Minyan Mailbag-Insurance Sector
A few bad apples can spoil the whole bunch!
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
I wasn't sure if your "witch hunt" comment in your opening post this morning was implying that you thought the insurance industry was being unfairly investigated...but I thought I would offer this anecdote based on my very recent experience dealing with a major insurance player. I don't think I have mentioned previously what type of work I do, but to try briefly explain, for the last 8 1/2 years I have worked for a private trust company that serves as guardian and trustee on Special Needs Trusts for incapacitated minors and young adults who have received large awards or settlements as a result of personal injury, wrongful death of a parent, or medical malpractice cases. (I guess it's my own way of trying to balance a love of finance and investing with the need to do something 'meaningful' with my life.)
My boss started his company because he felt the needs of this very vulnerable group of people were not being well served by the existing network of banks, brokerage firms, and insurance companies, and he wanted to offer an alternative. The driving force behind everything we do is a recognition that we are a FIDUCIARY for these individuals and we have an absolute responsibility to protect their money and make decisions that are in THEIR best interests because they have no capacity or "voice" to speak for themselves or make their own decisions. As a result we often find our firm in opposition to many bank trust departments, insurance companies, etc.
Anyway, back to the story...a personal injury lawsuit case settles, there are three minors that all have derivative claims and receive a small portion of the settlement. It is decided that their part of the settlement will be structured (i.e. put in an annuity paying out at various times starting at age 18). So the structure is then put out for bid to 10 different insurance companies. Most come back in a fairly close range, but there are two that are significantly better, paying out a total of $40,000 more over the structure period. One of those two companies (call it XYZ) has the same high financial strength rating as most of the companies with the lower payout. So it is decided to choose the XYZ bid.
End of story, right? Nope, not quite. The insurance company that is paying out (on the personal injury claim) has a small list of "approved" companies that they will fund structured settlements from...none of them anywhere near the top of the list as far as total return/payout. They refuse to fund an annuity from XYZ because it is not on their "approved" list. Since our firm is the settlement guardian for the kids, and clearly it is in the kids best interests to have the higher payout (after all, $40,000 is a significant difference), we're taking them to court to force them to purchase the better annuity, since they really shouldn't legally have any say about how the proceeds of the settlement are allocated or invested.
This ended up being quite a bit longer than I intended, but my main point is that over the years I have seen a lot of shoddy business practices in the insurance business and I happen to believe that it needs "cleaning up".
Thanks for reading this and have a great Monday!
Thanks for sharing your story with the Minyanship. To clarify, I didn't mean to infer that the "witch hunt" is unwarranted. I was simply making the point that the financial complex has come under increasing scrutiny as Citigroup (C:NYSE), Fannie (FNM:NYSE) and the insurers are all under fire.
With psychology acting as the ultimate differentiator, it is something that we should keep on our trading radar as we assimilate the metrics.
Sorry for any confusion!
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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