Personal Injury Earnings Restitution
The calculation of pecuniary loss in personal Injury claims is governed by legal
precedent and legislative prescription. NetActuary's economic loss reports are necessarily constrained by
these rules and prescriptions. Looking from a broader perspective, however, a better actuarial computational
model could be developed that takes into account inflation, investment earnings and accurate predictions of
vicissitudes and other matters. This blog outlines why the current legal approach in many instances leaves to
less than full restitution.
Legislation in all states of Australia prescribe a “discount factor” to be applied to
future economic loss of earnings and superannuation. This discount factor is a “real rate of discount.” That
is, instead of a separate allowance for inflation and investment earnings, the discount factor is the
difference between the two. A full model may have 4% wage inflation and 7% p.a. earnings on investment
with the "real rate of discount” therefore being 3%. Applying a discount factor rather than making separate
allowance for inflation and investment earnings yields virtually the same result except that applying
separate provisions has the advantage of allowing for different short and long term assumptions. Separate
allowance leads to a more precise calculation. In the past year or two, for example, the short term assumptions
for inflation would have been larger than the longer term assumptions.
The real rate of discount set by state legislation typically prescribes a 5% or 6% p.a.
discount. Real rates of discount in the 2 to 5% range are conventionally considered reasonable. The higher
prescribed discount is deliberate to keep insurance premiums reasonable but leads to awards less than full
restitution.
The 15% vicissitudes discount that is set by legal precedent is a higher discount
than that which would be applied from an actuarial perspective. A fairer and more accurate discount for
future vicissitudes could be reached if an individual’s risk circumstances were examined. The risk of
becoming unemployed for someone one year out from retirement is less than the risk of becoming unemployed
at the start of one’s career. A more accurate discount for vicissitudes would determine each individual’s
own probabilities of dying, being unable to work and being unemployed. NetActuary is going to research this
area by publishing information on a realistic discount for vicissitudes that varies by age and gender.
In the past we have encouraged practitioners not to use loss multiplier factors but
instead full year by year calculations. This was important with the legislated three stages of tax cuts and
the superannuation guarantee level of contributions varying on a year by year basis. This aspect has become
less critical now the final stage of tax cuts and SG levels have been reached and so we have loaded
Personal Injury Actuarial Factors tables onto the NetActuary website. For ease of use, we provide loss
multiplier factors on a weekly, fortnightly and monthly basis to two decimal places. Our life expectancy
tables are based on the latest Australian Life Table 2020-22 as published by the Australian Government Actuary
will be loaded shortly. The Australian Life Tables are used in preference to the ABS life expectancy data
as they do not rely on estimations of deaths as the ABS data is required to do.
While NetActuary, with its specialisation in computational support for lawyers, is
interested in esoteric matters, we also strive to make our expert witness personal injury damages reports
comprehensive, timely and cost efficient.