Category: Actuarial

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Actuaries and Hooky Street

The latest publication from the Institute and Faculty of Actuaries (IFoA) is called Beyond the next Parliament: The case for long-term policymaking. It refers to a number of previous reports, such as the Great Risk Transfer report from April 2021 and the two more recent climate papers (here and here), all of which contained much thoughtful analysis even if I did not always agree with all of the recommendations.

The case for long-term policymaking is certainly something that needs to be made loudly and often, although I was perhaps expecting some discussion of concepts like cathedral thinking, ie a capacity to plan and implement projects over multiple generations, or intergenerational justice, an issue of particular importance when discussing responses to climate change, in tying these various reports together within a long-term narrative. The Good Ancestor by Roman Krzanic is a great starting point for considering such questions.

Instead the IFoA have chosen to go in a different direction entirely in linking this previous work together, displaying imprisonment by current short-term political thinking in a paper supposedly focused on the long-term to such an extent that I am now left feeling that I disagree with them about nearly everything.

Take pensions, for instance (bold type is mine):

With the decline of defined benefit (DB) pension schemes, the responsibility for investment and longevity risk is increasingly being placed on the individual.

In a world where responsibility for funding retirement is increasingly being placed on the individual, there is remarkably little consistent consumer information about how much someone should save into their pension, or what a ‘good’ pension pot constitutes.

The IFoA remains concerned that many UK households are not saving enough for later life, are not accessing free guidance or paid-for financial advice, and remain ill-equipped to deal with the risk of running out of money in retirement.

It is almost as if the transfer of risk to individuals is something inevitable, or beyond the ability of mere humans to control. In the words of the late great John Sullivan, in the theme song from Only Fools and Horses:

Cause where it all comes from is a mystery. It’s like the changing of the seasons and the tides of the sea.

Why Only Fools and Horses you ask? Well have you ever heard a better description of defined contribution pensions than:

No income tax, no VAT. No money back, no guarantee

The IFoA’s main concern is that UK households are not doing enough about this new “responsibility” to provide for their own retirement. And the state? The state pension is mentioned only once here:

Naturally, the next UK Government will need to address the adequacy question as part of a wider pensions strategy for the UK that also considers big questions such as the sustainability of the State Pension and the triple lock.

This of course is so-called “positive economics” in action, which makes much of only relying on objective data analysis, but within a policy framework which is not up for discussion. Increased state provision, which one would have thought would at least need to be considered in the mix in this case, is reduced to obsessive focus on tiny questions like the triple lock while being kept generally outside this policy framework. Instead we get this:

We recommend that the government should reinvigorate its public messaging around minimum pension saving levels – particularly through workplace auto-enrolment pension schemes – to ensure that consumers are not lulled into a false sense of security as to whether their pension saving will be adequate to achieve their retirement income goals.
In doing so, government should use expertise and evidence on testing behavioural responses to different messages and channels, to identify those that are most effective in impacting saving behaviour.

So at a time when, according to the Resolution Foundation, the marginal rate for low to middle income households have an effective marginal rate of tax of 63%, the IFoA apparently think it is acceptable to push the cost onto them even more in order to achieve a sufficient pension at retirement. A certain cost and uncertain benefit. It is not a basis for a minimum income guarantee.

The second section sets out the problems associated with long-term care, again asking for a greater contribution by individuals via an expansion of insurance and savings-based financial products.

We are back to the changing of the seasons and the tides of the sea in the next section on keeping pace with rapid digital transformation, which states that:

there has been a trend away from broad risk pools and toward more granular pricing based on an individual’s specific rating factors (i.e. their risk characteristics)

Note the use of the passive tense there – it implies that noone is responsible and there is no way we can swim against this current back up to those old broad risk pools however hard we try. And so we shouldn’t try. The only option is to instead try and lower the premiums at the bottom end a bit – which is explained in their other report, The hidden risks of being poor: the poverty premium in insurance. The model for this is Flood Re, which is explained here. Of course this probably won’t work if you are underinsured as, it seems, 80% of us are.

Section 3 remains one I can cheer about, laying out more clearly than I have seen before to the financial community the risks of climate change, with the work on biodiversity at a somewhat earlier stage. However a framework is immediately assembled in the next section, Going for growth to build a better Britain (a slogan which I am sure Liz Truss would have been quite happy with), to limit the options for tackling these risks. An example:

Even though there is evidence that infrastructure development can promote growth and job creation, governments may be forced to defer such funding until the national balance sheet looks healthier. Although governments may be partially able to finance infrastructure projects, given their capital constraints they also need to attract investment from the private sector.

Unbelievably, the rest of this section then focuses almost entirely on what can be done to lure the private sector into investing in preventing their own doom (not framed in those terms of course, but in terms of boosting growth rather than curbing emissions) along with everybody else’s. As long as private investors are looked after, everything else seems to be a secondary consideration. John Sullivan again:

C’est magnifique, Hooky Street.

Of course I am just having a bit of fun here with the Only Fools and Horses references and I am certainly not suggesting that everyone involved in financial markets is a Del Boy looking to take advantage of every punter or government that comes their way. That would be a caricature as gross as referring to the “dead hand of the state” or talking about public servants as “The Blob”. What I am saying is that the jostle of the market place cannot be the primary solution to many of the problems so accurately analysed here.

I realise I have been very slow to fully appreciate the IFoA’s general direction of travel, but by putting all of these reports together in one place they have clarified this for me. I believe that the overall programme of recommendations here would condemn the poor to further immiseration and uncertainty while letting government largely off the hook for solutions and companies largely off the hook in terms of further regulation. It would further accelerate the financialisation of our economy with the promise of additional financial markets to be exploited by the already wealthy.

This is not acting in the public interest but as a cheerleader for protecting the long-term profits of fund managers. And I despair that, three years on from the IFoA’s Economics Member Interest Group coming into existence, there should still be so little pluralism on display here in economic thinking that this is regarded as a balanced narrative.

It is clear to me that views outside the IFoA’s current policy framework will need to come from elsewhere. I am currently researching a paper on alternative approaches to pensions provision with Alan Swallow which I hope we will be able to publish something about soon.

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The Government is using the latest pay increase to actually reduce its funding to the NHS for the second year running

Pinhead and spikes wait on a bench outside the doctor's room

NHS pay is supposed to be set with reference to the recommendations by the NHS Pay Review Body. The terms of reference of this body, often referred to as “independent”, mean that they are unlikely to make truly unaffordable recommendations, as two of their six considerations in making any recommendations are as follows:

  • the funds available to the Health Departments as set out in the Government’s Departmental Expenditure Limits; and
  • the Government’s inflation target.

Despite this, as recently as last month, Helen Whately, the minister of state for social care, was saying that the “government has to look overall at what is affordable”, adding that the PM has said ministers must be “responsible with the public finances…We take the advice and recommendations from the pay review bodies, but you’ll understand that government has to be responsible with the public finances. That’s why I can’t say here and now what the outcome of the whole process is going to be”.

The Government then finally confirmed that it would accept the recommendations of the Pay Review Body (report here), but that:

The government will fund this pay award through prioritisation within existing departmental budgets, with front line services being protected.

Existing budgets in the NHS were set on the basis of a 3.5% pay rise, rather than the 6% for most doctors, 8.1-10.3% for junior doctors and 5% for senior leaders which has been agreed. So it will mean a reduction in non pay budgets to meet the shortfall.

The NHS Confederation’s response is that:

If health leaders are expected to raid their own budgets to somehow plug this funding gap at local levels, it will almost certainly result in cutbacks to patient care elsewhere.

What they didn’t say was that the government will effectively be reducing their net spending on the NHS by not funding the award. As Richard Murphy has pointed out:

Firstly, all of these pay awards will be taxed. They extra pay will be the top part of a person’s pay. It’s likely that tax of 20% and NIC of 12% will be paid by each employee as a result.

On top of that employer’s NIC of 13.8% will be paid. In other words, of the gross cost (pay plus employer’s NIC), just over 40% will return to the Treasury in tax.

It makes no sense, in that case, to refuse that 40% back to the departments that are paying these people.

And that is even before you take into account indirect taxation and multiplier effects.

Not only does it make no sense for the government to use this of all moments to reduce their net contribution to the NHS, it also clearly goes against the wishes of the majority of voters. 82% think more funding is needed and support is found across all age groups, UK nations and across the political spectrum (63% among Conservative voters and 94% of Labour voters).

The main reason given by the government is that it “balances the need to keep inflation in check while giving some staff significant pay increases.” If that “balance” is achieved by robbing Peter of his operation due to a lack of beds or equipment in order to pay Dr Paul, then what sort of an achievement is that? And why, if the government are not prepared to actually fund the pay review body recommendations, do they have a say in whether they are accepted or not?

And this is not the first time. In July 2022, the failure to fully fund the recommended pay increase led, according to the NHS Confederation, to a shortfall of £1.8 billion, adding to the shortfall already due to inflation and increasing energy costs of over £4 billion. Then, as now, these increased costs will need to be absorbed by already over-stretched individual NHS trusts.

This will mean further additional avoidable deaths and more record waiting lists. It is a policy which is anything but balanced.

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There are three less visible battles to win if we are to decarbonise five times faster than we have done in the last 20 years – and the good news is that actuaries can help!

In Simon Sharpe’s great new book Five Time Faster, he points out that, if we are going to decarbonise everything, “it’s not just the physical plumbing of the global economy that needs to be replaced, but the intellectual plumbing.” In a blog post from January, Three less visible battles to win, Simon mentions three targets in particular for this intellectual plumbing:

  1. Infrastructure that makes sure heads of government know just how bad climate change could get;
  2. Ideas in economics that exert a critical influence over governments’ policy decisions; and
  3. Institutions in diplomacy that will get the job done.

The first one means targeting the Integrated Assessment Models which have informed so much of our hesitancy and inappropriate prioritisations over the last 20 years where climate is concerned. I have written about this several times before, and this is something actuaries can contribute to much more in the future.

The second is at a much earlier stage, but the opening session in the current IFoA Presidential Speaker Series programme of talks indicates a greater confidence amongst actuaries to talk about, and influence, a more pluralist economic future.

And the third one will I believe become much more tractable once the intellectual tide starts to change.

I will be heading down with my banner to London tomorrow for Extinctions Rebellion’s Big One, alongside 90 other organisations united in demonstrating for a survivable future. Hope to see you there!

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This actuary and science fiction

I was looking through my old blog posts the other day and came across something I wasn’t looking for. Actuaries and Science Fiction told the story of a one-off visit I made to the Birmingham Science Fiction Group (BSFG), when the guest speaker had been the late great Brian Aldiss, who told the story of a time Kingsley Amis had had dinner with Margaret Thatcher. He told her what his book Russian Hide and Seek was about, to which she had responded that he needed to get himself another crystal ball.

By coincidence, I have just joined the BSFG nearly 10 years later (well I needed to think about it!), attending my first meeting online (Anna Stephens – really good about writing for Warhammer and Marvel in particular) and now very much looking forward to seeing Alastair Reynolds at my first in person meeting next month. I now have a bit more context for the Kingsley Amis story, as Andy Beckett has an account of a dinner Amis had at Thatcher’s Flood Street house in the late 70s (before she became Prime Minister). He wrote at the time:

I was rather overcome with the occasion and the fairly close propinquity of Mrs T…very much a new face to me as to most people, too much so to take in a lot about the fare except that it was properly unimaginative, and, as regards drink, ample enough. The hostess wore one of those outfits that seem to have more detail in them than is common, with, I particularly remember, finely embroidered gold-and-scarlet collar and cuffs to her blouse…[she was] one of the best-looking women I had ever met and for her age…remarkable.

And he also attributed the following quote to Thatcher herself:

People have always said that the next election is going to be crucial. But this one really will be, and if it doesn’t go the way Denis and I want then we’ll stay [in Britain], because we’ll always stay, but we’ll work very hard with the children to set them up with careers in Canada.

Anyway, back to Aldiss. He had told the story as he felt it showed how Thatcher (and he was not just picking on her as he felt this was a view held by many) misunderstood science fiction. It was not about prediction of the future, but for people who “liked the disorientation” of portraying an unfamiliar landscape.

Ursula K. Le Guin goes further in her introduction to The Left Hand of Darkness (just finished it and, if by any chance you haven’t read it already, it is an amazing piece of immersive world building which will leave you never feeling the same way about gender again). As she says:

Science fiction is not predictive; it is descriptive.

Predictions are offered by prophets (free of charge), by clairvoyants (who usually charge a fee, and are therefore more honoured in their day than prophets, and by futurologists (salaried). Prediction is the business of prophets, clairvoyants and futurologists. It is not the business of novelists. A novelist’s business is lying.

The weather bureau will tell you what next Tuesday will be like, and the Rand Corporation will tell you what the twenty-first century will be like. I don’t recommend that you turn to the writers of fiction for such information. It’s none of their business…All they can tell you is what they have seen and heard, in their time in this world, a third of it spent in sleep and dreaming, another third of it spent telling lies.

And, my favourite bit:

In reading a novel, any novel, we have to know perfectly well that the whole thing is nonsense, and then, while reading, believe every word of it. Finally, when we’re done with it, we may find – if it’s a good novel – that we’re a bit different from what we were before we read it, that we have changed a little, as if by having met a new face, crossed a street we never crossed before. But it’s very hard to say just what we learned, how we were changed.

The artist deals with what cannot be said in words.

The artist whose medium is fiction does this in words. The novelist says in words what cannot be said in words.

Who wouldn’t want to do that? It struck me while I was reading those words how the pandemic was something which changed all us survivors a little (and some a lot of course) and in ways that are often hard to put in words. But we are changed and there is work to do to try and understand how, even if that cannot be completely put in words.

The other thing from the introduction which has stayed with me is Le Guin’s contention that, while we read a novel, we are bonkers: believing in people who have never existed, hearing voices, perhaps even becoming other people. As she says:

Sanity returns (in most cases) when the book is closed.

But what about when you can’t close the book? Are we, to a greater extent, condemned to some level of future insanity? As William Faulkner said:

The past is never dead. It’s not even past.

In 2013 I tried to suggest that actuaries might also be about portraying an unfamiliar landscape and trying to work out what would hold true under different circumstances, and that they should therefore put themselves about a bit more, even if they sometimes made themselves look a bit foolish in the process. As William Hynes reminded me at yesterday’s excellent An introduction to alternative economic thinking event (recording available soon from the Institute and Faculty of Actuaries), the group of economists responding to the Queen’s question as to why noone saw the 2008 crisis coming, concluded:

In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

If a failure of imagination is the main problem, I would suggest that science fiction must be at least a part of the solution. Looking a bit foolish at times is a bit of a speciality for me, so you probably won’t be surprised to hear that I am devoting most of my time from here on in to an almost certainly doomed attempt to write what Le Guin might regard as a good novel. I have been here before, way back in my pre-actuarial past, and have a nice back catalogue of unpublishable books and rejection letters to look at whenever I forget that I have no idea what I am doing. But if I find myself shouting to noone in particular that what I am trying to say cannot be said in words, I might dare to believe that I am on the right track.

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Day 1 of the UCU Strike and it feels like a class war entirely manufactured by the Government

Hundreds of thousands of public sector workers were on strike today. I was one of them. Meanwhile the Bill above is making its way through Parliament – it was voted through earlier this week by all but one of the Conservative MPs, but is currently getting rather more scrutiny and push back in the House of Lords.

It seems likely that there will be legal challenges to some elements of the Bill and that some of them will be successful. The Labour Party have promised to reverse it if they win the next election.

I spent my first strike day ever (yes, I know, I am just a political union member and a mere picket tourist – all of these criticisms are entirely justified) by attending a meeting of the Leicester Actuarial Science Society with the Institute and Faculty of Actuaries (IFoA) President Matt Saker. It was a very well attended event and there were a lot of questions for Matt. These ranged from the IFoA strategy in Africa, to mutual recognition agreements with the Institute of Actuaries in India to the pros and cons of the recent vote to create a Chartered Actuary status for associates and fellows to the future relationship of the profession to AI applications, reflecting the global nature and broad range of interests of the student audience. I felt very much like I was witnessing the next generation of actuaries getting stuck into the issues that would be important to them through their careers, and it was inspiring to see.

Back to the strike. I differ from many of the strikers interviewed in that, in my view, I was not doing anything particularly altruistic by striking. I was standing up for my own pay and conditions. Which, it seems to me, everyone should be able to do in a free society. Years of anti union legislation, uberization and the growth of sectors with weak unions has made us used to having to negotiate for ourselves individually or in small groups against much more powerful employers. The fall in real pay over the last 12 years indicate that this has not really worked for us and perhaps a new era of collective bargaining is now necessary.

Meanwhile the Government thinks that it is a better idea to muzzle unions and repress future strike action than to deal with any of the grievances of the workers they represent. They think this is a better idea than to build anything, invest in anything, or do anything positive at all. You have to ask who such a move, temporary and largely struck down as illegal as it is likely to be, is designed to impress: future party donors perhaps?

The next generation I saw today did not strike me as one which will have much patience for such manufactured class wars and the governments which manufacture them.

It is my hope and, after today, my belief that they will think we have more important things to be doing.

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Chartered Actuary: I am still very confident that this is a good idea

I originally talked about Chartered Actuary status (here, with the cartoon above) when the Institute and Faculty of Actuaries (IFoA) first proposed the idea and set up a consultation in 2018. I said then that sometimes an idea comes along that seems so obviously good that you wonder why it hasn’t been done a long time ago.

Four years on from the retreat from the proposal following the slenderest of straw polls offering some challenge, and it remains a good idea. There are still relatively few full actuarial roles available for associates and many firms still assuming a default career path of continuing to fellowship.

There are some differences this time however:

  • There will be two chartered actuary designations: Chartered Actuary (Fellow) and Chartered Actuary (Associate), with the hope that the FIAs who were most concerned with maintaining their distance from AIAs last time will now support the proposal. The original proposal suggested Chartered Actuary (CAct) would be a single distinct qualification, a required qualification point for all student actuaries to reach before going any further and globally recognised as the generalist actuarial qualification from the IFoA. This approach has been abandoned, with no requirement to complete the core curriculum before tackling specialist modules. It will be interesting to see whether Chartered Actuary (Associate) will be seen as a destination in its own right, or just a change of letters. This will depend on all of us within the profession (see below).
  • The environment we are operating in has certainly changed, with the replacement of our regulator, the FRC, by the Audit, Reporting and Governance Authority (ARGA). One of the concerns that the IFoA were looking to address in 2018 was that another, much larger, profession, could pose an existential threat. If actuaries have a unique skill set, which is likely to be lost to a wide range of businesses and other sectors if it is unable to meet the demand for those skills due to a simple lack of numbers, then the need to take any perceived barrier to practise away from our emerging young professionals is clear. The move from FRC to ARGA does not remove this threat and there also remains in the regulatory proposals to date the threat of differential regulation, where actuaries are regulated more heavily than other professionals doing similar work could price us out of markets where we have value to add. The profession therefore needs to grow to increase our voice and influence over the future regulation of the profession.
  • We have acknowledged the impact of the Great Risk Transfer within the finance sector, but in my view the impacts more generally of the increased individual risks and uncertainties millions of the UK population face as energy, food and housing costs escalate need to be faced up to by our profession. For that we need to continue to be a destination of choice for a growing number of your people with a widening range of backgrounds and experiences.

So what do we need to do to make this a change worth making? We need to start behaving like a generalist actuarial qualification is what we want, and offering roles for actuaries on completion of core practice modules in future. It will mean not necessarily insisting on further actuarial specialisation as a requirement for senior roles within our firms. It will mean getting comfortable with a much wider range of specialisms amongst those we consider to be actuaries. Some are already doing this, but most of us need to go much further. A good place to start might be the IFoA’s own website, where the Route to Becoming An Actuary still features a diagram where an IFoA Associate is shown as a milestone on the way to the final destination of becoming a Fellow.

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Do cuttlefish dream of the passive electroreception of sharks?

“Tom-and-Jerry-tom-and-jerry-81353_800_600” by momokacma is licensed under CC BY 2.0.

We do it all the time. We assume that the animals around us experience the world as we do, with our obsession with the visual sense. We are used to anthropomorphising animals in our cartoons, but it goes much further than that: for instance if, like a dog, your sensory world or Umwelt is primarily based on smell rather than sight, then that daily walk you take with your dog has very different highlights and notable features (amazingly the slits on the side of a dog’s nostrils allow it to smell on out-breaths as well as in-breaths). We have sayings based on these anthropomorphisms: for example, the “unconcerned” frog in the water as it is heated to boiling (cited by Emily Maitlis in her recent speech in Edinburgh) may not be unconcerned at all, merely showing its distress by filling the air with smells like peanut butter, cashew nuts or curry rather than via the reactions we would expect from a human.

Our vision is not even all that extraordinary compared to some other animals. Mantis shrimps have more classes of photoreceptors covering the ultraviolet spectrum than we have in total. They are the only animals who can detect circular polarization, where the plane in which the light is polarized also rotates. However they are much worse than us at telling our visual range of colours apart and may not even have a conception of colour as we know it at all. We don’t know.

We are not even sure how many senses there are. Aristotle said there were five (sight, hearing, smell, taste and touch), but missed our senses of proprioception (ie awareness of your own body) and equilibrioception (ie sense of balance). There are also animals who have a secondary system for detecting odours, or who detect the body heat of their prey via their brain’s visual centre or have sensors which both detect electric fields and pressure. How should we categorise these and does a clear division between senses make any sense? We don’t know.

Elephants can hear each other several miles apart just after sunset, but we don’t know what they are listening for. Beaked whales have a range of crests, ridges and bumps on their skulls which are not outwardly visible other than via the echolocation they use, but we don’t know why.

And finally, for now, the cuttlefish of the title. When cuttlefish sense sharks, who have passive electroreception (ie the ability to detect electric fields in other animals), they stop moving, hold their breath and cover their gill cavities to reduce the voltage of their electric fields by up to 90%. I could go on, but all of this and so much more is contained in Ed Yong’s masterful An Immense World, which I could not recommend more highly, not only for the content but also for the wonderful joyful writing throughout (AC/DC’s Rock and Roll Ain’t Noise Pollution even gets a mention!).

The recurring theme for me is how much we still don’t know about all of these animals, and the amazing new discoveries which are being made every year. Every animal perceives a different world from the one we think we are living in, many of these perceptions currently (and in some cases perhaps permanently) impossible for us to understand. It takes an extraordinary level of anthropomorphic arrogance for us to convert all of those strange and wonderful lives into the concept of natural capital.

The Institute and Faculty of Actuaries’ Biodiversity and Natural Capital Working Party defined natural capital in their paper from April 2021 (which acknowledges the concerns I am raising here and those raised by others) as follows:

The concept of ‘natural capital’ therefore aims to recognise nature as an asset and aims to ensure that
the goods and services offered by nature become a part of decision making by governments,
businesses, and individuals regarding resource allocation, growth and development.

The Dasgupta Review has gone further, focusing on the economics of diversity. As it acknowledges:

The Review has developed the economics of biodiversity by viewing Nature in anthropocentric
terms. That is an altogether narrow viewpoint, but it has a justification. If, as we have shown in
Part I, Nature should be protected and promoted even when valued solely for its uses to us, we
would have even stronger reasons to protect and promote it if we were to acknowledge that it
has intrinsic value.

I strongly disagree. As George Monbiot pointed out several years ago, markets change the meaning of the things we discuss, replacing moral obligations with commercial relationships. The latest article in The Actuary magazine on natural capital discusses ecosystem collapse in its final paragraph in terms of how it would “negatively impact GDP” and “economic value”.

Once the diversity of nature can be reduced to a monetary amount or metric value, it can obviously be modelled much more easily but, as we have seen again and again within the finance sector and elsewhere, that is at the expense of consideration of any other aspect of our relationship with it.

Perhaps cuttlefish do dream of the passive electroreception of sharks. If they only knew what we were up to, they might instead have nightmares about their balance sheet entries in our spreadsheets.

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Could climate change slash global GDP by 18%? It’s much worse than that

Last week, the news from the Actuary magazine was that climate change could slash global GDP by 18%. This was based on a Swiss Re report, the economics of climate change, from which the analysis above is taken.

According to the report, “The current trajectory of temperature increases, assuming action with respect to climate change mitigation pledges, points to global warming of 2.0–2.6°C by mid-century.” It was unclear why they had decided to stop at 2050, when current commitments continue to push temperatures up until 2100. And the scenarios from the IPCC’s AR5 Synthesis Report (see below) show that the path we are currently on diverges far more considerably from the Paris agreements after 2050. Climate effects are very long-term and many of the impacts of a 2-3°C warming would be irreversible ones, ensuring continuing losses at similar or greater levels for decades to come, and that is before we even consider the much higher probabilities of feedback effects: from the melting of the permafrost, additional methane releases, loss of Amazonian carbon and the loss of the albedo reflectivity of Arctic ice. The Swiss Re report makes clear that is has not considered these.

You might notice that there is a separate column to the left, in a different colour, with the title “Well-below 2°C increases” and sub-title of “Paris target”. It is actually an agreement which 189 countries have signed up to, including the UK. As the Paris Agreement says (Article 2 Point 1):

This Agreement, in enhancing the implementation of the Convention, including its objective, aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by:
(a) Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature
increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

There has been some debate over whether the Agreement is aiming for 1.5°C warming with a 50% chance of staying below it, or for “well below” 1.5°C similar to the 2°C goal with a 66% chance of avoiding more than 1.5°C warming, but the modelling used for the next IPCC report has adopted the latter definition. Either way, I cannot see why Swiss Re has decided to put the Paris Agreement targets in a different column from what it calls the “likely range of temperature gains” as if those we have committed to are no longer feasible to aim at.

In saying this, I do not underestimate the massive challenge of keeping to the Paris target. As Mark Lynas says in Our Final Warning, at the end of 2018 over 1,000 GW of additional fossil-fuelled electrical power generation capacity was planned, permitted or already under construction around the world, equivalent to adding an additional 188 Gt CO2 into the atmosphere to the 658 Gt already baked in from existing infrastructure, which gives a total of 846 Gt of CO2 not including impacts from deforestation, agriculture and future land-use change. This compares to a future carbon budget as estimated at the end of 2018 by the IPCC (although estimates of this vary considerably) of 420 Gt of CO2 (or 1,170  Gt of CO2 for 2°C warming). So an extraordinary change of direction is required and we should be very cautious of getting anywhere near these limits when we do not know precisely where they are.

Which brings me onto the modelling of economic impacts. The first thing to say is that modelling in terms of impact on GDP, while guaranteed to get the attention of the financial community, is perhaps not the best way of communicating the devastation of runaway climate change.

In the summary of Mark Lynas’ excellent book Six Degrees: Our Future on A Hotter Planet , which summarised the scientific consensus already arrived at by 2007, the three degree increase for which damages are being estimated is expected to lead to Africa […] split between the north which will see a recovery of rainfall and the south which becomes drier […] beyond human adaptation. Indian monsoon rains will fail. The Himalayan glaciers providing the waters of the Indus, Ganges and Brahmaputra, the Mekong, Yangtze and Yellow rivers [will decrease] by up to 90%. The [IPCC] in its 2007 report concluded that all major planetary granaries will require adaptive measures at 2.5° temperature rise regardless of precipitation rates.[and] food prices [will] soar. Population transfers will be bigger than anything ever seen in the history of mankind. [The feedback effects from the] Amazon rain forests dry[ing] out and wild fires develop[ing] [will lead] to those fires [releasing] more CO2, global warming [intensifying] as a result, vegetation and soil begin[ning] to release CO2 rather than absorb[ing] it, all of which could push the 3° scenario to a 4°-5.5° [one]. The recent update to this: Our Final Warning, describes “entering the three-degree world means we are now living in a hotter climate than any experienced on Earth throughout the entire history of our species”. These impacts, which are likely to pose existential risks for many, appear totally inconsistent with the economic loss modelling shown above.

In his 2020 paper, The appallingly bad neoclassical economics of climate change (apologies, Journal access required), Steve Keen says in the abstract:

Forecasts by economists of the economic damage from climate change have been notably sanguine, compared to warnings by scientists about damage to the biosphere. This is because economists made their own predictions of damages, using three spurious methods: assuming that about 90% of GDP
will be unaffected by climate change, because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact
of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists. Nordhaus has misrepresented the scientific literature to justify using a smooth function to describe the damage to GDP from climate change. Correcting for these errors makes it feasible that the economic damages from climate change are at least an order of magnitude worse than forecast by economists, and may be so great as to threaten the survival of human civilization.

There follows a demolition of the methodologies employed by Nordhaus and others in this field. To be fair to the Swiss Re report, some of the criticisms in Keen’s paper appear to have been borne in mind when constructing their model, eg:

A shortcoming of our model build so far is that some economic impacts are linearly estimated: non-linearities are not adequately captured. We use multiplicative factors of 5 and 10 to simulate the increasing severity of outcomes from nonlinearities… Importantly, the framework does not consider
tipping points, events such as the partial disintegration of ice sheets, biosphere collapses or permafrost loss, that pose a threat of abrupt and irreversible climate change. This is because it is thought that tipping points will materialise well after our model horizon of mid-century only.

And as the Swiss Re report also acknowledges:

It is likely that the estimated impacts of GDP damages from climate change will rise as existing modelling develops to incorporate economic linkages in trade, migration and other channels, and to generalise the results to multiple countries.

And they are getting criticisms from the usual suspects of climate denial, eg Bjorn Lomberg on Twitter here, that even their attempts to date to quantify the uncertainties caused by non-linearity are a step too far.

And yet there remains a problem with these analyses in that they fail to capture existential risk. One of the things Steve Keen points out in his paper is the different attitude Nordhaus found towards estimating damages from climate change in natural scientists as opposed to economists. Natural scientists typically estimated the damage at 20-30 times higher than economists and some refused to cooperate with the exercise at all:

I must tell you that I marvel that economists are willing to make quantitative estimates of economic consequences of climate change where the only measures available are estimates of global surface average increases in temperature. As [one] who has spent his career worrying about the vagaries of the dynamics of the atmosphere, I marvel that they can translate a single global number, an extremely poor surrogate for a description of the climatic conditions, into quantitative estimates of impacts of global economic conditions. 

But how do you calibrate what is clearly a complicated model that Swiss Re and Moody’s have constructed for this analysis? Obviously we all have a very recent GDP fall in our minds at the moment – here is a summary from the UK Commons Library of Economic Indicators as at 30 April 2021 (themselves sourced from OECDstat and Eurostat):

This shows an almost identical GDP fall of 10.5% year on year in Q2 2020 for the OECD as predicted in the event of a 3.2°C warming, although it has bounced back pretty quickly since. For a longer term view of the global data, Our World In Data have an Annual growth in GDP per capita graph which runs from 1961 to 2017 (see below).

One very large GDP fall which stands out in the data here is the 26.5% fall in China in 1961. This was towards the end of the China’s Great Famine, in which approximately 3 million people died of starvation over a 3 year period. This certainly qualifies as an existential event and Swiss Re’s modelling suggest something of similar proportions in Asia and Africa at 3.2°C warming.

The biggest danger in all of this is that rich countries will look at a 10.6% reduction in GDP (at 3.2°C warming) and think this liveable with and adaptable to for their populations. After all, Simon Wren Lewis calculates that the austerity policies between 2010 and 2018 in the UK reduced GDP by nearly half of this amount every year for at least the second half of this period, compared to where it would have been without these policies, with an estimated cumulative loss of 15.9% of GDP. An 18.1% overall world average loss, however, effectively means more than a 25% loss for the rest of the world outside the OECD, as the OECD accounts for around half of the world’s total GDP which, even if we did not allow for the acknowledged likelihood that these are underestimates, is still in the Chinese Famine category of disaster and neither liveable with nor adaptable to.

We are already seeing vaccine nationalism carve up the world between rich and poor countries, with up until last month only 0.3% of the vaccines administered around the world having gone to people in low-income countries. This is likely to reduce the ability of poorer countries to be represented properly at this year’s COP26 when it frames a global response to the climate change which will affect them so disproportionately. And the losses if we do not act will be measured in far more frequent floods and sea level rise, extreme storms and heatwaves, crop failures, water and food shortages and mass migration on a scale we have never seen before, not GDP.

Could climate change slash global GDP by 18%? It’s much worse than that.

 

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A-levels, algorithms and pulling up the ladder

I have written about school qualifications once before here in 2014, when I was criticising the move to adding an A* grade at GCSE and the consequent narrowing of the grade boundaries to mimic the A-level ones. We have of course since moved to a numerical grade system for GCSEs which is even narrower. However, if the exam grade system was a bad way to assess students, the algorithm which replaced it in the summer (explained here and critiqued here) was clearly worse still.

So, against a background of steadily less reliable grade information at both GCSE and A-level, it was interesting to look at the Institute and Faculty of Actuaries’ (IFoA’s) employer directory and note that, of the 25 separate adverts for graduate roles, 11 of them have an A-level or UCAS points requirement in addition to the university degree requirement. My question is why?

I understand that employers, particularly this year, are likely to have very large numbers of applicants and need some way of reducing the number they need to review in detail, but there are many much better sieves than A-levels these days. Psychometric tests can assess how rusty students’ numeracy is. Application forms can be digital and given a computerised first pass on any number of criteria and, if the questions are constructed thoughtfully, will give companies a smaller set of applicants much more closely aligned to their goals than the grade given at mathematics A-level.

Even if you accept the grades as representative, there are clearly issues around social mobility and widening participation from relying on them to exclude a large number of candidates initially, which was highlighted when an algorithm attempted to reproduce the results based on subject studied and school attended. The news today that they will not be trying this again this summer is encouraging, but even if mark allocations are fairer, many problems with A-levels remain.

I have felt that this has been a growing issue for some time – it has always seemed to me ridiculous that a student on my programme (the BSc Mathematics and Actuarial Science at the University of Leicester – a qualification accredited by the IFoA), doing well and on track for all 6 of the core principles exemptions available as a result, still feels the need to retake an A level taken before they had discovered the motivation for actuarial work that they now have, in order to have a chance with many of the top employers. Are those employers so lacking in confidence in the integrity of their own profession’s qualification system that they need the security backstop of an A-level pass?

It is likely to be a tough environment for young people attempting to start their careers this year, whatever their skill set. I hope employers will review their current approach to recruitment and check they are not inadvertently pulling up the ladder before seeing all of the talent available.

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Let’s stop worrying about “damaging” GDP and transfer risks back to where they belong

“We won’t go back to normal, because ‘the normal’ was the problem.”

For me the turning point came on 12 March, when the FTSE 100 fell by 639 points or around 11% of its value in one day. What were the newspaper headlines that day?

Only the Times and the Financial Times had the stock market fall on their front page at all. Everyone else led with some variant on the Prime Minister saying that many families would lose loved ones. The attention switch was so complete that when KPMG published their UK Economic Outlook for March 2020 the following week – forecasting a main scenario for Gross Domestic Product (GDP) in the UK to fall by 2.6% in 2020 then grow by 1.7% in 2021, and a downside scenario for GDP to contract by 5.4% in 2020 and by another 1.4% in 2021, representing a slightly more severe recession than the downturn experienced in 2008-09 – nobody noticed that either (19 March and 20 March headlines here and here respectively), sandwiched as it was between the announcement that schools were to close and the Prime Minister saying that we had 12 weeks to turn the tide.

KPMG’s report was an example of damage function modelling of course: trying to model changes in economic activity due to some phenomenon and summarising that change in terms of a change in GDP. I have recently been quite exercised by similar considerations with regard to climate change damage functions and the inconsistencies of the ones in most current use with climate science. However it has become increasingly clear to me that I may have been missing the point. I realise I was focusing on damage functions because I felt they were leading to extreme optimism in the modelling of the impact of climate change on our economies and that it was this link which was most likely to get the attention of policymakers (and other actuaries!).

But of course GDP is only ever a proxy for some of the things we regard as important, rather than something that is important in itself, and a flawed one too. As Diane Coyle’s excellent book, GDP: A Brief But Affectionate History, makes clear. Its problems include:

  • It under-records growth by failing to capture fully the increase in the range of products in the economy;
  • It becomes a worse measure as the world economy consists less and less of material items, eg online activities; and
  • It can show positive growth caused by clearly unsustainable practices and those which deplete natural resources.

When KMPG released their economic outlook, it was as if they were trying to drag a weary world population away from the windows and balconies from which they are still trying to connect with each other and what is still real in the world back to the Monopoly game that they have set up in the front room.

It took a lot to get our behaviour to follow this change in attention. When Wuhan went into lockdown on 23 January, I was talking to Stuart McDonald, now a member of the COVID-19 Actuaries Response Group, about the talk he was planning to do at the University of Leicester on 18 March and deciding he would probably need to add a few slides about coronavirus. Italy went into lockdown on 9 March and yet on 12 March we had a second call where we still felt on balance that it might go ahead as long as we took sensible precautions, but by this time it was almost entirely about getting accurate messaging out about COVID-19. We called it off the following day. The UK finally went into lockdown on 23 March.

So perhaps it is no wonder that we have so far been unable to change human behaviour to anything like the same extent in response to climate change, which is a bit like COVID-19 in slow motion, progressing unseen with each stage of its development effectively locking us into the next steps in its relentless escalation. In the same way that movement restrictions may not slow down the increase in new cases for perhaps around a week, stopping carbon emissions now would still see us locked into further warming for 40 years. And even with the greater immediacy of coronavirus, it has only been when we have decided we care more about saving each other than maintaining our GDP that real progress has become possible.

My view is that some things that must be different post COVID are already clear. I think as a society we are going to demand more resilience, for example:

  • Resilience of our health service – this means much higher levels of spending, building deliberate over-capacity into the system in normal times;
  • Resilience of our food supplies, for example strengthening domestic supply chains;
  • Resilience of our population, so that we do not have 1.6 million food parcels needing to be given out in a year by the Trussell Trust, in the absence of a pandemic, for instance; and
  • Resilience of our infrastructure – to everything from floods to banking crises to pandemics to storms and heatwaves.

The Institute and Faculty of Actuaries (IFoA) has therefore shown great timing in its launch of its 2020 thought leadership campaign The Great Risk Transfer. The campaign aims to examine the trend of the transfer of risk from institutions to individuals, and how people can be better equipped to manage the financial risks they now face. I think the campaign rightly highlights the fact that risk transfer is all one way, but it clearly also goes way beyond the finance sector. Rail franchises never took on any real risk, it appears, even before the pandemic. Nor have PFI contracts, despite the price tag. By contrast the incremental removal of risk pooling by corporations for their employees and/or government for their citizens over the last 40 years has been relentless and in one direction only.

As Andrew Simms, one of the Green New Deal Group, said on Twitter yesterday about taking lessons for the climate emergency from the pandemic crisis:

Those roads with a fraction of the traffic, the drop in aviation, the economic shift to put public health & well-being first, the speed with which the brain adapts to the new normal: as someone said, these things are a postcard from the future we need to get to. Let’s take notes.