Insuring Progress

Britain is stuck. How can we get it moving again?

This post was written as our (Duncan McClements and Jason Hausenloy’s) entry to the TxP Progress Prize which encourages responses to the question, ‘Britain is stuck. How can we get it moving again?’

Further details can be found here: https://txp.fyi/progress-prize

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Image generated by DALLE-3, prompt: painting of the london skyline, with parents of children very tiny, but the skyline is being constructed with cranes and stuff, abstract

Regulators are easy targets. Before 2009, EU Regulation No. 1677/88 required “Class I cucumbers must not bend more than 10mm per 10cm of length.” Colorado’s child care regulators dictated everything, from handwashing to block-sets (“a minimum of ten blocks per set.”) In Britain, this detailed, prescriptive regulation controls everything, fire-safety to financial services.

Us progress-types pay much attention to zoning laws (which should be scrapped), limits on high-skilled immigration (which should be loosened), or certain tax reforms (which should be implemented). However, “process-based regulation”,  is an often-overlooked cause of Britain’s stagnation. 

Instead, we propose replacing these process-based regulations with outcome-based regulation, and, for some sectors, introducing a Mandatory Insurance Scheme (MIS). Our analysis will focus on three sectors – childcare, energy, housing – where, if implemented, we expect our proposal to most boost British growth.

Outcome-based Regulation

Instead of prescribing a specific process, regulators would instead specify some overall objective, and leave the regulated entity to find the most efficient way to achieve this.

For example, for child-resistant packaging, the CPSC, the US’ consumer safety watchdog, doesn’t specify how to make bottle-caps. Instead, it requires that all manufacturers test any new child-resistant packaging with a sample of four-year-old children, 85% of whom mustn't be able to open the package within five minutes. 

Regulators can achieve regulatory outcomes, while allowing businesses and individuals to decide how. Businesses have many ways to produce their product: regulators with imperfect information will struggle to discern which way is the best. If regulators fine businesses with the social costs of various actions, businesses can optimise accordingly. 

Mandatory Insurance Schemes

One difficulty of simple outcome-based regulation is that, in many industries, regulations are not for definite harms, like dumping chemicals into water sources after usage. Instead, they aim to prevent low-probability, high-downside events, like nursery accidents, nuclear meltdowns, or property fires. 

In these cases, we further propose the adoption of a Mandatory Insurance Scheme. 

In limited cases, we do this already. For example, instead of requiring specific worker-safety standards, British firms must buy workplace injury insurance. If there is an accident, the insurer will pay the workers compensation, and, when necessary, a fine. Mandating insurance means firms will price in the risk, and cannot hide behind limited liability. And ensures victims get compensated. 

This simple change can transform British growth. We’ll now look at three sectors where Britain is stuck and, through implementing our proposal, we can get it moving again.

Childcare

Britain has the second-highest childcare costs in the OECD.¹ On average, a two-earner household with two young children will spend one-third of their disposable income on childcare. No wonder fewer than 15% of mothers return to full-time employment five years after giving birth. These costs may be one factor behind lower birth-rates.

Britain’s crippling childcare costs come from UK regulation on staff-to-child ratios. For under-threes, they are the strictest in Europe. If Britain relaxed ratios to Norway’s, this would halve costs, with almost no effects on child safety. One 2015 study shows that this may even increase the quality of childcare, because the nurseries’ fewer staff have increased training. 

While we could (and should!) implement this specific change to staff-to-child ratios, switching to outcome-based regulation would solve this problem, and future ones. Regulators would simply decide the fines and compensation for an accident, and implement a mandatory insurance scheme. Insurers are incentivised to verify safety compliance, and punish unsafe practices. The resulting price decrease might alone increase British birth-rates by 3-4%.²

Nuclear energy

British electricity consumption is set to double by 2050. As global electricity prices have fallen, British electricity prices have doubled in real terms since 2008. Beyond increasing our electricity bills, higher costs have led to significant lost industrial capacity.³ While Britain’s energy sector as a whole needs reform, nuclear power plants are a missed opportunity. They are reliable, safe and environmentally-friendly. Yet the most recent finished British reactor was finished 28 years ago.

This is because British regulation previously only permitted large, pressurised water reactors. These reactors were optimised to keep submarines underwater for as long as possible, not to minimise costs. Hinkley Point C, currently under construction, will likely cost $42bn.

Here, we can see another benefit of our proposal: increasing innovation. Under these changes, if a firm could demonstrate its safety to insurers, it could build a new design.⁴ This would allow: safer molten-salt reactors that don’t melt-down, thorium reactors that don’t produce weapons-grade plutonium, cheaper highly-scalable small-modular reactors. By allowing firms flexibility, regulators can achieve their desired outcomes – safer nuclear power and greener energy – by allowing for innovation.

Housing

Housing prices across Britain have grown astronomically. Indeed, if inflation since 1971 had matched the rate of house prices increases, a chicken today would cost £82. 26% of median British family income is spent on rent, and 35% in London. 

This is a result of the “Green Belt.” Infamously, this is region around Britain’s most productive cities where regulators have made new development practically impossible, and responsible for much of today’s prices. This zoning, and housing generally, has been the target of specific policy reforms by progress-types for decades (which we support): street votes, deregulation of the green-belt around railway stations, mandatory home-building targets for councils. However, some process-based reforms are vulnerable to motivated adversarial actors, like “NIMBYs”, who can find loopholes in a new process.

Outcome-based regulation changes the incentives, leading to more resilient change. Regulators would simply have to specify desired environmental results and food production, and allow firms to develop accordingly. Following, firms may purchase and provide protection to land elsewhere in the country, achieving desired environmental benefits at the lowest cost.⁵ Developers would find the most effective solutions.

Implications

This isn’t (only) a list of specific changes to boost British growth: decrease staff-to-child ratios, approve innovative nuclear designs, reform land-use. We highlight a general procedure on how to achieve those changes. Regulators should optimise for the outcome they care about, not dictate the process to achieve this. Whether that be accident-free nurseries, safe nuclear reactors, protected natural beauty, or any regulatory outcome: safer construction, cleaner air, non-toxic medical drugs. ⁶

We emphasise childcare, electricity and construction because implementing this proposal in these sectors could boost workforce participation and birth-rates, lower energy costs and attract businesses, decrease house prices and increase worker mobility. Those industries neatly illustrate the three, central benefits of outcome-based regulation: cost-effective safety procedures, technological innovation, and resilient policy reforms.

In short, these sectors epitomise why Britain is stuck. Changing burdensome process-based regulations to outcome-based ones can get it moving again. 

Looking forward, the most exciting application of our proposal may be in regulating new, rapidly-evolving technologies, which have massive potential benefits, but also the potential for widespread harm. Think biotechnology, nuclear fusion, artificial intelligence. British regulators today face an impossible dilemma. They must try to regulate an exponentially-changing technology without limiting innovation or scaring away companies, and simultaneously protect public safety, all while lacking resources and technical expertise. 

However, by mandating outcomes and insurance schemes, regulators need not design and redesign standards as technology advances. Instead, regulators can set their desired outcomes - letting developers, and insurers, find the most cost-effective way to achieve and monitor them.⁷ Only this way might Britain stay moving.

1.  Figure for a two-earner British household, with two children aged two and three.

2. Childcare costs £14,000/child on average, so the 50% saving below implies £14,000 per child (as maternity leave lasts x months then 30 hours of free childcare per week starts at age 3). A reduction in the present value of childcare costs of $17,800 in Sweden boosted the birth rate by 4-6% (https://docs.iza.org/dp3942.pdf): this represented some 57% of GDP per capita at the time, so the 38% reduction equivalent this represents should boost birth rates by 3-4%.

3. The long-run price elasticity of demand of electricity is -0.3 to -1.1 (https://www.haas.berkeley.edu/wp-content/uploads/T.-Deryugina.pdf), so UK businesses would use 20-93% more electricity if prices had remained at 2009 levels: a large increase in industrial production.

4. Some projects, like nuclear reactors, may be too big for a single insurer to insure - but fractionalising insurance contracts and selling them to many parties, would allow much larger projects than could otherwise occur by spreading risk. 

5. Parkland is estimated to be worth 61 times more than green belt land by unit area (£54,000 vs £889/acre, https://www.adamsmith.org/research/the-green-noose), so even very small proportions of new development reserved for parkland would be completely sufficient to improve amenities compared to the current situation.

6. To illustrate, clinical trials could also be made more flexible here: firms could sell any medical product which a sufficiently capitalised insurer would agree to back, and payouts would then be issued if the drug resulted in increases in mortality or reductions in quality of life beyond some threshold.

7. Take AI. AI will revolutionise Britain’s economy, but carries significant, societal-scale risks: disinformation, privacy violations, even existential. Today, British regulators are trying to implement a “model evaluations” scheme, whereby they have to design and execute which “tests” models must pass in order to be safe for public deployment – a difficult technical challenge. Instead, under a MIS, after regulators decided certain harms that they’d like to fine companies (such as leaks of model weights, certain dangerous capabilities like hacking), insurers both monitor and incentivise the AI company by adjusting risk premiums depending on the expected riskiness of their actions, internalising the uncertain cost to society before the harm occurs.