On stochastic modelling of actuarial compensation for loss of future earnings in Turkey

Abstract

Abstract This article presents an actuarial perspective to estimate the economic loss for compensations resulting from a wrongful act. The main aim of this study is to propose a stochastic approach for modelling discount rates and survival probabilities which are used to calculate the present value of the future loss of earnings. We adopted the Wilkie model as an economic scenario generator to forecast future stochastic discount rates and fitted the Lee–Carter and the Heligman–Pollard models to forecast future age-specific survival probabilities using Turkish data. We discussed the impact of stochastic modelling on annuity values and compensation amounts through sensitivity analyses. We also compared the compensation amounts for various cases with the benchmark case representing current practice in Turkey. The results show that the compensation amounts are substantially affected by the financial assumptions, particularly in the case of an unstable economy. The major finding is that the uncertainty in future mortality rates is largely outweighed by the uncertainty associated with future financial and economic variables in the Turkish case.