Conclusion
14 years ago
Thursday, October 1, 2009
Hedge Funds
Some investors use hedge funds to reduce risk in their portfolio by diversifying into uncommon or alternative investments like commodities or foreign currencies. Others use hedge funds as the primary means of implementing their long-term investment strategy.
Tuesday, September 29, 2009
Hedge Funds
Hedge funds are not registered as publicly traded securities.
For this reason, they are available only to those
fitting the Securities and Exchange Commission definition of
“accredited investors”—individuals with a net worth exceeding
$1 million or with income greater than $200,000
($300,000 for couples) in each of the two years prior to the
investment and with a reasonable expectation of sustainability.
Institutional investors, such as pension plans and limited
partnerships, have higher minimum requirements.
The SEC reasons that these investors have financial advisers
or are savvy enough to evaluate sophisticated investments
for themselves.
For this reason, they are available only to those
fitting the Securities and Exchange Commission definition of
“accredited investors”—individuals with a net worth exceeding
$1 million or with income greater than $200,000
($300,000 for couples) in each of the two years prior to the
investment and with a reasonable expectation of sustainability.
Institutional investors, such as pension plans and limited
partnerships, have higher minimum requirements.
The SEC reasons that these investors have financial advisers
or are savvy enough to evaluate sophisticated investments
for themselves.
Monday, September 28, 2009
Hedge Funds
A “hedge fund” is a private partnership
aimed at very wealthy investors. It can use
strategies to reduce risk. But it may also use
leverage, which increases the level of risk
and the potential rewards.
Hedge funds can invest in virtually anything anywhere.
They can hold stocks, bonds, and government securities
in all global markets. They may purchase currencies,
derivatives, commodities, and tangible assets. They
may leverage their portfolios by borrowing money against
their assets, or by borrowing stocks from investment
brokers and selling them (shorting). They may also
invest in closely held companies.
aimed at very wealthy investors. It can use
strategies to reduce risk. But it may also use
leverage, which increases the level of risk
and the potential rewards.
Hedge funds can invest in virtually anything anywhere.
They can hold stocks, bonds, and government securities
in all global markets. They may purchase currencies,
derivatives, commodities, and tangible assets. They
may leverage their portfolios by borrowing money against
their assets, or by borrowing stocks from investment
brokers and selling them (shorting). They may also
invest in closely held companies.
Sunday, September 27, 2009
Combined Derivative Products
The range of derivative products is limited
only by the human imagination. Therefore, it is
not unusual for financial derivatives to be
merged in various combinations to form new
derivative products.
For instance, a company may find it
advantageous to finance operations by issuing
debt, the interest rate of which is determined
by some unrelated index. The company may have
exchanged the liability for interest payments
with another party. This product combines a
Structured Note with an interest
rate Swap.
only by the human imagination. Therefore, it is
not unusual for financial derivatives to be
merged in various combinations to form new
derivative products.
For instance, a company may find it
advantageous to finance operations by issuing
debt, the interest rate of which is determined
by some unrelated index. The company may have
exchanged the liability for interest payments
with another party. This product combines a
Structured Note with an interest
rate Swap.
Saturday, September 26, 2009
Rights of Use
A type of swap is represented
by swapping capacity on networks
using instruments called
“indefeasible rights of use”, or IRUs.
Companies buying an IRU might book the
price as a capital expense,
which could be spread over a number of
years. But the income from IRUs could
be booked as immediate revenue,
which would bring an immediate
boost to the bottom line.
Technically, the practice is within
the arcane rules that govern financial
derivative accounting methods, but only
if the swap transactions are real
and entered into for a genuine
business purpose.
by swapping capacity on networks
using instruments called
“indefeasible rights of use”, or IRUs.
Companies buying an IRU might book the
price as a capital expense,
which could be spread over a number of
years. But the income from IRUs could
be booked as immediate revenue,
which would bring an immediate
boost to the bottom line.
Technically, the practice is within
the arcane rules that govern financial
derivative accounting methods, but only
if the swap transactions are real
and entered into for a genuine
business purpose.
Friday, September 25, 2009
Swaps
Interest rate swaps occur generally
in three scenarios. Exchanges of a fixed rate
for a floating rate, a floating rate for a
fixed rate, or a floating rate for a
floating rate.
The "Swaps market" has grown dramatically.
Today, Swaps involve exchanges other than
interest rates, such as mortgages, currencies,
and "cross-national" arrangements. Swaps may
involve cross-currency payments
(U.S. Dollars vs. Mexican Pesos) and
crossmarket payments,
e.g., U.S. short-term rates vs. U.K. short-term rates.
in three scenarios. Exchanges of a fixed rate
for a floating rate, a floating rate for a
fixed rate, or a floating rate for a
floating rate.
The "Swaps market" has grown dramatically.
Today, Swaps involve exchanges other than
interest rates, such as mortgages, currencies,
and "cross-national" arrangements. Swaps may
involve cross-currency payments
(U.S. Dollars vs. Mexican Pesos) and
crossmarket payments,
e.g., U.S. short-term rates vs. U.K. short-term rates.
Thursday, September 24, 2009
Swaps
A Swap is a simultaneous buying
and selling of the same security or obligation.
Perhaps the best-known Swap occurs
when two parties exchange interest payments
based on an identical principal amount,
called the "notional principal amount."
Think of an interest rate Swap as follows:
Party A holds a 10-year $10,000 home equity loan
that has a fixed interest rate of 7 percent,
and Party B holds a 10-year $10,000 home equity
loan that has an adjustable interest rate that
will change over the "life" of the mortgage.
If Party A and Party B were to exchange
interest rate payments on their otherwise
identical mortgages, they would have
engaged in an interest rate Swap.
and selling of the same security or obligation.
Perhaps the best-known Swap occurs
when two parties exchange interest payments
based on an identical principal amount,
called the "notional principal amount."
Think of an interest rate Swap as follows:
Party A holds a 10-year $10,000 home equity loan
that has a fixed interest rate of 7 percent,
and Party B holds a 10-year $10,000 home equity
loan that has an adjustable interest rate that
will change over the "life" of the mortgage.
If Party A and Party B were to exchange
interest rate payments on their otherwise
identical mortgages, they would have
engaged in an interest rate Swap.
Wednesday, September 23, 2009
Structured Notes
Structured Notes are debt instruments where
the principal and/or the interest rate is indexed
to an unrelated indicator. A bond whose interest
rate is decided by interest rates in England or
the price of a barrel of crude oil
would be a Structured Note,
Sometimes the two elements of a Structured Note
are inversely related, so as the index goes up,
the rate of payment (the "coupon rate") goes down.
This instrument is known as an "Inverse Floater."
With leveraging, Structured Notes may
fluctuate to a greater degree than the underlying index.
Therefore, Structured Notes can be an extremely
volatile derivative with high risk potential
and a need for close monitoring.
Structured Notes generally are traded OTC.
the principal and/or the interest rate is indexed
to an unrelated indicator. A bond whose interest
rate is decided by interest rates in England or
the price of a barrel of crude oil
would be a Structured Note,
Sometimes the two elements of a Structured Note
are inversely related, so as the index goes up,
the rate of payment (the "coupon rate") goes down.
This instrument is known as an "Inverse Floater."
With leveraging, Structured Notes may
fluctuate to a greater degree than the underlying index.
Therefore, Structured Notes can be an extremely
volatile derivative with high risk potential
and a need for close monitoring.
Structured Notes generally are traded OTC.
Tuesday, September 22, 2009
Stripped Mortgage-Backed Securities
Stripped Mortgage-Backed Securities,
called "SMBS," represent interests in a pool of
mortgages, called "Tranches", the cash flow of
which has been separated into interest and principal
components.
Interest only securities, called "IOs",
receive the interest portion of the mortgage
payment and generally increase in value as interest
rates rise and decrease in value as
interest rates fall.
Principal only securities, called "POs",
receive the principal portion of the mortgage
payment and respond inversely to interest rate movement.
As interest rates go up, the value of the PO
would tend to fall, as the PO becomes less attractive
compared with other investment opportunities
in the marketplace.
called "SMBS," represent interests in a pool of
mortgages, called "Tranches", the cash flow of
which has been separated into interest and principal
components.
Interest only securities, called "IOs",
receive the interest portion of the mortgage
payment and generally increase in value as interest
rates rise and decrease in value as
interest rates fall.
Principal only securities, called "POs",
receive the principal portion of the mortgage
payment and respond inversely to interest rate movement.
As interest rates go up, the value of the PO
would tend to fall, as the PO becomes less attractive
compared with other investment opportunities
in the marketplace.
Monday, September 21, 2009
Financial Derivatives - Futures
A Future is a contract to buy or
sell a standard quantity and quality of an
asset or security at a specified date and price.
Futures are similar to Forward Contracts,
but are standardized and traded on an exchange,
and are valued daily. The daily value provides
both parties with an accounting of their financial
obligations under the terms of the Future.
Unlike Forward Contracts,
the counterparty to the buyer or seller
in a Futures contract is the clearing corporation
on the appropriate exchange.
Futures often are settled in cash or
cash equivalents, rather than requiring physical
delivery of the underlying asset.
sell a standard quantity and quality of an
asset or security at a specified date and price.
Futures are similar to Forward Contracts,
but are standardized and traded on an exchange,
and are valued daily. The daily value provides
both parties with an accounting of their financial
obligations under the terms of the Future.
Unlike Forward Contracts,
the counterparty to the buyer or seller
in a Futures contract is the clearing corporation
on the appropriate exchange.
Futures often are settled in cash or
cash equivalents, rather than requiring physical
delivery of the underlying asset.
Sunday, September 20, 2009
Financial Derivatives - Forward Contracts
In a Forward Contract,
both the seller and the purchaser are
obligated to trade a security or other asset
at a specified date in the future.
The price paid for the security or
asset may be agreed upon at the time
the contract is entered into or
may be determined at delivery.
Forward Contracts
generally are traded OTC.
both the seller and the purchaser are
obligated to trade a security or other asset
at a specified date in the future.
The price paid for the security or
asset may be agreed upon at the time
the contract is entered into or
may be determined at delivery.
Forward Contracts
generally are traded OTC.
Saturday, September 19, 2009
Financial Derivatives - Options
Options
The purchaser of an Option has rights
(but not obligations) to buy or sell the asset
during a given time for a specified price
(the "Strike" price). An Option to buy is
known as a "Call," and an Option to sell
is called a "Put. "
The seller of a Call Option is obligated to
sell the asset to the party that purchased the
Option. The seller of a Put Option is obligated to
buy the asset.
In a “Covered” Option, the seller
of the Option already owns the asset.
In a “Naked” Option, the seller does not own the asset
Options are traded on organized exchanges and OTC.
The purchaser of an Option has rights
(but not obligations) to buy or sell the asset
during a given time for a specified price
(the "Strike" price). An Option to buy is
known as a "Call," and an Option to sell
is called a "Put. "
The seller of a Call Option is obligated to
sell the asset to the party that purchased the
Option. The seller of a Put Option is obligated to
buy the asset.
In a “Covered” Option, the seller
of the Option already owns the asset.
In a “Naked” Option, the seller does not own the asset
Options are traded on organized exchanges and OTC.
Thursday, September 17, 2009
Common Financial Derivatives
• Options
• Forward Contracts
• Futures
• Stripped Mortgage-Backed Securities
• Structured Notes
• Swaps
• Rights of Use
• Combined
• Hedge Funds
• Forward Contracts
• Futures
• Stripped Mortgage-Backed Securities
• Structured Notes
• Swaps
• Rights of Use
• Combined
• Hedge Funds
Wednesday, September 16, 2009
Repayment of Financial Derivatives
In creating a financial derivative, the means for, basis
of, and rate of payment are specified.
Payment may be in currency, securities, a physical
entity such as gold or silver, an agricultural product
such as wheat or pork, a transitory commodity such as
communication bandwidth or energy.
The amount of payment may be tied to movement of
interest rates, stock indexes, or foreign currency.
Financial derivatives also may involve leveraging, with
significant percentages of the money involved being
borrowed. Leveraging thus acts to multiply (favorably
or unfavorably) impacts on total payment obligations
of the parties to the derivative instrument.
of, and rate of payment are specified.
Payment may be in currency, securities, a physical
entity such as gold or silver, an agricultural product
such as wheat or pork, a transitory commodity such as
communication bandwidth or energy.
The amount of payment may be tied to movement of
interest rates, stock indexes, or foreign currency.
Financial derivatives also may involve leveraging, with
significant percentages of the money involved being
borrowed. Leveraging thus acts to multiply (favorably
or unfavorably) impacts on total payment obligations
of the parties to the derivative instrument.
Tuesday, September 15, 2009
Definition of Financial Derivatives
A financial derivative is a contract between two (or more)
parties where payment is based on (i.e., "derived" from)
some agreed-upon benchmark.
Since a financial derivative can be created by means of a
mutual agreement, the types of derivative products are
limited only by imagination and so there is no definitive
list of derivative products.
Some common financial derivatives, however, are
described later.
More generic is the concept of “hedge funds” which use
financial derivatives as their most important tool for risk
management.
parties where payment is based on (i.e., "derived" from)
some agreed-upon benchmark.
Since a financial derivative can be created by means of a
mutual agreement, the types of derivative products are
limited only by imagination and so there is no definitive
list of derivative products.
Some common financial derivatives, however, are
described later.
More generic is the concept of “hedge funds” which use
financial derivatives as their most important tool for risk
management.
Monday, September 14, 2009
Structured Settlements, Security, Legislation, Clean break
SUMMARY
1. Structured Settlement
Security : Yes
Legislation : Exists
Clean break : Yes
2. Compulsory Structured
Settlement, RPI+2%
Security : Yes
Legislation : Court rules ?
Clean break : Yes
3. Income award without
review
Security : Yes, but framework required
Legislation : Small Step
Clean break : Yes
4. Income award with
review
Security : Yes, but framework required
Legislation : Required
Clean break : No
5. Indemnity award (with
review)
Security : Yes, but framework required
Legislation : Required
Clean break : No
1. Structured Settlement
Security : Yes
Legislation : Exists
Clean break : Yes
2. Compulsory Structured
Settlement, RPI+2%
Security : Yes
Legislation : Court rules ?
Clean break : Yes
3. Income award without
review
Security : Yes, but framework required
Legislation : Small Step
Clean break : Yes
4. Income award with
review
Security : Yes, but framework required
Legislation : Required
Clean break : No
5. Indemnity award (with
review)
Security : Yes, but framework required
Legislation : Required
Clean break : No
Structured Settlements - The Motion
The needs of victims and society would
be better served by courts making
income or benefit awards. This would
be more effective than awarding lump
sums.
be better served by courts making
income or benefit awards. This would
be more effective than awarding lump
sums.
Structured Settlements - Requirements
Focus on needs and risks
Social and political understanding
No vested interests
Legal reform
Security and reserving framework
Informed debate
Catalyst - LCD consultation
Social and political understanding
No vested interests
Legal reform
Security and reserving framework
Informed debate
Catalyst - LCD consultation
Costs
Lump sums
Win or lose in court following offer
Income award - capitalise income
Review, no clean break, no winner
Court or statutory framework
Win or lose in court following offer
Income award - capitalise income
Review, no clean break, no winner
Court or statutory framework
Income/Indemnity Awards
Insurance policies
General insurance
Reassurance with life office?
Security - insurers, others
Special fund, government guarantee?
Supervision
Special class
General insurance
Reassurance with life office?
Security - insurers, others
Special fund, government guarantee?
Supervision
Special class
Indemnity Awards
Existing indemnity awards
NHS
Provision of care (only)
Reserving
Security
Rehabilitation
NHS
Provision of care (only)
Reserving
Security
Rehabilitation
Indemnity Awards
Amend multiplicand to “needs” per annum
Care needs (6-10 NDNs)
(+ Income needs - earnings and pension)
Same fundamental shift
With review - another fundamental shift
Court framework
Legislation, security, supervision
Care needs (6-10 NDNs)
(+ Income needs - earnings and pension)
Same fundamental shift
With review - another fundamental shift
Court framework
Legislation, security, supervision
Income Awards
Fundamental shift
Stop at the multiplicand
Assess current monetary requirements
Income award - £ pa + increases
Without review = “structured
settlement+”
With review - no clean break, legislation
and supervision and security issues
Stop at the multiplicand
Assess current monetary requirements
Income award - £ pa + increases
Without review = “structured
settlement+”
With review - no clean break, legislation
and supervision and security issues
Income/Indemnity Award
Definition - a new form of award
Fundamental shift
Multiplicand assessment, only
Clean break - generally no
Loss of earnings/pension
Care costs
Not small claims (under £200K)
Fundamental shift
Multiplicand assessment, only
Clean break - generally no
Loss of earnings/pension
Care costs
Not small claims (under £200K)
The Future
Structured settlements
Investment and mortality risk removed
Tax break, clean break
Security, RPI+2%, but
Subject to negotiation
Not widely used
Compulsory consideration?
Investment and mortality risk removed
Tax break, clean break
Security, RPI+2%, but
Subject to negotiation
Not widely used
Compulsory consideration?
Lump Sum Settlements
Accepted approach
Discharges liability
Flexibility and freedom
Suitable for small settlements
No risk of defendant default
Transfers risk to claimant
Money may run out
Discharges liability
Flexibility and freedom
Suitable for small settlements
No risk of defendant default
Transfers risk to claimant
Money may run out
Continental Europe - WCA
Belgium and Portugal: insurance systems
Belgian system - similar to US
- wage replacement on capped basis, indexed
annuity (wages generally indexed in Belgium)
- medical costs covered (Social Security primary)
- Belgian medical, generally coinsurance system
- In case of workplace accident, WCA insurer
picks up portion of costs that individual would
have had.
- in contrast to US, medical not major portion of
claim
Belgian system - similar to US
- wage replacement on capped basis, indexed
annuity (wages generally indexed in Belgium)
- medical costs covered (Social Security primary)
- Belgian medical, generally coinsurance system
- In case of workplace accident, WCA insurer
picks up portion of costs that individual would
have had.
- in contrast to US, medical not major portion of
claim
Continental Europe, ctd.
Most jurisdictions: judge has power to
award annuity
- i.e. agreement of both parties is not needed.
- Non-motor damages: indexation basis can be
set by judge and indexation is borne by
general insurer
In general, annuities for wage replacement
are taxable,
- otherwise tax free (e.g. nursing care)
award annuity
- i.e. agreement of both parties is not needed.
- Non-motor damages: indexation basis can be
set by judge and indexation is borne by
general insurer
In general, annuities for wage replacement
are taxable,
- otherwise tax free (e.g. nursing care)
Continental Europe- Motor
Annuities provided by general insurers, lumps
sums common as well
- France: indexed annuities common, indexation
provision is borne by state
- Belgium: annuities rare, done on indexed
basis
- mostly for minors, imposed by court
- insurance industry not in favour of expansion,
pool set up to equalise costs
- Germany: unindexed annuities traditionally -
now lump sums are common
sums common as well
- France: indexed annuities common, indexation
provision is borne by state
- Belgium: annuities rare, done on indexed
basis
- mostly for minors, imposed by court
- insurance industry not in favour of expansion,
pool set up to equalise costs
- Germany: unindexed annuities traditionally -
now lump sums are common
Australia- tax issue, ctd.
1999: Federal Government announced
taxation issue would be considered in
2000 budget
Budget to be announced on 20 May 2000
Could be implemented by 1 July 2000
Recent study, Treasury would save
between $4-8m per annum even if 30-60
structures done each year
taxation issue would be considered in
2000 budget
Budget to be announced on 20 May 2000
Could be implemented by 1 July 2000
Recent study, Treasury would save
between $4-8m per annum even if 30-60
structures done each year
Australia- C&L study findings
Government net liability for lump sum claimants:
- At least $225m p.a. for 6,000 lump sum claimants
- Took into account taxation revenue from claimants
returned to work
- Social Security liability of $500m incurred for these
claimants
- Adopting MAA proposal would halve the social
security liability and eliminate overall net liability
(authors: John Walsh, FIAA; Raewin Davies, FIAA)
- At least $225m p.a. for 6,000 lump sum claimants
- Took into account taxation revenue from claimants
returned to work
- Social Security liability of $500m incurred for these
claimants
- Adopting MAA proposal would halve the social
security liability and eliminate overall net liability
(authors: John Walsh, FIAA; Raewin Davies, FIAA)
Australia (NSW) ctd.
Tax issue:
- 1997: NSW Motor Accident Authority (MAA)
proposes adopting UK “structures” system
- Endorsed by NSW government, but not
adopted by Federal Government (Treasury
concerns re loss of taxation revenue)
- Coopers & Lybrand study- adopting
“structures” would produce a gain to the
Treasury rather than a loss (dissipation issue)
- 1997: NSW Motor Accident Authority (MAA)
proposes adopting UK “structures” system
- Endorsed by NSW government, but not
adopted by Federal Government (Treasury
concerns re loss of taxation revenue)
- Coopers & Lybrand study- adopting
“structures” would produce a gain to the
Treasury rather than a loss (dissipation issue)
Australia (NSW), ctd.
Lump sum awards found to be
problematic:
- Bass Study: 75% of claimants exhausted
award within 6 years
- 70% had continuing accident related medical
costs unpredicted at settlement date
- Neave & Howell Study: Only 32% named
investment as major use of award in 1st year
- 17% named a luxury item instead!
problematic:
- Bass Study: 75% of claimants exhausted
award within 6 years
- 70% had continuing accident related medical
costs unpredicted at settlement date
- Neave & Howell Study: Only 32% named
investment as major use of award in 1st year
- 17% named a luxury item instead!
Australia (NSW)
Workers Compensation: similar system to
USA traditional system
Motor: Lump sum awards used exclusively
- little to no use of structured settlements
- structures allowed, but currently not tax-free
- both parties must agree to structure
- either party can apply for later review- insurers
reluctant for this reason to structure
USA traditional system
Motor: Lump sum awards used exclusively
- little to no use of structured settlements
- structures allowed, but currently not tax-free
- both parties must agree to structure
- either party can apply for later review- insurers
reluctant for this reason to structure
US Structures, WC
Review
- Depending on jurisdictions, may be open to
review if change in condition or mistake in
fact
- In some jurisdictions, no review allowed.
- N.B. in motor cases, no review is allowed
Court approval
- Needed in most jurisdictions
- Not common law court, usually state WC
board
- Depending on jurisdictions, may be open to
review if change in condition or mistake in
fact
- In some jurisdictions, no review allowed.
- N.B. in motor cases, no review is allowed
Court approval
- Needed in most jurisdictions
- Not common law court, usually state WC
board
US Structures, ctd.
Main reasons for use:
1) tax advantages: tax free (same as UK)
- win/win situation, insurer and claimant
usually notionally divide the savings
2) Risk of dissipation:
- 25-30% of accident victims dissipate lump-
sums within 2 months
- 90% spend it all in 5 years (Source: California
Practice Guide: Personal Injury, Rutter Group, Chapter 4)
1) tax advantages: tax free (same as UK)
- win/win situation, insurer and claimant
usually notionally divide the savings
2) Risk of dissipation:
- 25-30% of accident victims dissipate lump-
sums within 2 months
- 90% spend it all in 5 years (Source: California
Practice Guide: Personal Injury, Rutter Group, Chapter 4)
US Structured Settlements
Introduced in 1960s, took off in 1970s
Commonly used now in both motor and WC
Usually based on both parties agreeing
Approximately 50,000 structures per annum
Framework very similar to UK (UK simplified
and improved on US system)
Done either via annuity or US treasury trust
fund
Commonly used now in both motor and WC
Usually based on both parties agreeing
Approximately 50,000 structures per annum
Framework very similar to UK (UK simplified
and improved on US system)
Done either via annuity or US treasury trust
fund
US Traditional- WC, ctd.
Rehabilitation- system works fairly well
due to no-fault basis
Paraplegic work accident victim-
chances of full time return to work:
- 50% in Scandinavia
- 30% in USA
- 15% in UK
due to no-fault basis
Paraplegic work accident victim-
chances of full time return to work:
- 50% in Scandinavia
- 30% in USA
- 15% in UK
US Traditional- WC, ctd.
Indemnity: not full wage replacement
- usually 2/3 basis (but tax free) subject to min
and max, unindexed
- tradeoffs: statutory no-fault system, no need to
prove fault, encourage return to work
Medical: often done on managed care
basis
- but Insurer incentivised to provide excellent
care to facilitate return to work
- usually 2/3 basis (but tax free) subject to min
and max, unindexed
- tradeoffs: statutory no-fault system, no need to
prove fault, encourage return to work
Medical: often done on managed care
basis
- but Insurer incentivised to provide excellent
care to facilitate return to work
USA Traditional Systems
Motor: Lump Sum Awards
Workers Compensation (WC):
- 1) Indemnity: Annuity for wage
replacement, plus various ancillary benefits
- 2) Medical: Full coverage of hospital costs
and continuing care
- 3) Rehabilitation: Focus on return to work
Workers Compensation (WC):
- 1) Indemnity: Annuity for wage
replacement, plus various ancillary benefits
- 2) Medical: Full coverage of hospital costs
and continuing care
- 3) Rehabilitation: Focus on return to work
International Perspective on Damages
Discuss provision for damages
Motor and Workers Compensation
systems in:
- USA
- Australia
- Continental Europe
- France
- Germany
- Belgium
Motor and Workers Compensation
systems in:
- USA
- Australia
- Continental Europe
- France
- Germany
- Belgium
Structured Settlements
“ The conventional lump sum approach
was, at its inception, not adopted as a
result of sound ideological reasoning,
but rather for purely expedient ends.
With the advent of computerisation and
advancements in actuarial science, the
Courts are now in a position to
administer an alternative system. ”
JP Weir
was, at its inception, not adopted as a
result of sound ideological reasoning,
but rather for purely expedient ends.
With the advent of computerisation and
advancements in actuarial science, the
Courts are now in a position to
administer an alternative system. ”
JP Weir
Marketplace - Intermediaries - remuneration
Professional fees
- charges based on hourly rate
- ‘professional’ approach
- defendant pays costs regardless of whether a
structured settlement is achieved
Commission
- ‘no win : no fee’
- remuneration may exceed a reasonable hourly rate
for time spent
- uncertainty as to whether a structured settlement
will be achieved encourages defendant to prefer
this approach
- does plaintiff pay?
- charges based on hourly rate
- ‘professional’ approach
- defendant pays costs regardless of whether a
structured settlement is achieved
Commission
- ‘no win : no fee’
- remuneration may exceed a reasonable hourly rate
for time spent
- uncertainty as to whether a structured settlement
will be achieved encourages defendant to prefer
this approach
- does plaintiff pay?
Marketplace - Insurers
few insurers active in market - rarely more than 5 at
any one time
various barriers to entry into market
lack of specialist underwriting experience
small size of market fails to provide ‘pooling’ of
risks, possibly leading to an overly prudent
approach to underwriting
the market will need to grow if more participants are
to be enticed into the market
any one time
various barriers to entry into market
lack of specialist underwriting experience
small size of market fails to provide ‘pooling’ of
risks, possibly leading to an overly prudent
approach to underwriting
the market will need to grow if more participants are
to be enticed into the market
Marketplace - Intermediaries
IFAs - Independent Financial Advisers
‘forensic’ accountants
- specialists in structured settlements
- designing financial packages for plaintiffs
- bringing defendants and plaintiffs together
- satisfying the legal and Inland Revenue
equirements
- making it happen
- undertake lobbying to gain wider acceptance,
understanding and more favourable treatment:
- law, politics, tax
‘forensic’ accountants
- specialists in structured settlements
- designing financial packages for plaintiffs
- bringing defendants and plaintiffs together
- satisfying the legal and Inland Revenue
equirements
- making it happen
- undertake lobbying to gain wider acceptance,
understanding and more favourable treatment:
- law, politics, tax
Structured Settlements: Defendants
Pros -
liability is discharged in full
offer significant tax advantages
‘market pricing’ of annuity should ensure lowest cost
solution
risk passes from defendant
Cons -
income purchased may be too high
‘market price’ rather than negotiated settlement
could result in higher costs of settlement
too much trouble
liability is discharged in full
offer significant tax advantages
‘market pricing’ of annuity should ensure lowest cost
solution
risk passes from defendant
Cons -
income purchased may be too high
‘market price’ rather than negotiated settlement
could result in higher costs of settlement
too much trouble
Structured Settlements: Claimants - Cons
require a ‘budget for life’
inflexible - once in place
RPI may not be a good proxy for increases in cost of care
Index-Linked Gilts mistakenly believed to offer poor
returns - price of certainty
risk of loss of “capital” on very early death - price of
certainty
too much trouble
inflexible - once in place
RPI may not be a good proxy for increases in cost of care
Index-Linked Gilts mistakenly believed to offer poor
returns - price of certainty
risk of loss of “capital” on very early death - price of
certainty
too much trouble
Structured Settlements : Claimants - Pros
adopt a ‘needs-based’ approach to restitution (‘bottom-up’ vs ‘top-down’)
offer significant tax advantages
prevent dissipation via mismanagement or adverse investment experience
offer flexible solutions, eg young persons where money needed over very
long period
guaranteed index-linking (‘RPI’) of benefits
provide lifetime guaranteed protection - risk passes to life assurance
company
annuity is fully secured against the insolvency of the life office under Policyholders Protection Act
offer significant tax advantages
prevent dissipation via mismanagement or adverse investment experience
offer flexible solutions, eg young persons where money needed over very
long period
guaranteed index-linking (‘RPI’) of benefits
provide lifetime guaranteed protection - risk passes to life assurance
company
annuity is fully secured against the insolvency of the life office under Policyholders Protection Act
Structured Settlements
A STRUCTURED SETTLEMENT is the payment of money for a
personal injury claim where at least part of the SETTLEMENT
calls for future payment.
The payments may be scheduled for any length of time - even
as long as the claimant’s lifetime - and may consist of instalment
payments and/or future lump sums.
Payments can be in fixed amounts or they can vary.
The schedule is STRUCTURED to meet the financial needs of
the claimant. ”
National Structured Settlement Trade Association (USA )
personal injury claim where at least part of the SETTLEMENT
calls for future payment.
The payments may be scheduled for any length of time - even
as long as the claimant’s lifetime - and may consist of instalment
payments and/or future lump sums.
Payments can be in fixed amounts or they can vary.
The schedule is STRUCTURED to meet the financial needs of
the claimant. ”
National Structured Settlement Trade Association (USA )
Lump Sum: Defendants
Pros -
- liability is discharged in full
- suitable for small cases
- risk passes from defendant
Cons -
- lump sum may be too large
- liability is discharged in full
- suitable for small cases
- risk passes from defendant
Cons -
- lump sum may be too large
Lump Sum - Claimants: Cons
lump sum may be too small
- needs may be greater than expected
- costs of care inflation may be higher than
expected
- plaintiff may live longer than expected
- expected investment performance may fail to
materialise
relatives/carers may squander the lump sum
plaintiff may fall back upon the State for care
- needs may be greater than expected
- costs of care inflation may be higher than
expected
- plaintiff may live longer than expected
- expected investment performance may fail to
materialise
relatives/carers may squander the lump sum
plaintiff may fall back upon the State for care
Lump Sum - Claimants: Pros
lump sum may be too large
no risk of defendant default
provides flexibility and financial
freedom
covers past losses and immediate
requirements
suitable for small settlements
no risk of defendant default
provides flexibility and financial
freedom
covers past losses and immediate
requirements
suitable for small settlements
Life insurer concerns
Long term business
Underwriting expertise
Developing healthcare market
Strict reserving requirements
Underwriting expertise
Developing healthcare market
Strict reserving requirements
General insurer concerns
Stable rating basis
Retrospection
Matching assets
Finality and the balance sheet
Retrospection
Matching assets
Finality and the balance sheet
Post-Wells developments
Worrall v Powergen: projected mortality
Edwards:Lower index-linked yields
Woolf reforms
Conditional fees
Human Rights Act
LCD consultation
Edwards:Lower index-linked yields
Woolf reforms
Conditional fees
Human Rights Act
LCD consultation
Wells, Thomas and Page
House of Lords, July 1998
3% pa: index-linked yield
Rounded 3 year average
Ogden tables the starting point
Retrospective
3% pa: index-linked yield
Rounded 3 year average
Ogden tables the starting point
Retrospective
December 1997 paper
Discount rates: index-linked starting point
Victims not ordinary investors
Care and earnings inflation
Need to project mortality
Problems with lump sum awards
Periodic payment alternatives
Victims not ordinary investors
Care and earnings inflation
Need to project mortality
Problems with lump sum awards
Periodic payment alternatives
Initial reforms
1981 Index-linked gilts
1984 Ogden tables: population mortality
Structured settlements, interim payments
Civil Evidence Act 1995
Damages Act 1996 - BUT
1996 Wells Court of Appeal judgment
1984 Ogden tables: population mortality
Structured settlements, interim payments
Civil Evidence Act 1995
Damages Act 1996 - BUT
1996 Wells Court of Appeal judgment
Conventional approach
Clean break
Multipliers and multiplicands
Adversarial: medical evidence
Stable 4-5% pa: equity investment
Implicit allowance for inflation
Multipliers and multiplicands
Adversarial: medical evidence
Stable 4-5% pa: equity investment
Implicit allowance for inflation
Damages Seminar - An Alternative to Lump Sum Awards
Introductory considerations :
Damages, severe injury
Brain damage, spinal injury
Numbers
Amounts
Needs
Compensation, so far as possible, to put
back in same position as before
Damages, severe injury
Brain damage, spinal injury
Numbers
Amounts
Needs
Compensation, so far as possible, to put
back in same position as before
Sunday, September 13, 2009
What business opportunities are created?
Internet identity
Communications
Education
Marketing and sales
Collaboration
Communications
Education
Marketing and sales
Collaboration
How do you learn?
Follow market developments
Learn the vocabulary and concepts
- Wikipedia
- Concept maps
Study industry applications and developments
- Leaders
- Resources
- Standards
- Audience
- Listen first, then record
Learn the vocabulary and concepts
- Wikipedia
- Concept maps
Study industry applications and developments
- Leaders
- Resources
- Standards
- Audience
- Listen first, then record
Why should you podcast?
Broad societal change
- Builds upon and impacts other Internet developments
- Applications growing and costs are dropping
Improves productivity
Personal as well as business application
- Builds upon and impacts other Internet developments
- Applications growing and costs are dropping
Improves productivity
Personal as well as business application
What is podcasting?
Internet audio and video broadcasting -
Record, publish, find, subscribe and listen
Originated October 2004
Interactive
No intermediation
Technologies
RSS - Weblogs
MP3 Players
Pull technology – anywhere/anytime
Record, publish, find, subscribe and listen
Originated October 2004
Interactive
No intermediation
Technologies
RSS - Weblogs
MP3 Players
Pull technology – anywhere/anytime
Public policy impact
Better outcomes for accident victims
Some savings to insurers
Compensation dollars better spent
No removal of rights
Better risk allocation
Reduce double dipping
Some savings to insurers
Compensation dollars better spent
No removal of rights
Better risk allocation
Reduce double dipping
Benefits for defendants and insurers
A new tool to help settle cases
Can offer more without costing more
Can something that can’t otherwise be obtained
Objective determination of life expectancy
Better problem solving
Intangibles
Settlement dollars will be better spent
Good PR outcomes
Can offer more without costing more
Can something that can’t otherwise be obtained
Objective determination of life expectancy
Better problem solving
Intangibles
Settlement dollars will be better spent
Good PR outcomes
Not suitable in all cases
- Very short life expectancy
- Investment skill
- Desire to provide for relatives
- Mistrust of all insurance companies
- Investment skill
- Desire to provide for relatives
- Mistrust of all insurance companies
Case examples
- Child – concerned parents
- Elderly person – nursing home costs
- Reduced/uncertain life expectancy
- Inexperience with investment
- Elderly person – nursing home costs
- Reduced/uncertain life expectancy
- Inexperience with investment
Benefits for accident victims
- Tax savings
- Won’t outlive compensation
- Guaranteed payments – certainty and no
volatility
- Security – low risk investment
- Spendthrift protection and protection from
others
Payments are easy to manage
Control and independence
…..Lifelong financial security
- Won’t outlive compensation
- Guaranteed payments – certainty and no
volatility
- Security – low risk investment
- Spendthrift protection and protection from
others
Payments are easy to manage
Control and independence
…..Lifelong financial security
Working with structured settlements
- Step 1: Establish whether a structure is
possible
- Step 2: Encourage the claimant the
recognize the value in structuring
- Step 3: Negotiate a settlement
incorporating that value
possible
- Step 2: Encourage the claimant the
recognize the value in structuring
- Step 3: Negotiate a settlement
incorporating that value
Product
Lifetime annuities
- Normal life expectancy OK
- Underwriting required for impaired lives; reinsurance support required
Other products
- Existing products can be modified
- Demand will impact on supply
- Normal life expectancy OK
- Underwriting required for impaired lives; reinsurance support required
Other products
- Existing products can be modified
- Demand will impact on supply
Legislation
- Encourages financial advice before
settlement
- Encourages annuities – a safe financial
product with guaranteed payments
- A tax incentive to give up access to part
of the compensation
settlement
- Encourages annuities – a safe financial
product with guaranteed payments
- A tax incentive to give up access to part
of the compensation
Legislation
- Structures are settlement agreements
- Court approval required for minors and
those with intellectual incapacity
- State amendments confirm court
powers to make consent orders
- Periodic payments can be paid to a
trustee
- Court approval required for minors and
those with intellectual incapacity
- State amendments confirm court
powers to make consent orders
- Periodic payments can be paid to a
trustee
Legislation
Allows additional annuities
- Must be over 10 years
- May be paid annually
- Indexation flexibility
Allows deferred lump sums
- One-off future payment (eg. operation)
- Series of payments (eg. wheelchair)
- Must be over 10 years
- May be paid annually
- Indexation flexibility
Allows deferred lump sums
- One-off future payment (eg. operation)
- Series of payments (eg. wheelchair)
Legislation
Annuity must provide the minimum
monthly level of support
- Lifetime annuity
- Payable monthly
- Equivalent to the current aged pension
- Indexed to the CPI
Maximum guarantee period 10 years
Non-commutable, non-assignable
monthly level of support
- Lifetime annuity
- Payable monthly
- Equivalent to the current aged pension
- Indexed to the CPI
Maximum guarantee period 10 years
Non-commutable, non-assignable
Legislation
Requires the agreement of both parties
Annuity purchased using compensation
money
Defendant or its insurer must purchase
the annuity for the claimant
Claimant can’t buy their own tax-free
annuity
Annuity purchased using compensation
money
Defendant or its insurer must purchase
the annuity for the claimant
Claimant can’t buy their own tax-free
annuity
Legislation
Tax exemption for annuity payments
that meet legislative criteria
Only in certain types of cases
- Personal injury claims
- No death claims
- No workers compensation claims
that meet legislative criteria
Only in certain types of cases
- Personal injury claims
- No death claims
- No workers compensation claims
History - Australia
1980s NSW LRC
1994 Structured Settlement Conference
1995 Professional Indemnity Review
(medical negligence)
1998 NSW MAA Submission
1999 The Structured Settlement Group
ICA, APLA, Law Council, AMA, etc.
1994 Structured Settlement Conference
1995 Professional Indemnity Review
(medical negligence)
1998 NSW MAA Submission
1999 The Structured Settlement Group
ICA, APLA, Law Council, AMA, etc.
History - international
USA and Canada
- Late 1970s tax rulings
- 1982 US tax legislation
United Kingdom
- Late 1987 model agreement
- 1995/6 tax legislation
- Late 1970s tax rulings
- 1982 US tax legislation
United Kingdom
- Late 1987 model agreement
- 1995/6 tax legislation
A third way
Common law lump sums
Statutory periodic payments
Structured settlements
- A hybrid
- Combining the best elements
Statutory periodic payments
Structured settlements
- A hybrid
- Combining the best elements
What are structured settlements?
A form of settlement agreement
Used in the context of personal injury
Lump sum plus periodic payments
Periodic payments provided by an
annuity or annuities
Used in the context of personal injury
Lump sum plus periodic payments
Periodic payments provided by an
annuity or annuities
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