Towards the development of a three-state Markov Chain model of working life expectancy in South Africa

Abstract

Courts are able to exercise broad discretion when they assess the quantum of damages due to loss of earning capacity and have considerable discretion in making an award. South African courts have adopted the approach that an actuarial computation is a valuable basis for establishing the quantum of damages. Actuarial calculations, by their nature, account for certain contingency factors such as inflation, income tax, mortality and the retirement age. It is commonplace to deduct a general contingency where the actuarial calculation makes no explicit allowance. General contingencies cover many considerations that vary from case to case. The only real difference between mortality and other contingencies is that more evidence is available in statistical form to show mortality rates. Despite various data limitations that do not currently allow for a full implementation of the model, this paper seeks to develop a three state Markov Chain model of working life expectancy in South Africa by gender and broad education level. Working life expectancy is inextricably linked to general contingency deductions and the results of this paper challenge some common law conventions and the level of general contingency deductions that have been adopted by South African courts.