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Actuarial Science and Insurance Series: insurance-and-pensions

Calculating compensation for loss of future earnings: estimating and using work life expectancy

Each year thousands of people make claims for damages following an accident where someone else is to blame. Determining the level of damages due to the injured claimant is a complicated calculation which draws upon knowledge from economics, actuarial science and accountancy.

Author(s): Professor Steven Haberman - Cass Business School; Professor Richard Verrall - Cass Business School; Dr Zoltan Butt - Cass Business School;

Each year thousands of people make claims for damages following an accident where someone else is to blame. Determining the level of damages due to the injured claimant is a complicated calculation which draws upon knowledge from economics, actuarial science and accountancy. The greatest part of a claim involves future losses (earnings) and expenditures (care and accommodation) which are unknown at the time of trial or settlement and must be estimated. The basic parameters for the estimation are contained within the Ogden Tables – a set of discounted life expectancies and employment risks.

A new, Sixth Edition, of the Ogden Tables was published in May of 2007 and gives the most detailed guidance yet on how the courts should assess damages for personal injury and accidental death. The aim of the Tables is to provide a realistic estimate of discounted future earnings, allowing for the chances that the claimant might die before retirement age, and might also spend time not working due to sickness, unemployment, etc. Importantly, the Sixth Edition includes a new methodology for the calculation of loss of future earnings. It has been known for some time that the figures previously published in the Ogden Tables to allow for all contingencies other than mortality were not realistic. Previous editions of the Ogden tables had relied on research originally published in 1990, using the best available information at the time. Since then, much better data have become available and these have been used to make some important and significant changes to the ways in which people who are disabled following an accident are compensated. The basis for these changes was developed by two inter-disciplinary teams of academics working on research projects funded by a government research council (ESRC) and the UK Actuarial Profession.

The first project was undertaken by a team of labour economists and lawyers from Cardiff University in 1998-99 and revealed deficiencies in the existing method of calculation when compared to a US-style approach. Awards of damages for loss of future earnings in 100 adjudicated cases collected from solicitors’ files across the country were re-calculated under alternative assumptions derived from empirical data. The key finding from this study was that those individuals, who suffered residual disability but who were nevertheless able to return to work, went under-compensated. The standard way of allowing for this (a so-called Smith and Manchester award) under-estimated an injured claimant’s vulnerability to unemployment and inactivity.

The second project undertaken by a team of researchers from Cass Business School, City University sought to update the employment risks in the Ogden Tables using newly available survey data. While carrying out the research, the Ogden Committee arranged for the research teams at Cardiff and City Universities to collaborate, in order to combine different types of expertise within the new set of Tables and in particular to develop a methodology to account for the impact of disability as the result of an accident for those who have some capacity to work. Specifically, a new set of employment risks were estimated which included the impact of disability. And the Ogden method of calculation, already used by the courts, was adapted to incorporate the substantially greater employment risks experienced by the disabled.

The new employment risks, and the associated new method of calculation, are included in the Sixth Edition of the Ogden Tables, which represents an important development in the history of the Ogden Tables. They are likely to affect the level of damages in the UK, with the effects varying according to individual circumstances. Throughout, the over-riding aim of the researchers and of the Ogden Committee has been to try to provide tables which will enable the courts to deal fairly with all cases. In doing this, the Ogden Tables provide guidance to the courts in their determination of damages, but ultimately it is the judiciary who approve (or otherwise) the guidance.

The research work, which forms the basis of this new method for estimating employment risks, was presented to the Royal Statistical Society, London on 16th January 2008 as a discussed paper, appeared in the Journal of the Royal Statistical Society (series A: Statistics in Society).

Attachment(s)
{Calculating compensation for loss of future earnings}{https://www.cass.city.ac.uk/__data/assets/pdf_file/0012/368688/verrall-calculating-compensation-for-loss-of-future-earnings.pdf}
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