In SABs claims especially, annuity quotes are often used to determine the value of the various benefits owed to a claimant. The quotes are provided by life insurance companies to the structured settlement broker, and represent a real market value for a future SABs benefit entitlement.

One of the key benefits of these market values or “market present values”, as opposed to actuarial calculations, is that the annuity quotes do not require any assumptions with respect to discount rates or life expectancies.

The annuity cost represents the actual purchase price of a product that provides a stream of payments to exactly match the insurers’ obligation under the SABs, regardless of what happens to discount rates and how long the claimants actually live.

On the other hand, in order to calculate an actuarial present value, it is necessary to make assumptions about how long the claimant will live and what an appropriate discount rate might be. If the claimant lives longer than anticipated, or if the real life discount rate generates lower returns than expected, the present value will not produce enough payments.

Conversely, if the claimant does not live as long as expected or if the true discount rate generates higher returns than expected, then the calculated present value will have been too high, in hindsight.

An annuity quote, however, is based on market rates and, if the annuity is purchased, it will pay for exactly as long as the claimant lives. The life insurers are in the business of determining life expectancies. They take into account diminished life expectancies by assessing and applying life expectancy impairment ratings, which serve to reduce the cost of an annuity needing to provide benefits on a life contingent basis.

Because these annuities can actually be purchased, the market value in the form of an annuity quote is essentially unassailable, for SABs purposes, and forms the best starting point for any negotiations.