No more sweating actuaries after the Sweatman-judgement

One of the attempts to solve the Road Accident Fund’s cash flow problems was the introduction by the Road Accident Fund Amendment Act 19 of 2005 of various limitations on the Fund’s liabilities, one of which was introduced by subsection 17(4) and do the relevant provisions read as follows:

17      Liability of Fund and agents

                        (1) The Fund or an agent shall-

… be obliged to compensate any person (the third party) for any loss or damage which the third party has suffered as a result of any bodily injury to himself or herself or the death of or any bodily injury to any other person, caused by or arising from the driving of a motor vehicle by any person at any place within the Republic, if the injury or death is due to the negligence or other wrongful act of the driver…

(4)Where a claim for compensation under section (1)-

(b) includes a claim for future loss of income or support, the amount payable by the Fund or the agent shall be paid by way of a lump sum or in instalments as agreed upon;

(c) includes a claim for loss of income or support, the annual loss, irrespective of the actual loss, shall be proportionately calculated to an amount not exceeding-

i [Rx] per year in the case of a claim for loss of income; and

ii [Rx] per year, in respect of each deceased breadwinner, in the case of a claim for loss of support.”

(My emphasis.)

These amendments, which only came into operation on 1 August 2008, effectively capped or limited the amount to be awarded to a claimant, with reference to his or her annual loss suffered, which cap or limitation is quarterly adjusted, determined and published in the Government Gazette.

Actuaries differed in opinion regarding the interpretation of this legislative cap or limitation, and specifically the method used to actuarially calculate a claimant’s annual loss in context of this cap or limitation existed. The different calculation methods soon resulted in substantial monetary differences and eventually resulted in the adjudication thereof in the Supreme Court of Appeal matter of RAF v Sweatman (162/2014) [2015] ZASCA 22 (20 March 2015). In this matter the difference between the below explained calculation methods amounted to R2 000 000-00 and was it well worth the court’s effort to clarify which calculation method was to be used in future.

In the article The correct interpretation of s17(4)(c) of the Road Accident Fund Act 56 of 1996 (De Rebus, March 2014, p.18) well known actuaries Ian Morris, George Schwalb and Gregory Whittaker explained the different calculation methods in layman’s terms, for the numerically less blessed, as follows:

“We calculated the annual loss as the present value of the difference between the income had the accident not occurred and the income having regard to the accident for each year (after allowing for income tax, general contingencies, inflation and morality and then discounted to present day terms.) Each year’s annual loss is then compared with the cap and thereafter the lesser of the cap (at the date of the accident) and each year’s loss is used.”

This calculation method was branded by the Supreme Court of Appeal in the Sweatman- matter as the so-called conventional approach followed by actuaries over decades, which approach was similarly explained in Southern Insurance Association Ltd v Bailey NO 1984 (1) SA 98 (A).

On the other hand Mr Munro, an actuary testifying for the Fund in the Sweatman-matter rethought the whole method of calculation in view of the above amendments to the Road Accident Fund act and adopted a new approach whereby he applied the limitation or cap at a different point during the calculation process, resulting in a lesser amount than when using the conventional calculation method.

Morris, Schwalb and Whittaker in their above mentioned article explain this “new” method as follows:

The RAF’s actuaries’ methodology is to project the annual loss for each year in future monetary terms (after income tax, including general contingencies and inflation, but not morality and not discounted). This amount is then compared with the cap in each year (duly adjusted for inflation for each year in the future) and then the lesser of the actual inflated loss as calculated and the inflated cap value of each year is discounted (with the interest rate and mortality) to present day terms.”

By applying the conventional approach in the Sweatman-matter, the claimant’s claim calculated to an amount of R2 000 000-00 more than by applying the new approach followed by the actuaries acting on instruction of the Fund.

In the Law Society of South Africa & others v Minister of Transport & another 2011 (1) SA 400 (CC) the Constitutional Court confirmed that the purpose of the amendments to the Road Accident Fund Act were to make the Fund financially viable, sustainable and to render the compensation regime more transparent, predictable and equitable. In similar vein the court held in Sil & others v Road Accident Fund 2013 (3) SA 402 (GSJ) that it was not the intention of the legislature to interfere with the method used for calculation losses in terms of the Road Accident Fund Act, but to merely limit the sums to be paid, in view of the aforementioned Law Society of South Africa-matter.

Accordingly, in the Sweatman-matter the Supreme Court of Appeal still preferred the conventional calculation method, especially because it started from the text of s 17(4)(c) that provides for the annual loss to be compared with the actual loss and the lesser amount to be awarded. The court further found no reason to depart from a decades old tried and tested method which proceeds from a logical basis and which other courts have accepted time and again. The court subsequently ordered the conventional method to be correct.

Although very few claims are actually capped or limited in practice, the fact that the claimant usually recovers approximately 53,76% using the conventional method as opposed to the “new” method where the claimant usually only recovers approximately 36,84% of the award that would otherwise have applied according to Morris, Schwalb and Whittaker, is not only beneficial to the claimant, but also the legal practitioner who represents the claimant based on a contingency fees agreement.

  • A special thanks to Jackie and Rowan Haarhoff from Munro Forensic Actuaries who took the time to inform, educate and enlighten Dyason Inc about the wonders of actuarial calculations.

by Marietjie Botes
marietjie@dyason.co.za