Conflicts of interest long common to parts of the annuity industry have crept into the structured settlement industry.
If someone gets injured at an amusement park and sues the park’s owner, both parties may come to a settlement. Instead of the defendant paying the settlement all at once in a lump sum, the two sides will often agree to a “structured settlement.” With the help of a broker, the defense will purchase a special type of annuity that provides periodic compensation to the injured party.
Income for injury victims who received structured settlements have a special tax-free status, thanks to bipartisan legislation from the Reagan era. They also have blessings from plaintiff and defense bars and judges, which often consider them to be helpful options for the physically disabled.
Pacific Life, a leading annuity provider, has been offering certain brokers – who sell these structured settlement products – luxurious trips to destinations like a 2016 trip to Bora Bora to learn how to “exchange ideas.” These are perks that insiders say incentivizes brokers to favor those products over other, potentially more sensible options. While they are not explicitly rewards for top-performing sellers, insiders say they function much the same.
Pacific Life declined to comment for this article. Yahoo Finance reached out to three brokers who had photos from the Bora Bora trip with PacLife on their Facebook page; they did not respond.
Pacific Life made a “save the date” announcement for a 2018 trip last summer and again in October. The destination: the Four Seasons Resort in the Maldives with a special junket to the Four Seasons Jumeirah Beach in Dubai for a “select group” of insurance brokers. According to the announcement, invitations will be sent out by late May, giving brokers ample time to get sales in.
“Insurers offer these trips because it helps them sell structured annuities to accident victims,” said one member of the structured settlement industry who did not want to be identified because of possible professional repercussions. “PacLife’s annuity sales skyrocketed once it announced the Bora Bora trip.”
The invitation language is careful to frame the trip as an opportunity to “promote, enhance, and grow the industry,” but the fine print notes that attendees are required to sign an I-9, as the IRS may consider the trip as income. In other words, the trip is considered non-cash compensation by the company and the IRS.
On Feb. 12, Pacific Life announced it earned a spot on the 2018 World’s Most Ethical Companies list.
‘Uncommon practice’ in the industry
Pacific Life is the only major player in the structured settlement industry to offer brokers luxurious trips like this, according to industry insiders. (Yahoo Finance reached out to the top 10 providers in the industry, including Berkshire Hathaway, MetLife, AIG, Liberty Mutual, New York Mutual, Prudential, USAA, Amica, and State Farm. None of which said they have these trips.)
According to Mark Wahlstrom, a structured settlements consultant with Wahlstrom & Associates in Scottsdale, Ariz., incentives were once in the industry but had “dwindled down and is now a highly uncommon practice.”
“To me, a structured settlement annuity carries a higher standard of care given the vulnerable population we’re dealing with, injury victims,” said Wahlstrom. “In every instance we should always be looking for the most suitable market, not the company that’s offering us incentives. That’s why it’s uncommon and unwise because nothing should interfere with that decision process other than the best company at the best price.”
Pacific Life regains market share
In 2014, Pacific Life had bottomed out on a two-year slide in the structured settlement industry in which it fell from the top position (17% market share) to number three (14%), behind Berkshire Hathaway and MetLife. In late 2014, the company announced its first trip, to Bora Bora, which took place in September 2016.
The following year, Pacific Life surged back to recapture second place, regaining 16% of the market. In 2016, the company had 20% of the structured settlement business, generating over $1.2 billion in structured settlement sales, according to LIMRA, an industry group for insurance, retirement, and financial services.
Undisclosed incentives vs. disclosed incentives
A structured settlement is struck when an injured plaintiff and the defense agree on terms of how much money should be distributed. Generally, each party will hire its own broker, and the two brokers will arrange for an annuity to be bought. The brokers’ services are paid for by the annuity provider at a 4% commission, often 2% to each broker.
While these fees are usually clearly disclosed to clients — there is an ongoing lawsuit about this in the industry alleging this is not in fact true — one veteran structured settlements consultant told Yahoo Finance they never heard a trip come up with a client.
A 2016 ProPublica report found that a single free meal from a pharmaceutical sales rep was enough to incentivize doctors to prescribe their drugs more. So it stands to reason that a luxe trip to a tropical locale like Bora Bora or the Maldives — complete with in-ocean bar, according to pictures posted on Facebook by some of the attendees — could be big enough carrot to make a broker favor one annuity provider over another. Even if the non-cash perks are accepted on a good-faith basis, they could put a thumb on the scale.
The annuity industry’s reputation has been blemished before for not disclosing conflicts of interest. For years, seniors have fielded pitches for annuities, often enticed by a free dinner. While some annuities make sense for seniors, it is well-documented that brokers have long enjoyed non-cash perks like trips and other luxuries from annuity providers for securing new business.
In a report from Sen. Elizabeth Warren’s office in 2015, 13 of the 15 annuity companies surveyed “admitted to offering kickbacks” and that they were most frequently “all-expense-paid trips to expensive vacation destinations such as Aruba, the Bahamas, and other resorts.” The report added that this information is seldom disclosed to consumers.
When these non-cash incentives aren’t disclosed, the parties buying the structured settlement annuities could more likely be steered toward more expensive options that may not be right for them. This behavior, which studies had shown costs retirees significantly, helped spur the Department of Labor to implement a fiduciary rule barring these practices for retirement accounts.