Present Value Calculations Revisited

It Now Costs Much LESS to Meet Guaranteed Future

Needs Than It Did Only a Few Short Years Ago

September 12, 2023 - Among the duties a claims organization owes its insured when presented with an injury claim for damages by a third party, is the duty to promptly and fairly investigate the merits of the claim, determine coverage, allocate fault as necessary, and provide a legal defense if a lawsuit is filed.

Then, along the journey to resolution once a claim is accepted, the parties will either agree to what they mutually consider fair compensation for the loss, or a jury will do so for them.

But fairness, like beauty, is often in the eye of the beholder.

Where general damages are concerned, quantifying what's fair can be especially problematic since no two people experience pain and suffering the same way even when their injuries are comparable.

On the other hand, fairness consensus usually comes easier with special damages since pricing an agreed economic loss is infinitely more straightforward. (Or so it would seem. More on this in a minute.)

Nonetheless, just like the cost to provide replacement durable medical equipment is never static across numbers of years, the present value necessary to ensure future dollars are available to meet future needs also fluctuates.

It is here where even a little nuancing can make a significant difference in the overall outcome of a claims resolution. Specifically . . .

. . . because structured settlement interest rates are higher than they've been in more than a decade, the cost to provide future dollars is lower than it's been in more than a decade.

This creates a golden opportunity to do more with fewer dollars.

Pricing Future Damages for Claims Settlements

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:

Whether making a settlement offer, utilizing a Medicare Set-Aside Trust, or simply reviewing a file for exposure and reserving, better pricing on special damages leads to more flexibility with general damages and paves the way for an overall better resolution.

Don't overlook the importance of all of this when resolving Indemnity, Future Medical, and Death Benefit claims for workers' compensation injuries also.

It should be noted that it is in the ultimate best interest of BOTH sides of any negotiation to find the best pricing to meet any future need. As one now-retired former Claims VP I used to work with was fond of saying,

"Once I match the future needs with future dollars using a structured settlement,

I can take that steak off the table and focus on the rest of the claim."

Trying to meet a specific stated need for the lowest possible cost makes financial sense for defense and plaintiff alike. After all, who doesn't appreciate fair value?

Structured settlements afford an opportunity to do just that.

Thank you for the opportunity to be of service and best wishes to you for continued success in your personal and professional lives.

Dan Finn, CPCU, MSSC®, RICP®

Master's Certified Structured Settlement Consultant®

Retirement Income Certified Professional®

"Building lifetime client relationships!"

[email protected] | 949.999.3322 |

CA Insurance License: 0A96173

Click HERE for a FREE copy of the major motion picture: "The Baby Boomer Dilemma: "An Exposé of America's Retirement Experiment."

DISCLAIMER: We present this newsletter for educational purposes only using material freely available in the public domain and it should not be construed as containing tax, accounting, investing, or legal advice. Any guarantees referenced subject to the claims paying ability of the issuing carrier. All rights reserved.

Image courtesy of Michael Jin on Unsplash.

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