Managing Nanotechnology and Other Emerging Risks

Insurers need to learn how to manage new risks, not just exclude them, and actuaries can help.

Since the mid-1980s, casualty insurance has shrunk as a share of gross domestic product. Insurers have been able to push liabilities out of the insurance space, says Parr Schoolman, a fellow of the Casualty Actuarial Society and a senior managing director at Aon Benfield.

For example, the multi-billion-dollar BP oil spill has been primarily borne by the oil industry.

While that has helped short-term profits, it hurts long-term growth, Schoolman says. Many of the 40 largest insurers in the 1980s have disappeared in a bevy of mergers and a few financial flameouts.

Schoolman separates risks into two types: sudden and gradual. Insurers handle sudden accidents, like car wrecks, tornadoes, and hurricanes well, he says. They know how to monitor the risk and make sure they haven’t taken on too much.

Gradual risks emerge slowly, like the mythical frog dipped into a pot of water brought slowly to a boil. Before the frog realizes the water is hot, he is cooked.

The underwriting cycle, Schoolman notes, seems like the soon-to-boil frog. Trying to hold market share, companies loosen coverage terms. Then they let rates dip. Then reserve inadequacies creep in.

Emerging Tech

Asbestos is a classic example of a gradually emerging risk, but there are others. An emerging technology can leave insurers covering risks they never contemplated.

Enter nanotechnology. Scientists have learned how to rearrange atoms to get the benefit of atomic-level superpowers. That’s why anti-aging cosmetics can seep deep into human’s pores. It’s why lifeguards no longer have white stuff on their noses. Manufacturers have harnessed the atoms and revolutionized moisturizers and sunscreens, and hundreds of other products.

The potential is tremendous. Nanotech products may one day zap tumors or make drugs more effective. They could make batteries last longer or make materials stronger and lighter.

“A lot of really wonderful things are going to happen because of nanotech,” says Charlie Kingdollar, vice president and emerging issues officer of General Reinsurance Corp. But insurance exposure is growing.

Nanotech products are lightly regulated, and their long-term effects are not understood. Nanotech is growing so fast that reliable data is difficult to find and may be out of date by the time it is published.

There are more than 5,400 nanotech firms globally, Kingdollar says. Every state has at least one nanotech manufacturer; California has the most.

The federal government encourages the industry, spending $1.6 billion a year. The majority is in product development. Little is spent studying short- or long-term effects.

There also are few labeling requirements. Many manufacturers, he says, have failed to test product safety. And some early tests show risks, such as dying brain cells or genetic cellular damage. Some products pass through the skin and are distributed throughout the body, with effects unknown. Others appear to kill human liver and skin cells. Several studies have linked carbon nanotubes to asbestosis and mesothelioma.

Two-thirds of firms and universities fail to conduct toxicity tests on nanomaterials. At many firms, employers protect themselves with nothing more than paper masks. More than a third don’t require masks.

“We’re not spending a whole lot of time and money on environmental safety,” Kingdollar says.

Exposure Grows

Despite the risks, the insurance industry has reacted slowly. Few applications ask about nanomaterials, Kingdollar says. Standard policies don’t specifically exclude nanotech products. And it’s not clear whether courts in all jurisdictions would apply a policy’s pollution exclusion.

“By and large our industry is pretending this is something in the future,” Kingdollar says. “It’s already here. The question is what are we doing about it.”

Actuaries can help insurers handle this emerging risk, Schoolman says. They can encourage underwriting discipline, as well as help integrate pricing, planning and reserve setting to manage the underwriting cycle. And they can help underwriters develop insurance policies to handle new products, like those a nanotech firm might need.

Actuaries are keen analysts, he says. Their ability to analyze a situation can help develop a product and a rate — even without much data. The key, Schoolman says, is to look for opportunities within each new risk.