To illustrate this point, assume a claims professional is evaluating the file of a claimant whose spouse was killed in a car crash where liability is 100% adverse to their insured. Part of the evaluation includes a claim for lost future wages. At the time of death, the decedent had a 25-year remaining worklife expectancy and was earning $75,000 a year.
(NOTE: For this exercise, we're ignoring future wage increases, cost of benefits, vacation, taxes, etc. even though, as a practical matter, all of these would factor into the conversation.)
What is fair compensation for this particular wage loss?
If left to their own devices, the claims professional may be tempted to find a simple DIY solution by seeking out an online calculator. A quick Google search brings up a website from Calculator Academy that would seem to do the trick.
But while this site provides the correct future income loss of $1,875,000 by simply multiplying $75,000 per year by 25 years, it does nothing to address the actual present value (cost) necessary to provide these future benefits.
Enter the Economists
Enter the folks who make your head spin and eyes glaze over.
In what often becomes a clash of dueling experts, the defense and plaintiff sides will frequently each hire their own economists who argue over fair discount rates, inflation, cost of living assumptions, and other esoteric points of contention necessary to support their estimate of fair compensation for the wage loss.
All these arguments and more are fair game and worth discussing. But at the rates economists charge, I wasn't willing to hire one to estimate the present value of a hypothetical case study used for this newsletter.
Did you know economists predicted nine out of the last five recessions?
(That was a joke, BTW)
I have seen some economists simplify the process by opining that the present value of a loss equals its future value since the discount rate is offset by the cost of living which isn't factored into the Calculator Academy example.
Structures Then vs. Structures Now
Of all the methods used to fairly price future damages, none can more reliably and accurately meet future needs at a specific stated cost than a structured settlement calculation. Unlike the other methods which are more subjective, structured settlements pay actual dollars in future years.
And if it's been a while since you've considered consulting a structured settlement expert to help with a present value analysis, you will be surprised by what's happened over the past few years.
Before answering the question "What is fair compensation for this particular wage loss?" one must first ask another question.
When is the present value calculation being performed?
Because the present value (cost) to provide future damage dollars will change over time, a calculation performed in 2020 will be different than one preformed in 2023.
Look at the headline chart above to see how much less it costs today to provide this wage loss claim than it did three short years ago.
By allocating $427,770 (27.6%) LESS money to this portion of the claim evaluation, more of the reserves are available to address other aspects of the claim.
This can be particularly useful in situations where policy limits may otherwise hinder the ability to reach consensus.
Even Better Pricing with Rated Ages
By the way, this doesn't even account for additional value which can be realized on claims with lifetime needs where the injured party has a substandard life expectancy.
Claims involving future care where the injured party suffered traumatic brain injury, tetraplegia, burns, and similar severe bodily injuries, are prime candidates for structured settlement present value analysis.
Look how much more cost effective it is in 2023 to meet the lifetime future income needs of a 40-year-old female with a 10 year statistically reduced life expectancy than it was in 2020 by viewing this chart below: