Accounting treatment of structured settlements in which the claimant is the owner and payee?

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Multiple Choice

Accounting treatment of structured settlements in which the claimant is the owner and payee?

When a structured settlement is funded by an annuity and the claimant is the owner and payee, the insurer’s responsibility for future payments is effectively transferred to the annuity. That means the insurer no longer has a liability to make those future payments, so the loss reserve can be reduced by the funded amount (the present value of the remaining payments). The annuity in this setup is not owned by the insurer, so it isn’t recorded as an investment asset of the insurer, and the payments aren’t treated as income to the insurer. This funding mechanism simply discharges part of the liability, hence the reduction in loss reserves.

When a structured settlement is funded by an annuity and the claimant is the owner and payee, the insurer’s responsibility for future payments is effectively transferred to the annuity. That means the insurer no longer has a liability to make those future payments, so the loss reserve can be reduced by the funded amount (the present value of the remaining payments). The annuity in this setup is not owned by the insurer, so it isn’t recorded as an investment asset of the insurer, and the payments aren’t treated as income to the insurer. This funding mechanism simply discharges part of the liability, hence the reduction in loss reserves.

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