Note: While I wrote this, I do not have the copyright on this. I am providing excerpts only. Go to the original for the full text (PDF)
-GT
Excerpt one:
We all know the earth is finite. The number of atoms in the earth is finite; the number of molecules of a given type can change over time, but is always finite. Our actuarial models, however, seem to assume an infinite world, one where investments compound indefinitely into the future, and other factors — mortality, morbidity, accident frequency, trend rates — follow patterns that are similar to the past, without reaching any limits.
Evidence is building from the physical sciences that we are starting to reach some of earth’s limits. Unless we can find some technological solutions, once these limits are reached, we can expect to see a very changed world. Instead of having constantly increasing resources available to us, we can expect ever-decreasing resources to be available. Instead of seeing year after year of growth, increasing longevity, and improving morbidity, we can expect the opposite.
Some of the places where we may be reaching barriers to growth include oil, natural gas, fresh water, and climate change. The first three present depletion issues; climate change represents something very different. Since the world is finite, climate is affected by our activities, particularly the burning of oil, natural gas, and coal.
What’s the chance of a technological solution? It’s not clear. If we need to make a very major change — such as producing electricity primarily from nuclear energy, for example, or transporting people and goods in battery-powered or solar-powered cars and trucks — the change would take massive investment and at least 20 or 30 years to implement. At this point, we don’t even have a clear idea what might work. Some things being tried — such as ethanol from corn — look to be very partial solutions at best. And the shortages of oil, natural gas, and fresh water may be only a few years away.
Excerpt 2:
What Can Actuaries Do?
The first step is to educate ourselves on the topic. A list of suggested reading is provided with this article. There is also much information on the Internet, and panel discussions on this topic can be added to actuarial meetings.
Another thing actuaries can do is look at our own actuarial models in light of some of the issues discussed in this article. If nothing else, this analysis may help us realize that predicting the future based on the past is much less certain than it was a few years ago.
We can also question economic models. Actuaries are known for their long-term view of issues. Even though we’re not economists, we should be questioning current economic thinking, which tends to be short term, and doesn’t account for likely shortages in the long run. In many people’s thinking, supply is determined by weekly oil and natural gas inventories, even though these are tiny compared to the rapidly depleting worldwide supplies. People expect that price signals will occur enough in advance of shortages that adequate substitutions can be made. In fact, lead times of 20, 30, or even more years are needed, and the market doesn’t come close to signaling needs that far in advance. We should be pointing this out to decision-makers.
Economists seem to view the past 60 years as typical of what can be expected in the future. Yet, looking at the broader picture, we can see that the past 60 years reflected rapidly growing fossil fuel use and the future is likely to reflect the opposite. Economic models need to be reviewed in this light. What’s the expected relationship between stock prices and inflation when fossil fuel use is declining? Can economic growth be expected to continue in an era of reduced resource availability? Does the widespread use of debt continue to make sense? Does globalization make sense when transportation costs are very high?
The United States does not at this time have any long-term plan for dealing with depletion issues and climate change. We don’t know, for example, whether we should be moving toward nuclear energy and electric cars, or toward more trains and bicycles. There are two issues: making our political leaders aware of the need for a plan and determining what this plan should be, considering all the issues involved. Developing a plan will require individuals from many disciplines. Actuaries would seem to be able to play a key role in this, given their modeling skills and long-term view of situations.
Clearly there is much to be done. Hopefully many of us will choose to be involved.
