Development of the Secondary Market for Structured Settlements

The secondary market for structured settlements is the business in which Structured Settlement Purchasers participate. The secondary market developed because structured settlement recipients (payees) discovered that structured settlements are inherently inflexible and illiquid. A payee whose personal or financial circumstances changed, such that the rigid, long-term payment stream set forth in the original structured settlement years earlier was no longer beneficial, discovered that they had almost no flexibility with respect to their own financial asset. Because part of the value of any asset, particularly a financial asset, lies with the ability of the owner of same to freely sell and liquidate that asset, some payees suddenly discovered that their structured settlements were not as beneficial or valuable as they once thought.

In effect, the secondary market provides a release valve for those payees who found themselves locked into a long-term payment stream that may no longer be beneficial to them or suitable for their circumstances. Moreover, some payees simply desire and need freedom, flexibility, and control relative to their financial assets and lives. As the use of structured settlements mushroomed, it is little wonder that payees sought liquidity and flexibility from the secondary market relative to their future payments.

Structured Settlement Purchasers provide payees the ability to monetize their future structured settlements via the secondary market. In a typical secondary market transaction, a payee who is receiving structured settlement payments assigns to a third party (often referred to as a “funding company” or “factoring company”) the right to receive certain future payments in return for a lump sum payment. The amount of the lump sum payment (or the purchase price) is determined by calculating a discounted present value of the future payments, using a discount rate. It is a financial calculation. The higher the discount rate the lower the discounted present value (and thus, the lower the purchase price paid to the payee) and the lower the discount rate, the higher the purchase price.

An example of a secondary market transaction might look like this:

• Mrs. Jones, the payee, is injured in a car accident when she was 19 years old.
• She files a lawsuit and settles her case by way of a structured settlement, which provides for her to receive monthly payments of $ 1,000.00 per month for the remainder of her life, with 420 monthly payments guaranteed.
• The structured settlement is funded with an annuity issued by Big City Life Insurance Company. Ms. Jones does not own the annuity.
• Ten years later, Ms. Jones, now working, married with two children, and living in an apartment, wants to raise some money to put a down payment on a home and purchase appliances and furniture for her home.
• She enters into an agreement with a funding company to transfer and assign 120 monthly payments of $500 each in return for a lump sum payment of $ 33,000.00, calculated using a discount rate of approximately 13.5%.

Thus, Mrs. Jones is able to access and monetize her financial asset. Because of the laws that control structured settlements, and restrict liquidity and flexibility, absent a thriving secondary market, Mrs. Jones would find her structured settlement to be far less valuable and her options limited.

Prior to the late 1990’s most secondary market transactions were completed by way of contractual agreement between the funding company and the payee.