Transcript Thomas Cook actuarial slides - Faculty of Actuaries Students` Society

Thursday 27th February 2014
FASS Talks Programme 2013/14
Sponsored by AEGON
Limits to Growth
Presentation to FASS
Simon Jones
27 February 2014
Hymans Robertson LLP and Hymans Robertson Financial Services LLP are
authorised and regulated by the Financial Conduct Authority
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Objectives
Take you through some of the
interesting graphs and facts
presented in the report from
January 2013….
…and hopefully encourage you
to read more about the subject!
Discuss how actuaries could use
this work and get involved.
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Agenda
Exponential Growth
Opinions on Future Growth
Resource Limits
Actuarial Impact
Resource Limits and Actuaries
5
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Growth
The population has
been exhibiting
exponential growth.
Likewise the per
capital GDP has been
growing exponentially.
Population, billions
Exponential Growth
7
8000
6
7000
5
World
Population
4
World per
capita GDP
6000
The industrial
revolution
3
5000
4000
3000
2
2000
1
1000
0
0
0
Per Capita GDP, 1990 $
World Population and Per Capita GDP, 1-2008 AD
200 400 600 800 100012001400160018002000
Year, A.D.
Source: http://www.albartlett.org
There is a great presentation about exponential growth at this web address.
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Growth
Exponential Growth
World GDP, 1750-2008 AD
60
World GDP growth has
been exponentially
growing.
•
In real terms world
GDP has grown at
average rate of c.3%
per year in recent
decades = doubling
time 23 years.
•
2012 to 2100 is
almost 4 doubling
periods.
•
If 3% growth
continues, world
economy will be14
times as large in 2100
as it is now.
GDP, 1990 $trillions
50
40
30
20
10
0
1750
1850
Year, A.D.
1950
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Carbon Dioxide
Not everything that grows
exponentially is that great.
Atmospheric CO2 concentration, parts
per million
Growth
400
380
CO2
360
340
320
300
280
260
240
220
200
0
200
400
600
800
1000 1200 1400 1600 1800 2000
Year, A.D.
Source: Scripps Institution of Oceanography (SIO) CO2 Program http://scrippsco2.ucsd.edu R. F. Keeling, S. C. Piper, A.
F. Bollenbacher and S. J. Walker
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Growth
Moore’s Law
The number of transistors that can be placed
inexpensively on an integrated circuit doubles
approximately every two years.
Utility Patents Granted in United States 1800-2010
250,000
200,000
150,000
100,000
Intellectual Property
No. of patents granted illustrates the
explosive growth in human knowledge.
Patents
Granted
per Year
50,000
0
1800
1850
1900
1950
2000
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Growth to Service Debt
Since the 1970’s actuaries in the US have warned that given the ageing of the baby boomers, a fiscal
crunch would occur in America sometime between 2010 and 2020s. From 1993 to 2001 America’s
Debt:GDP ratio went from 49% to 33%. However by 2012 it reached 119% of GDP:”
Institute of Actuaries Evidence Report, January 2013
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Does Growth Make You Happy?
Does growth make you happy?
The graph % of people content versus
GDP per person at PPP.
Economic growth remains the dominant
concern of politics even in rich countries
yet beyond the levels achieved by
countries like Ireland, South Korea or New
Zealand the positive correlation between
GDP / person and happiness breaks down.
Evidence that inequality leads to a less
contented society too (The Spirit Level Wilkinson) – and to less innovative
economies!
Source: Jackson, T. (2009) Prosperity without growth? Economics for a finite planet,
.
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Limits to Growth – Predictions
Limits to Growth
(30 Year Update)
The green lines
represent the
“standard scenario” –
which is a business as
usual (growth agenda).
The purple
observations show the
realised observations.
Netherlands
Environmental
Assessment Agency /
Turner (2008)
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Agenda
Exponential Growth
Opinions on Future Growth
Resource Limits
Actuarial Impact
Resource Limits and Actuaries
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Future Growth?
Growth is the
Solution
Green Growth
GDP, 1990 $trillions
60
World GDP, 1750-2008 AD
End of Growth
50
40
30
20
Beyond the Limits
10
0
1750
1850
Year, A.D.
1950
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Opinions: Growth is the Solution
Angus Maddison (Contours of the World Economy, 2007) argues
that history is littered with warnings on natural limits from Malthus to
Jevons to the Club of Rome
“Technical progress, capital formation and international
specialisation have enabled humanity to avoid the calamities
portrayed.”
Matt Ridley (The Rational Optimist, 2010) argues that the human
race has become a collective problem-solving machine and
therefore confronts problems, such as resource and ecological
limits, through changing its ways by invention, usually driven by
scarcity in the market
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Opinions: Green Growth
McKinsey Global Institute note that the next 20 years see an
increase of 3bn more middle class consumers.
Three scenarios offered to cope with this expansion
Productivity static (supply expansion)
Productivity response (most demand met by productivity)
“Climate response case” – move to low carbon energy, reforestation, land
restoration, carbon capture
First two scenarios don’t avoid two degree warming.
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Opinions: End of Growth
Limits-to-Growth stressed (reiterated) that humanity is on
course to overshoot. Profound change needed soon to
avoid collapse.
Richard Heinberg (End of Growth) states that the global
economy is playing a zero sum game with an ever
shrinking pot divided among the winners.
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Opinion: Beyond Limits
WWF 2010 Living Planet Report tells us tropical diversity has reduced by
60%. They find five threats to biodiversity which underpin human
ecosystems (freshwater, carbon storage, agriculture):
Habitat loss, fragmentation, alteration
Over-exploitation of wild species (food, materials, medicine)
Pollution (excessive fertiliser, pesticides)
Climate change
Invasive species
Carbon Tracker Initiative (Unburnable Carbon) tell us we have used one
third of our budget for carbon to 2050 in order to remain within 2 degrees of
global warming
Only 20% of global carbon reserves are burnable to stay within
2 degrees. What we use this budget for is a key question
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Agenda
Exponential Growth
Opinions on Future Growth
Resource Limits
Actuarial Impact
Resource Limits and Actuaries
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Global challenges: Fuel, Metals, Minerals
Oil
150
Tin
Gas
100
50
Copper
Coal
0
Zinc
Uranium
Indium
Silver
[1] Current global reserves divided by current annual consumption (assuming no growth in demand).
[2] Data taken from BP Statistical Review 2012, http://bp.com/statisticalreview and
David Cohen, 'Earth's natural wealth: an audit', New Scientist, Issue 2605 (23 May 2007) pp. 34-41
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Oil
This graph from the IEA (International Energy Agency) 2008 World Energy
Outlook – shows significant dependence on fields yet to be developed.
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Oil
Data on reserves is disputed – this graph from University of Uppsala revised
the contributions on non-conventional and yet to be found fields.
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Local challenges: Degradation of soils
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Local challenges: Water availability
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Global challenges:
Anthropogenic emissions
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Global challenges:
Environmental Loading
Rockstrom et al, Nature 461, Sept 2009, Stockholm University Resilience Centre
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Doughnut Economics
Source:Oxfam, Kate Raworth
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Agenda
Exponential Growth
Opinions on Future Growth
Resource Limits
Actuarial Impact
Resource Limits and Actuaries
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Actuarial Assumptions – Real Rates
The paper provides historical evidence for the
correlation / co-integration of real interest
rates and GDP.
Population / wealth changes impacts need
consideration too.
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Actuarial Assumptions – Inflation
The paper makes a case for price inflation being linked to GDP growth – but highlights the disconnect
with wage inflation that is possible - which is important for the DB schemes that there the focus of the
actuarial analysis in the paper.
Also to consider is the extent to which resource constraints on many fronts could remove the ability for
substitutes to dampen cost-push inflation.
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Actuarial Assumptions – Mortality
The paper provides some historical evidence for the link between GDP and Mortality – using data
from Russia post-communism and the US over 150 years.
We need to bear in mind that the linkages may be more subtle in future and mortality / morbidity may
be selective with insured populations in wealthy countries perhaps less affected. However increased
connectivity with the globe could increase transmission of disease – for example.
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Actuarial – Scenarios in the Paper
Government NOT
sensitive to long
term projections.
Government
sensitive to long
term projections.
Markets sensitive to
long term
projections.
Markets sensitive to
long term
projections.
Government NOT
sensitive to long
term projections.
Government
sensitive to long
term projections.
Markets NOT
sensitive to long
term projections.
Markets NOT
sensitive to long
term projections.
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Agenda
Exponential Growth
Opinions on Future Growth
Resource Limits
Actuarial Impact
Resource Limits and Actuaries
34
Why Can Actuaries Help?
Global problems made worse by:
Lack of understanding of risk and uncertainty
Lack of understanding of exponential growth
Disregard for science and data
Actuaries’ core skills are in the following areas:
Risk and uncertainty
Exponential growth
Actuarial science and data based decisions
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Activity - Institute & Faculty
Resource & Environment Board (REB) formed at end 2013 from Member Interest
Group
Past Activity
Literature review in 2010 focusing on climate change
Literature review in 2011 focusing on energy
Research into the limits to growth published January 2013
Networking evenings during last three years
2012 thought leadership lecture on climate change by Professor Sir Brian Hoskins
Current Activity
Developing Board agenda
3rd Literature review due later in 2014, working with Professor Richard Werner, focusing on
sustainability of the financial system
Volunteers for the 3rd literature review are very welcome!
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Any questions?
Contact details:
Simon Jones
[email protected]
0131 656 5141