The Case for Independent Underwriters and Rated Ages

Medicare Set-Aside Blog on April 27, 2011
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It is not an either or situation when choosing between an independent underwriter and rated ages from the life companies. On cases involving annuity funding, you need both – but it is a question of timing.

First, life companies do not like to provide rated ages for cases that have no expectation of settling with an annuity. In fact, some have taken the position that using a rated age for this purpose is a violation of the broker’s agency agreement. The below verbiage from one of the life companies rated age response illustrates this point with no ambiguity.

” This information is being provided to an appointed broker for the exclusive use of pricing a claimant’s qualified structured settlement annuity offered by XXXXX. Any further distribution or other use of this information is strictly prohibited and subject to termination of appointment with XXXX”

Second, structured settlement brokers don’t like providing rated age information when there is no expectation of annuity funding. But they are caught between a rock and a hard place. On one hand, their clients need this information to mitigate MSA costs and if they don’t provide the information, someone else surely will. But it is patently unfair for a client  to ask a broker to violate his agency agreement with the life company in order to compete for annuity premium. Additionally, the sheer volume of requests burden the broker’s staff with no (or very little) corresponding revenue. Unfortunately, some brokers began charging MSA companies for the rated age which is unfair to the life companies that incur all of the costs of underwriting.

Third, rated ages as provided by a life company  are not always true indications of diminished life expectancy. As any broker will attest, they are as much about an individual life companies’ appetite for financial risk as true mortality risk. Some companies will return a standard on a cancer patient or quad just because they do not want to assume the risk of providing lifetime payments. And their aggressiveness will shift during any given year based on the amount of certain types of substandard risks that they have already written. Rated ages are mostly about pricing annuities in a competitive market environment.

Finally, based on CMS’ requirements that a median rated age be calculated when more than one is submitted, the rated ages used in MSAs can be artificially low. But there is no requirement to submit more than one rated age so any one that meets their absurdly strict requirements for formatting and independence will do. The result from an independent underwriter is generally one or two years greater than a median rated age that has to factor in a standard or an unreasonably low rated age. This has the potential of saving thousands of dollars per MSA whether funded as a lump sum or annuity.

There are only two solutions to this problem. One, the life companies could offer their rated age services, without the corresponding pricing and business concerns,  for a fee directly to the MSA community. To date, they have shown no interest in doing so. Two, MSA companies can adopt the use of independent underwriters for MSA calculation purposes, submit the case to CMS, and only then price the annuity with a broker. This removes the need for the MSA community to attest to knowledge of any and all rated ages obtained before settlement (which is an inherently slippery slope ethics wise), prices the MSA in accordance with a valid life expectancy calculation, unburdens the life companies’ underwriting departments (and hopefully encourages more companies into the WC annuity market driving down costs for all) and frees the broker to focus on the activities for which they are paid.

We use the two companies I have listed below. They meet the requirements outlined by CMS for rated ages, provide 24 hour turnaround and excellent customer service. I have received CMS approval 100% of the time when using these firms and find them to be well worth the nominal cost per file. I hope the industry as a whole will adopt this methodology.

Underwriting Contact Info:

Fraser Settlement Services, Inc.
279 Intervale Road, PO Box 844
Bethel, ME 04217-0844
Mike Fraser
phone: 207-824-2276
fax 888-765-4007
cell 207-744-5153

KP Underwriting, LLC
2420 Plum Woods Dr.
Sellersburg, IN 47172
Kevin Puckett
phone: (502) 345-8048
Fax: (812) 248-2575