How Actuarial Experts Evaluate Future Loss Calculations in Litigation

Future financial losses often depend on uncertain factors and events such as mortality, disability, retirement, benefit eligibility, inflation, and the timing of future payments.

Actuarial expert witnesses may assist when a disputed damages calculation or financial obligation depends on those uncertainties. Depending on the assignment, an actuary may review data and assumptions, project future cash flows, examine alternative scenarios, and calculate present value when appropriate. The informational appendix to Actuarial Standard of Practice No. 17 includes examples involving retirement-benefit present values, reserve adequacy, and lost earnings.

This guide explains how actuarial experts evaluate future-loss calculations and what attorneys should examine when the assumptions, data, or methods behind competing projections are disputed.

When Actuarial Analysis May Be Appropriate

Actuarial analysis may be particularly relevant when a future financial obligation depends on contingencies such as mortality, disability, retirement, employment termination, election of optional forms of benefit, claim development, or insurance risk.

The right discipline depends on the specific issue in dispute. Some earning-capacity or lost-profit questions may call for other economic or financial expertise, depending on the methodology and subject matter involved.

How Actuarial Experts Evaluate Future-Loss Models

An actuarial model should have a clearly defined purpose or question and use data, assumptions, and methods suited to that purpose. When Actuarial Standard of Practice No. 56 applies, an actuary using a model should make reasonable efforts to confirm that the model's structure, data, assumptions, governance and controls, and testing and output validation are consistent with the model's intended purpose.

Reviewing the Data

Relevant records may include earnings and benefit histories, pension documents, insurance policies, claim or reserve information, mortality data, and prior calculations.

Actuarial Standard of Practice No. 23 addresses the selection, review, use, and reliance on data. When selecting data, an actuary should consider, among other things, whether the data are appropriate and sufficiently current, internally consistent, and reasonable in light of relevant external information that is readily available and known to the actuary. The actuary should also consider whether the data are sufficient for the analysis and identify any known significant limitations.

Historical experience may inform a projection but does not automatically predict future results.

Evaluating Assumptions and Contingencies

Different assumptions can produce materially different projections. Their relevance depends on the assignment and may include financial, demographic, employment, or benefit-related assumptions.

When an actuary is responsible for selecting an assumption, Actuarial Standard of Practice No. 56 identifies several possible sources. These include actual experience that is available, relevant, and sufficiently reliable, with appropriate adjustments for the circumstances being modeled; other relevant and sufficiently reliable experience, such as industry experience, when actual experience is unavailable, irrelevant, or insufficiently reliable; future expectations or estimates, including market data when available and appropriate; and other relevant information.

For defined benefit pension obligations, Actuarial Standard of Practice No. 27 addresses assumptions such as inflation, investment returns, discount rates, compensation increases, retirement, employment termination, mortality, disability, and election of optional form of benefit. The standard applies to assumptions used to measure defined benefit pension plan obligations and notes that these measurements generally do not include individual benefit calculations.

Assumptions should also be considered together. Actuarial Standard of Practice No. 56 cautions that assumptions that appear reasonable individually may still produce unreasonable output when conservatism or optimism accumulates across multiple assumptions.

Present Value and Sensitivity Analysis

A present-value calculation expresses future payments as a value at an earlier measurement date when discounting is required or appropriate. The appropriate discount rate or method depends on factors such as the purpose of the calculation, governing law, and type of financial obligation. For property and casualty cash-flow analyses that use discounting, Actuarial Standard of Practice No. 20 directs actuaries to use reasonable discount rates appropriate to the intended purpose and to consider whether applicable law or relevant accounting standards impose constraints or requirements related to discounted cash flows or risk margins.

Professional actuarial guidance does not determine the governing legal rule. In Monessen Southwestern Railway Co. v. Morgan, 486 U.S. 330 (1988), the United States Supreme Court addressed present-value treatment in a Federal Employers' Liability Act case. The Court held that the trial court erred by instructing the jury, as a matter of law, not to discount future lost earnings to present value. According to the Court, that instruction removed the factual determination of the appropriate discount rate from the jury. The holding should not be treated as a universal rule governing every type of damages claim.

Sensitivity analysis can show how changes in significant assumptions affect the result. Actuarial Standard of Practice No. 56 specifically identifies varying key assumptions as a form of model testing and output validation.

How Attorneys Can Evaluate Competing Actuarial Opinions

When actuarial experts reach different conclusions, counsel should examine how each expert reached the result rather than comparing only the final numbers.

Key questions include:

• What question was the model designed to answer?

• What records and data support the inputs, and what limitations were identified?

• Who selected the material assumptions, and which assumptions have the greatest effect on the result?

• Are related assumptions internally consistent?

• How were mortality, retirement, disability, inflation, or other contingencies treated?

• Was the model tested, including through sensitivity analysis where appropriate?

• How was present value handled, if applicable?

• Did the analysis rely on information or opinions from other professionals?

A disagreement between experts does not, by itself, mean that one opinion fails to meet applicable actuarial standards. Actuarial Standard of Practice No. 17 recognizes that actuaries may reach different conclusions while applying reasonable assumptions and appropriate methods.

Actuarial Standards and Admissibility of Expert Testimony

Actuaries who provide expert testimony should follow applicable actuarial professional standards while also complying with the evidentiary and procedural requirements governing the case. Actuarial Standard of Practice No. 17 states that written actuarial expert testimony should explain the scope of the assignment and any limitations or constraints. When appropriate for the forum and intended audience, it should also describe the data, actuarial assumptions, and actuarial methods used in the analysis, along with their sources. It also addresses assumptions selected by others, opposing testimony, and material errors.

In federal proceedings governed by the Federal Rules of Evidence, Rule 702 requires the witness to be qualified as an expert by knowledge, skill, experience, training, or education. The party offering the testimony must also demonstrate to the court that it is more likely than not that the Rule's four requirements are satisfied. The expert's specialized knowledge must help the trier of fact understand the evidence or determine a fact in issue, the testimony must be based on sufficient facts or data and be the product of reliable principles and methods, and the opinion must reflect a reliable application of those principles and methods to the facts of the case.

An actuarial calculation does not itself determine liability, causation, or legal entitlement to damages. Those issues depend on the governing law and evidence.