CONTINGENCY DEDUCTIONS IN ACTUARIAL CALCULATIONS 101

INTRODUCTION

On 1 August 2008, the new RAF Act changed the lives of many people in that there was no longer an automatic right to general damages for inter alia pain and suffering. This meant that clients whom had suffered a loss of earning capacity was suddenly left without compensation and many a matter was settled on the basis that the plaintiff was only entitled to an undertaking. The right to an undertaking and the admission that an undertaking is needed for future medical expenses can be a basis for an argument on loss of earning capacity as the plaintiff wouldn’t need cover for future medical expenses if there was nothing wrong with her and would further need time off work to attend to such treatment which would translate into a loss of earning capacity.

The traditional view of damages is that you cannot separate the different heads of damages in such a manner as to decide one before the other, this essentially comes from the point of view that a loss of earning capacity should be bundled under general damages. The now infamous Deysel v RAF matter (unreported Bizos AJ) was and still is widely used in SGHC by RAF counsel (and some Judges) to force a postponement until general damages is decided (where these have been referred to the HPCSA) or to state that a loss of earning capacity should only increase the amount of general damages as the plaintiff will ‘struggle’ to do their job and an actual loss of earnings cannot be demonstrated.

It is however not that simple, a loss of earning capacity goes to the heart of the client’s ability to earn a living and in particular to the possibility of future loss of earnings due to time of work for treatment or losing out on a promotion. As much of last mentioned is often a possibility as opposed to a probability which would show a direct loss based on the evidence at hand, it cannot be ignored for various reasons. The court in Southern Insurance v Bailey (SCA) clearly stated that one cannot adopt a non-possumus attitude to loss simply because it cannot be quantified in general terms. A loss of earning capacity can also not be ignored because of the maxim of the ‘once and for all rule’ which does not allow a claimant to return for another slice of damages at a later stage.

This means that any possibility of a future loss must be taken into consideration over and above normal contingencies which an actuary would already be applying. These ordinary contingencies would not be visible in a calculation to an untrained eye as it is normally done by means of various algorithms that are automatically applied. Robert Koch in his book, The Quantum of Damages has various tables for longevity which are implemented automatically by actuaries based on the earnings and economic circumstances as well as for instance HIV status of a plaintiff (last mentioned can be more complicated though as the CD 4 count is taken into consideration) Koch also refers to normal contingencies being 5% (but for the accident on past loss) and 15% (now that the accident has happened on future loss). There is a myriad of case law on this aspect and in particular an old argument that a ½% per year should be allowed till date of retirement from date of calculation as a normal contingency) There is also a school of thought that feels that there should be no pre-morbid deduction of 5% (I’m one of them) as there is no possibility of anything unforeseen happening as it’s already in the past.

The above 5% and 15% is deducted from what the plaintiff would have earned if the accident did not happen for future possibilities such as death. The deduction is found in the first column of an actuarial calculation (depending on the actuary’s style) and is referred to as a negative contingency as it reduces your loss (explained below in more detail). The amount to be deducted from the second column is called a positive contingency as it increases the loss and this deduction is based on possibilities for a future loss of earning capacity including the prospect of early retirement. If one starts on Koch’s 15% as a normal contingency it would mean that one can never go lower than 15% on the positive deduction as that would mean that the plaintiff now has a better chance of survival than before the accident. One also cannot simply manipulate the contingencies where the plaintiff’s earnings is subject to the RAF CAP (Sweatman v RAF – SCA) without getting another calculation done unless the plaintiff falls far below the CAP. Simply lobbing off an amount from the total and calling it a contingency is also incorrect as the loss lies in the percentage difference between the negative and positive contingency and as such without a negative contingency being applied a positive contingency would skew the loss in favour of the defendant (see below).

A negative contingency can also be applied if the plaintiff is placed in a very high pre-earnings scenario, but for the accident, which scenario is for the most part only a possibility.

THE CALCULATION SIMPLIFIED

The easiest way to look at how the loss is calculated is to use an amount of R1000 in earnings for a client that could show no probability of loss, only a possibility and as such his earnings is calculated as also being a R1000 after the accident in question. We will ignore past loss.

BUT FOR THE ACCIDENT                                               NOW THAT

Earnings                    R1000                                                R1000

Less Contingency    15%                                                    25%

Equals                       R150                                                  R250

Loss                           R850                          minus            R750              = R100          

Without contingencies, no loss.

The calculation of the loss is based on what is referred to as a contingency differential i.e. the 10% difference between the 15% and the 25% and because the positive contingency is higher than the negative contingency you show a loss.

If the scenario was the other way around, say for instance where you reflect a loss based on a loss of a promotion (which was only ever a possibility) you can apply a negative contingency which would looks as follows.

BUT FOR THE ACCIDENT                                               NOW THAT

Earnings                    R10 000                                             R1000                       

Less Contingency    20%                                                    25%

Equals                       R 2 000                                              R 250

Loss                           R8 000                       minus            R 750             = R7 250      

Without contingencies, the loss would be R 9000, hence the application of the higher but for contingency being referred to as a negative contingency as stated before, it reduces the loss.

CONCLUSION

An actuarial calculation can be manipulated in several different ways to ensure that client has the best and most reasonable outcome in any claim for damages. Aspects such as retirement age as well as the date on which a client will stop getting salary increases and the discount rate applied for capitalisation can all have an impact on the loss and will explain why on the same facts two actuaries with different instructions can come to a completely different conclusion.