With the Government Actuarys Department celebrating its centenary this year, Matt Gurden shares some of the ways in which it is advising and supporting policymakers
Since its establishment 100 years ago in 1919, the UK Government Actuary's Department (GAD) has been at the heart of actuarial advice, serving the public interest by providing specialist risk and finance advice to public policymakers. This is directly related to a requirement of the IFoA Royal Charter, under which the profession has a duty to put the public interest first.
GAD's role has changed significantly since its inception. In the early years, it advised the National Health Insurance Joint Committee, providing advice to support the financial management of the newly introduced old age pension and health insurance systems. Over time, its influence widened as it provided advice on public service pensions, expanding social security benefits and population projections.
Evolving the actuarial skillset
The risks and financial uncertainties for the country continue to evolve, and the need for actuarial advice has similarly developed. Challenges include climate change, Brexit uncertainty and an ageing population demographic, to name a few. These developments pose ongoing policy questions for government.
In recent years, the department has placed an emphasis on developing its people and embedding new skills in order to provide the support government requires. This extends beyond the work of the profession, which has been considering the actuarial exam syllabus and the skills that new actuaries will require.
Given the role GAD performs in the public sector, it often has very large data sets available to inform its analysis. New analytical approaches and a wider range of software tools are used on these data sets to enhance its advice. This has led to improvements such as:
- Faster response to requests
- Developing tools for more immediate comparison of alternative policy options
- Greater awareness of the factors, or combinations of factors, that have the greatest impact on outcomes
- Considering the impact of a wider range of options.
However, GAD's importance to policymakers across the public sector comes from its ability to translate the results of its analysis into implications for policy decisions. Actuarial training provides a wider financial grounding than many other analysts receive; this enables GAD actuaries to understand how analysis relates to practical policy implementation and the other potential impacts of such an approach.
The following case studies summarise some of the diverse areas in which actuarial expertise is being applied to improve decision-making for the benefit of the public at large.
Just the beginning
GAD is a hub of talented analytical experts who combine technical expertise with financial and business acumen to support the government. This draws on the skills learned through the actuarial exam process, and provides opportunities to apply these in new ways to policy areas that affect millions of individuals across the country.
The department is not resting on its laurels as it reaches 100, but instead continues to progress, exploring new data analytics techniques and sharing thought leadership across government. With continued climate change, demographic pressures and societal issues, the next 100 years will present further challenges that actuaries within GAD will be helping policymakers address.
Case study 1
Risk pooling
Within the public sector, there are often areas in which financial liabilities are expected to arise over the year, but for which the size and detail of the liabilities is relatively uncertain. GAD works with public sector colleagues to help better understand these risks and ways in which they can be managed. Two such examples are the risk protection arrangement (RPA) and NHS Resolution.
Risk Protection Arrangement (RPA)
The RPA is an alternative to commercial insurance for academy trusts. Under the RPA, the Department for Education (DfE) covers the property and liability losses incurred by academies instead of using commercial insurance. The RPA was only established in 2014, and GAD has been working in partnership with DfE to further improve the value for money the arrangement offers. It has provided analytical support to better understand the risk profile and potential costs of new areas of cover. For the 2018-19 academic year, protection for overseas travel and cultural assets has been provided by RPA at no additional cost to academies as a result of this improved understanding of the risks and related costs.
By building upon the techniques used in the commercial insurance market, GAD also provides support with pricing decisions. This work helps the RPA better understand extreme but plausible loss events, providing an indication of the size of losses that the RPA may need to absorb in shock scenarios. This analysis has supported DfE when making decisions on the price of membership, leading to a recent announcement that the price will drop from £20 per pupil to £18 per pupil from September 2019.
NHS Resolution
NHS Resolution provides indemnity schemes for the NHS in England and fairly resolves claims for compensation. GAD has been providing advice to NHS Resolution for a number of years. Part of GAD's role is to provide relatively typical actuarial advice on reserving and pricing in relation to the compensation claims NHS bodies are exposed to - including NHS Resolution's new professional indemnity scheme for GPs in England, which was launched in April 2019. However, GAD's support extends beyond this, making use of its public sector expertise to partner with NHS Resolution and address other policy and financial challenges that arise.
Case study 2
Disaster risk financing
Financing to manage the impact of natural disasters is increasingly important as climate change is expected to impact the frequency and severity of events such as floods, hurricanes and droughts. Experts at GAD have developed modelling tools that help the World Bank and developing countries better understand and plan for the financial losses relating to such natural disasters.
The tools can be used by a diverse range of stakeholders, from financial experts to non-technical audiences in developing countries. GAD's aim is to build capacity in countries in relation to planning for the financial impact of natural disasters and considering the use of risk transfer products to mitigate large losses. GAD helps developing governments to understand their risk profiles so they can get the right support from financial or actuarial experts.
This work involved combining actuarial and statistical techniques with programming skills and understanding the requirements of a range of different users.
The year-long project involved GAD producing a suite of user-friendly spreadsheet tools, supported by more than 20,000 lines of code, in an iterative development process with the World Bank.
The work that GAD put into developing these tools included designing clear interfaces on which users can:
- Input loss data and model a risk profile by fitting distributions to the data
- Input financing assumptions to meet disaster losses and compare multiple options
- Interact with 40 dynamic exhibits that display results of underlying risk profiles and the impact of financing strategies
- Investigate more advanced modelling options.
Thanks to GAD's models, developing countries are better equipped to manage the financial consequences of natural disasters.
Case study 3
Data analytics
Many of the projects GAD works on involve larger datasets than are typically seen in private sector consultancies. It values pension schemes with millions of members, analyses the state pension system applying to the entire UK population, and advises in relation to student loans with millions of borrowers.
These large datasets are being used with new and evolving analytical approaches. For example, machine learning techniques such as random forests and neural networks are being used to identify and gain insights into drivers of change within large and multi-faceted datasets. As well as enabling an improved predictive quality to modelling, combining advanced technical output with actuarial judgment leads to greater understanding and the ability to deliver clear messages and better advice. For example, Figure 1 illustrates how output from machine learning techniques can be visualised to better understand the factors of most importance. Here, importance is a measure of how useful the test algorithm finds information within each feature in making improved predictions.
CLICK HERE TO SEE FIGURE 1
- 1911 National Insurance Act
The 1911 National Insurance Act introduced a limited level of health and unemployment insurance. Actuarial input was required to help assess the costs and funding of the arrangement.
- 1919 GAD is established
Recognising how actuarial advice was increasingly being used in areas such as war pensions and shipping, the Haldane Report recommended the introduction of a dedicated actuarial department in government.
- 1925 Public service pension schemes
Following the Widows, Orphans and Old Age Contributory Pensions Act 1925, GAD began producing actuarial calculations and reports for the public service pensions schemes.
- 1948 NHS launches
The NHS launched and aimed to provide free healthcare for all. GAD's duties changed to include regular costings of pensions for the police, fire service and NHS.
- 1954 GAD produces official UK population projections
GAD began a 52-year stint producing the official national population projections, used by government to test the affordability and appropriateness of policy options.
- 1978 Earnings-related state pensions
A new earnings-related state pension was introduced. GAD set the level of rebates for those who chose to contract out (opt out) of the new arrangement.
- 2001-2005 Restructure of GAD operations
Responsibilities for insurance supervision and production of UK population projections transfer to the Financial Services Authority and Office for National Statistics respectively.
- 2010 Public service pension schemes
The Independent Public Service Pensions Commissions recommended changes to ensure public service pension schemes remained sustainable. GAD helped implement the reforms.
- 2014 NHS Resolution
GAD extends its actuarial service provisions to include NHS Resolution (the compensation scheme provided for clinical and non-clinical negligence claims).
- 2015 Student loan debt
GAD began modelling anticipated payments on the stock of student loans, which was central to the sales of student loans to private service investors.
- 2019 GAD is 100 years old
A year of celebrations to mark GAD's centenary!
Matt Gurden is acting head of insurance and investment at the Government Actuary's Department.
