Why was my RAF claim for personal injury calculated by the actuary different to that expected?

A:  Loss of Income

Client asks:

I did a simple rough calculation of what my personal injury claim would be. I earned R200,000 pa. I had 10 years left until  retirement. I  am  now  unemployable.  I calculated my  claim  for  future  loss  to  be R200,000 times 10 years equals R20 million. My claim as calculated in the actuarial report was different to that. How did the actuary calculate the amount?

Actuary answers:
There are 5 factors that actuaries take into account in ascertaining the legal claim for loss.

1. Income tax
The figure of R200,000  is before the deduction  of income tax. The amount actually received after income tax would be a lower amount. Since there will be no tax deducted from the actual claim paid, we need to deduct the income tax in our calculation of the claim.

2. Mortality‍

There is no guarantee that the claimant would have survived for the 10 years. The actuary takes into account the possibility that the claimant may have died prior to his normal retirement age.

3. and 4. Salary Inflation and Investment Income = Discounting

The income of R200,000 would be expected to increase in future years.

On the other hand, the claimant will only suffer a loss over a period stretching many years  into  the  future.  Even  though  the  loss will  be  suffered  in  the  future,  the compensation received will be paid now. From now until the future time that the loss will be payable, the claimant can earn investment returns on his claim settlement. This is allowed for by reducing the claim amount payable to allow for these future investments returns.

The increase in the claim due to salary inflation and the decrease in the claim due to allowance for future investment income to some extent offset each other. For this reason, the actuary will often make the assumptions about the salary inflation and investment income together. A typical assumption would be that investment income will be 2.5% above salary inflation.

5. General Contingencies
In  addition  to the more  scientific  calculations  of the actuary,  there are certain  other factors which are normally taken into account via a general contingency deduction to the claim. These include the possibility of sickness and unemployment.

Summary
Thus it can be seen that the inclusion of the 5 factors shown above can significantly affect a claim and give a different result to the simple calculation mentioned by the client.‍

B:  Loss of Support

Client asks:
After my husband died, why was the RAF claim for loss of support for myself and my two children lower than expected? He earned R200,000 pa. He had 10 years left until retirement. Would our claim for future loss to be R200,000 times 10 years equals R20 million. ‍

Actuary answers:
The five factors shown above that actuaries use in their loss of income calculations are also relevant here. There are a number of further relevant factors:‍

6. Split of family income
The income earned by the husband, besides being used to support his family, was also being used to support himself. The portion used to support himself is not available for a loss of support claim to his other dependants.‍

7. Wife's salary
If the wife earned an income, that would reduce the amount of support she required from her husband. If her income was high compared to her husband, she may have even been contributing to the support of the children. Thus her and even the children's claim could be reduced or even fall away.‍

8. Remarriage contingency
There is a chance that the widow will remarry and thus be supported by her new husband. Allowance for this would reduce the claim.‍

9. Accelerated benefit
The widow may have received an inheritance on the death of her husband. In the normal course of events, she would only have expected to receive an inheritance at a later date or not at all. The value of the accelerated benefit of her receiving the inheritance earlier, needs to be calculated and deducted from any claim she has by way of loss of support.‍

Summary
Thus it can be seen that the inclusion of the 9 factors shown above can significantly affect a claim and give a different result to the simple estimate mentioned by the client.