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The Actuary The magazine of the Institute & Faculty of Actuaries

Calculating compensation for loss of future earnings

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
that draws upon knowledge from economics,
actuarial science, and accountancy. The
greatest part of a claim involves future losses
(earnings) and expenditures (care and accommodation)
that 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.
The sixth edition of the Ogden tables was
published in May 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 owing 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 tables 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 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 interdisciplinary teams of academics working
on research projects funded by the Economic
and Social Research Council and the UK
actuarial profession.
The first project was undertaken by a team of
labour economists and lawyers from Cardiff
University in 19989, 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 recalculated 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 were
undercompensated. The standard way of allowing
for this (a so-called Smith and Manchester
award) underestimated an injured claimant’s
vulnerability to unemployment and inactivity.
The second project undertaken by a team of
researchers from Cass Business School, City
University London, 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 that 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, representing
an important development in the history of the
tables. They are likely to affect the level of damages
in the UK, with the effects varying according
to individual circumstances. Throughout,
the overriding aim of the researchers and of the
Ogden Committee has been to try to provide
tables that 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 that forms the basis of this
new method for estimating employment risks
will be presented to the Royal Statistical Society
on 16 January 2008 at 5pm in London, and there
will be opportunity for discussion afterwards.
The authors will also be presenting a workshop
designed for lawyers during the afternoon
at Cass Business School. This workshop will provide
background information about the data
and methods, and advice on interpretation of
the estimates. Any interested actuaries are also
welcome to attend. There will be contributions
from members of the Ogden Committee, as
well as those directly involved in the research.
Further details of these events can be found
at www.cass.city.ac.uk/ogden.