Editor's Note: The following article has been contributed byBrian M. Farrell, the former Director of Litigation Managementfor Aetna. Now retired, Farrell spent more than 44 years in theclaims profession.

Over the years, claims handling has undergone significanttransformation. Specialization by line of business, regionalizationof claims operation centers, and a far greater reliance ontechnology are just a few of the changes we in the claims worldhave experienced. The typical claims adjuster role today is gearedto working at a desk and successfully leveraging technology. In thepast, there were considerably more claims field office locations,with adjusters spending significantly more time out of the officeconducting all facets of claims handling face toface.

Unfortunately, as our world evolves, many claims professionalsmay not be taking advantage of time-tested tools used in the lossresolution process. This is especially true as it concerns the useof structured settlements. About a year ago, I was briefing thehead of claims at a major casualty company concerning a high-valuecase on which I was brought on to review. As part of thesettlement strategy, I recommended starting the negotiation with acombination of cash and a structured settlement.

“What's a structured settlement?” he replied.

Why Incorporate Structured Settlements?

There are several reasons for claims departments to incorporatestructured settlements. Let's start with reserving. Earlyinvolvement of a structured settlement consultant in the claimsresolution process can assist the claims professional in his or herexposure analysis in order to establish accurate case reserves.

Underwriters and actuaries rely on claims to establish casereserves as timely and as accurately as possible. Poor reservingpractices can lead to premiums that are too high or too low for aspecific line or an entire book of business. Thisis a serious problem that directly impacts a casualty company'sbottom-line profitability and ability to compete with othercarriers.

Structured Settlement Consultants

Accurate reserving is especially important for larger casesbecause these high exposure cases have more influence on premiumpricing than do the smaller cases. During my 8 years as headof the Travelers' Major Claims department, I supervised more than250 claims professionals. Approximately 80 percent ofTravelers claim indemnity spend was on about 20 percent of ourcases handled in the Major Case Unit. It is critical that theclaims professional, using all the resources available, asaccurately as possible, estimate the company's ultimate financialexposure on these high-exposure claims.

Structured settlement consultants are experts at understandingfuture medical and living costs, and can help with the damageevaluation. They can help claims professionals establish moreaccurate claims reserves through the pricing of future medicalcosts, by providing cost estimates of wage replacement whileassisting with the coordination of public assistance benefits thatmay be at risk through a claims settlement. The structuredsettlement consultant can help align the costs to fund claims forfuture damages with future dollars.

In addition to timely and accurate indemnity reserving, thereare also benefits in minimizing legal expense with the timelyrecognition of a case's value and, in many instances, settlementnegotiations conducted sooner to thereby reduce discoverycosts.

Another significant value a structured settlement consultant canprovide is a rated age, or sub-standard age rating. Using a ratedage can help to produce a benefit stream to reflect the futurecosts of medicals and wages at a cost we cannot provideotherwise.

Claims departments need a reminder. Structured settlementconsultants are a no-cost resource that your claims team needs toleverage. What other expert is available to you at no cost? Theseconsultants, who are paid a commission from the life insurancecompany that issues the structured annuity, offer expertise inquantifying damages and developing negotiation strategies. They canalso handle the settlement paperwork.

When To Consider 'Structure'

“What types of cases are best-suited for structuredsettlements?” is a question that inevitably arises. One answer iscases involving minors and those with brain damage. These areobvious ones, because the court may insist on a structuredsettlement as a condition of the settlement.

Beyond that, a claims professional should look at a structuredsettlement when confronted with a case where the demand includesfuture damages. In addition, claims should focus on cases involvingtotal disability or when a future payout is likely to be greaterthan $500,000. We should include that structures are utilizedon cases of all sizes, with structures as low as $15,000.

Application In Workers' Comp Cases

Nowhere in claims is a structured settlement a more obviouswin-win negotiating tool than with workers' compensationlosses. Start with the nature of most states' workers'compensation systems. Typically, an insurer does not have to settleand can elect to pay the claim as mandated by statute and schedulesthat may or may not fit the needs of the workers' compensationclaimant. That said, most workers' compensation carriersprefer to settle claims. Capping medical inflation and thefuture unknown clearly carries a benefit for the carrier.Structured settlements provide a flexible tool to settle suchclaims.

Today, liability and workers' compensation carriers are requiredto report certain damage payments to Medicare, which does notallow a settlement that shifts future medical costs from adefendant or its insurer to Medicare or to the taxpayer.

Medicare's interests must be protected in any settlementinvolving a qualified Medicare beneficiary. The MedicareSet-Aside (MSA) is an insurance industry accepted and Medicare'srecommended method to protect Medicare's interests and allowsettlement of workers' compensation claims. I have also seenuse of Set-Aside's used in the settlement of certain liabilityclaims involving future medicals.

Here's the lesson for claims department: By using a structuredsettlement to fund the MSAs, you meet your obligation to Medicareand free reserves to use in other parts of the settlement, such asnon-Medicare-covered medical expenses which are often roadblocks tosettlement.

Let's say you have a reserve set on a claim for$400,000. You consult with a Medicare specialist, who saysthat $125,000 cash will be needed for an MSA. That effectivelyleaves $275,000 to negotiate a settlement. If you structurethe MSA, then the amount needed to protect Medicare could be asmuch as 40 percent less than cash or only $75,000 (cashseed and annuity premium). So, instead of having $275,000 tosettle the claim, you now have $50,000 more, which could mean thedifference between settling a claim or not.

Finally, structures bring back creativity to the negotiatingtable. Most experienced claims professional know thatproviding a settlement offer that includes cash plus future annuitypayments that protects the future needs of the claimant withguaranteed payments at the time those payments are needed is thebest outcome of any claim and for all parties.

Cash plus a structured settlement designed by a structuredsettlement consultant leverages the claim professional's settlementautonomy, providing far greater flexibility and appeal than a lumpsum cash offer. Structures can include a guaranteed payment periodor a “second to die” option to help a spouse or child.

A Vital Reminder

We use structured settlements in our claim process becausewe believe that it's a massively valuable tool. It helps usget what every claims person cherishes: a closed file at the rightprice, where you feel good about the work you did and you've got anoutcome that you think is right.

That comes from a recent speech about claims operationsdelivered by Richard Woollams, Chief Claims Officer at AIGCommercial Insurance. Woollams' comments raise an importantpoint about how to view structured settlements, namely that theyare not just another financial investment.

A structured settlement is not designed to make the claimantrich. It is, however, designed to address theclaimant's specific needs through tailored, tax-free income. The funding annuity is held by a well-capitalized, regulatedinstitution and payments are backed by state guaranty associations(up to certain limits). Changes in the stock market are notgoing to affect a person's payment stream.

For the casualty company, the structured settlement offers theprospect of more accurate reserve allocations and ultimately theability to move liabilities off our books. It also shows evidenceof bargaining in good faith, a crucial legal standard in manystates.

Faster case closure. Greater efficiency. Fewer reserveproblems. Better legal protections. These are some of themany reasons why I have pushed structured settlements in claim workfor more than four decades.

Brian M. Farrell has spent more than 44 years in theinsurance claims profession. He is formerly the Director ofLitigation Management for Aetna and Vice President, Major Case Unitfor Liability, Workers Compensation & Property Claims atTravelers.