This month we are publishing Actual to Expected performance results for our Structured Settlement underwriting business. The results are good, with an Actual to Expected ratio of 98% for the 2012 through 2016 period, assuming IBNR of 7%. Without IBNR, the A to E ratio would be 91%.
But the real story here is not the results, but the learning curve behind the results. When we started underwriting structured settlements in 2007, our initial results were terrible. We were reviewing files with Attending Physician Statements (APSs) and Paramedical Exams, and our life expectancies were far too long. We learned that underwriting tools that worked for life insurance and life settlement underwriting do not work in the secondary market for structured settlements. The demographic of people wanting to convert their structured settlement annuity into a lump sum is different than that of the higher income life insurance and life settlement populations. First of all, the annuitants typically do not have a regular physician, but rather use the Emergency Room or a walk-in clinic for their medical needs. So APSs do not provide the same meaningful underwriting information as they do in other insurance related markets. As important, the types of impairments this population have are frequently behavioral, such as incarceration histories and drug/alcohol abuse, and this information is often not picked up in APSs and paramedical exams.
So we developed a new, streamlined underwriting approach using a Questionnaire targeted to the types of impairments found in the Structured Settlement population, supplemented with prescription drug reports, criminal/driving histories, and telephone interviews. I think that the results speak for themselves. But the real story here is that a streamlined, essentially short form underwriting methodology can work. I think a similar approach could be used for some life settlements; but to be successful it is important to have practical experience and a proven track record, not only in life settlements, but in applying short form underwriting tools.
President, Fasano Associates