Photo of Donald F. Behan

  • Home Page - Home page with brief resume and links to site contents
  • Contact Us - Send us an e-mail message to inquire about actuarial consulting services.
  • Consulting - Capsule descriptions of principal areas of my consulting practice
  • Economic Life Value - Discussion of issues considered by actuaries in estimating the economic value of human life
  • Courses - Description of courses that I have recently taught
  • Publications - Articles that I authored or co-authored, and transcripts of meetings for which I was the moderator or a panelist
  • Meeting Handouts - Documents from my presentation at the Society of Actuaries meeting on May 10, 2007


Determining the Economic Value of Human Life

The need to evaluate the economic value of human life is important in various areas of public policy, and arises in the determination of damages in wrongful death and personal injury cases. Here are some highlights of the issues to be considered in determining the economic value of human life.

The economic value of human life involves the length of life, and the net economic contribution that a person could be expected to make during his or her lifetime. Both of these areas involve issues that can be established through expert testimony.

Total net economic value involves the life expectancy, the value of the person's earnings and other economic contributions, and the valuation of the present value of a stream of future uncertain monetary amounts.

Life Expectancy

The length of life is often discussed in terms of life expectancy, the average lenth of life taking into account the expected mortality rates that apply to the individual. For centuries actuaries have studied mortality rates. Mortality depends on age, gender, health status, habits such as smoking and drinking alcohol, and participation in dangerous activities. Mortality rates may be estimated on the basis of these characteristics. Of course the specific mortality for any individual cannot be known in advance, but a large volume data and years of research exist to allow the rates to be estimated with a high degree of accuracy. Mortality rates change over time, in response to changes in health care, in the environment, and in society in general.

Actuaries evaluate present values on the basis of mortality rates, rather than simply using life expectancy. The reason for this is the fact that the results derived from mortality rates differ from those based on life expectancy, and the results based on mortality rates are more accurate.

Mortality rates are frequently presented in the form of a mortality table. There are literally hundreds of available mortality tables, and they have been constructed for a variety of purposes. A table constructed for one purpose may not be appropriate to use for a different purpose.

A concept related to life expectancy is worklife expectancy. This concept takes into account the fact that a person may choose to leave the work force, or may be unable to continue to work during his or her lifetime. Contingencies to be considered include disability, unemployment, and retirement.

There are so many combinations of the relevant characteristics that there is often no published mortality table that is directly applicable to a given situation. When actuaries select a mortality table, they evaluate the basis and purpose of the table, to see whether it is suitable for the use that they have in mind. They will also adjust the rates in a particular table using mathematical techniques, so that it more closely conforms to the rates appropriate to their intended use.

In Georgia the statutes recognize certain specific mortality tables, such as the American Experience table, as rebuttable presumptions for the evaluation of life expectancy. An actuary can determine the suitability of these tables for a given situation, and can propose alternatives when the statutory tables would not be expected to accurately estimate mortality in a particular case.

Earning Capacity

Future earning capacity may be estimated on the basis of earnings history, age, education, health status, and using published data on earnings of the population. There are numerous government and industry sources for relationships between various relevant characteristics and earnings. The economic value that a person generates also includes the value of employee benefits. Care is required to evaluate benefits, and to be sure that they are not double-counted. For example, vacation benefits are included when one includes vacation pay in salary, and should not be added to a salary amount that already includes salary received during vacation periods.

The economic value of services other than employment are part of the total economic value produced by a person. On the other hand, a person's expenses, both employment-related and those not related to employment, must be deducted to arrive at net economic value.

Lifetime earnings for the population follow an inverted "U" shape by age, with earnings generally increasing to a peak, and then decreasing with advancing age. The amount and pattern of earnings may differ by industry. In addition, contingencies such as disability may reduce the earnings of a particular individual. If the value of an employee disability benefit is recognized as part of the value of employment, then the contingency of disability should be considered as a reduction of future earnings.

Employee benefits to be considered would include the employer portion of Social Security, and employer contributions toward pension plans and health insurance. For highly-compensated individuals it may also be appropriate to include the value of executive benefits, such as stock options.

Valuation Issues

Given the mortality rates, net earnings, and other economic contributions of an individual, the present value of the net economic contribution depends on the discount rate (interest rate) selected. There will be a range of present values that may be determined on the basis of different discount rates. In Georgia there is a 5% statutory discount rate for use in establishing present value in these cases [O.C.G.A. Section 51-12-13]. Generally the determination of an appropriate discount rate would take into consideration consistency with other assumptions, such as salary progression or inflation assumptions.

An actuarial result known as Jensen's inequality shows that for any positive interest rate the present value of a level continuous life annuity is less than the value of the corresponding level continuous annuity certain for the life expectancy. For this reason actuaries generally base their valuations on mortality rates, rather than on life expectancy as such.

Expert Issues Under the Daubert Decision

Expert testimony on mortality rates by a qualified professional actuary can conform to the requirements for admissibility under the Daubert decision [Daubert v. Merrell Dow Pharmaceuticals (92-102), 509 U.S. 579 (1993)]. The key issues to be considered are the existence of a cause and effect relationship between the characteristics considered (e.g., age, gender, health status, etc.) and mortality, the publication of results in peer-reviewed publications, the ability to determine error rates, and general acceptance of the results. The actuarial profession has a long history of using appropriate scientific methods, and of publishing the results in peer-reviewed publications.

An actuary who has appropriate professional qualifications, and who uses due care in the selection and application of actuarial methods, and who has been provided with and has used sufficient facts or data should be able to pass the Daubert tests.



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