Nanotechnology is an emerging field with tremendous promise for producing new and innovative products that are safer, smarter and cleaner now and in the future. Along with that promise, nanotechnology presents the insurance industry and risk managers with significant challenges and opportunities that must be addressed sooner rather than later.
Whether you are an insurance underwriter or risk manager, what you don't know may hurt you. An unknown toxicity exposure may be a much greater problem than a high toxicity exposure that is known. An underwriter can select, price and mitigate a known risk. Known risks are potentially insurable. Unknown risks are not.
Little is known about the toxicity of nanostructures. The science, research and usage have not yet matured.
Since nanoparticles may present a different toxicity profile compared to their macro counterparts, we cannot rely on existing research results of macro materials to assess their degree of toxicity in the nanostate. Nor can we rely on existing environmental health and safety regulations and risk mitigation protocol.
As a result, nanotechnology is largely beyond the bounds of existing underwriting practices and guides, current risk management protocols, and prevailing actuarial calculations/projections.
Yet every day, knowingly or unknowingly, underwriters will assume EHS risks associated with nanotechnology and extend a considerable amount of capital in terms of policy limits, defense obligations and other commitments.
This can create dangerous consequences–beyond the individual underwriter–and in a broader "industry" sense.
A continuous and repeated exposure to a toxic risk may silently and systematically occur over the course of many calendar years and potentially involve a series of insurance policies, subject to policy terms and conditions.
Resultant potential reserving inadequacies arising from latent (unknown) toxicity claims may create a very significant adverse potential with extremely long-term consequences.
Certainly, history has shown us that asbestos and polluted Superfund sites are among the examples of having potential long-term consequences.
Complicating the underwriting strategy further, in the case of nanotechnology, is that it is not an industry unto itself that insurers can isolate, set apart and deal with as if it were its own independent field.
This is an enabling technology embedded into the products and processes of most existing major industries that underwriters want to insure and must cover to maintain a significant force in the commercial insurance market. Hence, nanotechnology is introducing an unknown and potentially new order of exposures into a previously understood world of insurance and risk.
However, there are significant benefits for insurers arising from nanotechnology.
o First is growth. Nanotechnologies' projected growth in terms of its share of global output is impressive and good for the insurance industry.
o Second, as nanotechnology thrives, some of the nastiest exposures facing insurers and their customers may be mitigated: pollution site clean-ups, stronger and more flexible building materials, better health care, etc. The list is long and impressive.
We must not let nanotechnology fail as a commercialized industry, and we must not let the insurance industry fail in delivering sustainable risk-transfer products.
The role of the insurance industry should be to help bring balance between efforts to commercialize nanotechnologies for economic growth, with efforts to address the unknown toxicity potential to our environment, health and safety.
The insurance industry must pursue collaboration with other stakeholders in three key areas: industry standards, regulation and risk assessment.
o Industry Standards: The science of nanotechnology has not yet developed its own language. Many standards bodies, at both the national and international levels, have initiated efforts to develop nanotechnology standards of measure and nomenclature.
These standards will eventually become a framework for insurance decision-making and risk analysis. They should contemplate the insurance and risk management perspective earlier rather than later. Yet, the insurance industry engagement with these organizations is minimal.
The insurance industry must take a greater, more visible role in this area.
o Regulations: Recently, the state of California, Canada, France and the European REACH Directive on Registration, Evaluation, Authorization and restriction of Chemicals, have indicated that they may take a lead in regulating manufacturing, importing or marketing of nanotechnology products. Switzerland is considering product-labeling requirements.
Nanoproducts present different risks over their life cycle, thus influencing the roles and responsibilities of several government agencies. In the United States., these agencies would include the Environmental Protection Agency, Occupational Safety and Health Administration, Consumer Products Safety Commission, Food and Drug Administration, and the U.S. Department of Agriculture, to name a few.
Although the type and degree of regulatory oversight may depend on the products and the processes, there is a need for prudent regulations that are consistent across various regulatory agencies and perhaps countries.
The insurance industry should weigh in on this, perhaps through trade and lobbying organizations and their nanotechnology customers for reasonable and practical regulations.
o Risk Assessment: Finally, insurers must look within themselves. They cannot afford to wait for toxicity research to mature and regulations to be implemented before developing a strategy.
Each company should develop their own strategy on underwriting this exposure. The options range from full acceptance of the exposures with existing policy provisions, to broad exclusionary measures or avoidance altogether.
If insurers choose to underwrite this exposure effectively, they must start now to build meaningful and deliberate underwriting and risk management tools to address nanotechnology exposures, just as insurers have done for other exposures such as chemicals, pharmaceuticals, and the food and beverage industries.
Because of the characteristics and the evolving nature of nanotechnology research, a risk assessment approach must be built at its core with an inventory of the existing body of research from only credible sources that have undergone appropriate peer review.
This core must allow continuous expansion to reflect the latest technological developments and research results over time.
One of the most difficult tasks in assessing nanotechnology exposures is to translate technical research studies into useful quantification benchmarks that are relevant to the insurance underwriting business. Insurers may develop such skills internally or seek independent consultation.
An underwriting protocol must support the individual account-level underwriting decision, but must also allow for strategic portfolio and accumulation management of their nanotechnology portfolio over time. It has to be scalable to accommodate new knowledge and findings from research studies.
Whatever the proprietary and competitive position an individual insurer may take, there is a responsibility and an important role for the insurance industry, as a whole, in supporting and shaping the promise and the future of this new technology.
Steve Knutson is first vice president and director of emerging issues for Zurich North America Commercial, while A.V. Riswadkar is the liability line of business director for Zurich Services Corp., which provides risk engineering services. For more information, go to www.zurichna.com.
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