annuity, at less than the cost of the current reserve, with a concomitant reduction in balance sheet liability. It is an alternative to an all cash settlement under a Compromise and Release (C&R)
Furthermore, where it is not possible to settle a workers compensation claim, but a state fund, pool, casualty company or self-insured can simply purchase an annuity to fund the long term indemnity payments. Structured annuities are able to match the payment streams required by state statutes. This usually avoids the need for special regulatory approvals to change the payment pattern.
In some cases, medicals may also be funded in this manner, particularly in conjunction with a Medicare Set Aside.
The ideal cases for this approach are those where:
By adopting a strategy of funding Workers Compensation claims with the above mentioned characteristics, your firm can secure a number of financial benefits.
- Questions concerning compensability and liability have been determined.
- The claimant has stabilized medically and degree of disability and/or permanency can be accurately determined.
- There is a high probability that payments will continue at least 10 years into the future.
1. Mortality risk is transferred to a life insurer. Writing annuities on a life contingent basis can eliminate reserve deficiencies arising from poor mortality forecasts. A life insurers actual mortality experience tends to be more predictable due to a large pool of risks. However, reserve adjustments related to medical expenses and other factors may still be necessary. To the extent annuity financing reduces adverse reserve development it will also stabilize future earnings.
Mortality Based Discounts(MBDs) are applied when, in the underwriters determination, an individuals life expectancy is shorter due to a disclosed medical condition. Of significant interest is that a ratable condition need not be related to the claim being filed. A "rated age" will significantly bring down your firms cost of a life contingent payment stream. The use of rated ages and mortality data is a major advantage of structured annuities. IMPORTANT! both industrial and non-industrial medical conditions that may reduce the applicant’s life expectancy in the view of the life insurance company that provides the annuities for the workers compensation structured settlement. This may reduce the cost of the Medicare Set Aside Allocation making it easier for a case to settle.
2. Investment and reinvestment risk is transferred to a life insurer. In a sense, all non-fatality workers compensation claims can be divided into two groups. Short-term claims constitute the largest group in terms of numbers of cases and represent a significant portion of claim debts. These short-term liabilities match up nicely with the short duration assets of the typical casualty company or pool.
The next group of claims is made up of long-term claims. These long-term liabilities are not well matched with the short duration assets of the typical casualty company or pool portfolio. Purchasing annuities to fund these long-term claims provides a better matching of assets and liabilities. This is a cost effective strategy since the Capital requirements and long-term investment strategies of life companies allow them to price annuities competitively compared to assets of similar quality and duration.
3. Administrative expenses can be decreased through the annuity financing mechanism. Payments can be made directly to the claimant by the life insurer, relieving the obligor of this burden. Some annuity issuers can make payments on a weekly or bi-weekly basis.
Compromise Settlements and Redemptions
- The Tax Payer Relief Act of 1997 served to permit a qualified assignment vehicle under IRC Section 130 for compromise settlements and redemptions, the object of which is to provide additional financial security to the payee.
- Several others provide a reinsurance approach to finance both statutory obligations and compromise settlements.
- Several companies have created special endorsements that provide for the commutation of the funding asset upon the cessation of the statutory obligation. (e.g. remarriage of a widow or widower)
How Do We Begin?
Following is a brief checklist of the items needed to underwrite and price an individual or group workers compensation transfer utilizing the approaches covered above.
- Name of Claimant and Social Security Number
- Date of Birth
- Type of Injury
- Date of Accident
- Monthly or Bi-Weekly Payment desired?
- Annual Medical Costs, if any
- Applicable State COLA, if any
- Current Reserve Amounts by claimant
For life contingent cases, a current Independent Medical Evaluation(IME) will be required to be eligible for the Mortality Based Discount (MBD)