Earlier this week Lloyd's Emerging Risks Team published a 26-page report entitled "Nanotechnology: Recent Developments, Risks and Opportunities." At the outset, Lloyd's notes its "report aims to provide an up-to-date view to inform the . . . insurance industry about the risks and opportunities that may exist in this developing area," and is intended to "enable insurers to make better informed decisions regarding any nanotechnology risks they may have written or intend to write." A short review follows.
Not wanting to appear unduly pessimistic, Lloyd's spends some time initially discussing potential "direct benefits" offered to the insurance industry by nanotechnology. This includes the creation of an entire "new industry to insure," direct environmental risk mitigation benefits, and the development of stronger, lighter, more durable materials which should increase safety. Ominously, Lloyd's also notes “[m]edicine could also be transformed by nanotechnology allowing cheaper and more sensitive diagnostic tools for diseases giving insurance professionals better statistics to determine pricing.” Personally, count me out on this last "benefit."
Additionally, although we commonly refer to a "nanotechnology industry" for simplicity's sake, it is difficult to imagine a single distinct insurable "nanotechnology industry." This is especially the case if nanotechnology is thought of as an evolving area of science that will permeate and change most existing commercial manufacturing industries.
Regarding which specific nanoscale materials (if any) pose the greatest potential EHS risks, Lloyd's quotes the 2004 Royal Society's seminal report stating that "free" rather than "embedded" nanoscale particles pose the greatest potential risks. Lloyds, however, does little to develop this concept or explain to its readers the prevalence (or lack thereof) of "free" nanoparticles in realistic human exposure settings. Additionally, while vaguely pointing the finger at carbon nanotubes by claiming they bear a similarity to asbestos fibers, Lloyd's acknowledges "[m]any materials can be engineered into nanoparticles . . . " and that functionalization of nanoparticles also a key issue regarding their potential toxicity.
Turning to possible personal injuries, the report aptly notes a primary issue clouding insurance coverage in this area: ". . . the insurance industry needs to know which nanoparticles are hazardous to humans, and what levels of concentration are required to cause harm." Candidly, Lloyd's admits "[t]he short answer is that we simply do not know." The report, however, provides a short overview of relevant scientific literature regarding possible exposure routes, permeability of the blood-brain barrier, and bio-accumulation of certain nanoscale materials.
Lloyd's also highlights three possible human exposure routes: inhalation, ingestion, and dermal penetration. The coverage of possible inhalation and ingestion routes is more even-handed than that afforded to dermal penetration. In this latter area, Lloyd's primarily relies on the Monteiro-Rivera, et al., quote that "skin is surprisingly permeable to nanomaterials" and therefore suggests its insureds employ "[s]trict industrial hygiene measures" when using same. There is a fair-sized body of literature concluding the opposite that Lloyd's should at least mention in passing.
Concerning potential environmental hazards accompanying the use of certain nanoscale materials in commercial settings, Lloyd's relies on the 2005 Royal Society report which finds that there is little existing data in this area and "[r]esearch into the ecotoxicology is urgently required." The report cautiously provides coverage of the few scientific studies finding that certain nanoscale materials may pose hazards to aquatic life and may accumulate in the environment.
Lloyd's then turns to potential "disaster" scenarios faced by insurers. Although it acknowledges they may be "extreme" examples, Lloyd's lists the following potential loss scenarios: pollution spills from nanoparticle production facilities; workplace exposures causing chronic illnesses; nanoscale materials leaching from products into the environment; product recalls, and "liability claims on a company, directors and officers regarding a product that was indicated by research to be unsafe, but subsequently released to the consumer market.” (Let's hope the latter never occurs.)
Lloyd's advises that any of the foregoing may require insurance companies to pay for environmental remediation costs; medical costs of human exposure; liability to persons directly affected, environmental groups, and shareholders; unexpected claims for life, health, and workers compensation insurance; business interruption expenses; and product recall expenses.
In light of these potential risks, Lloyd's advises its insurer brethren:
“Faced with little or no regulation or definition of a nanotechnology product, any exclusion to prevent large latent losses has to be wide enough to encompass and future definition.” . . .”With a regulated and well-defined product, exclusions can be written with increased contract certainty, as it would be less likely for a third party to contest the validity of the exclusion.”
Lloyd also notes:
"Insurers would be prudent to consider adverse scenarios when agreeing (to) terms and conditions and when determining price and capital. In particular whether a claims made trigger as opposed to an occurrence trigger is appropriate and whether limits should have an aggregate limitation."
Regarding existing European regulation of nanoscale materials, the report contains a single paragraph on REACH (Registration, Evaluation, Authorisation and Restriction of Chemical substances). Lloyd's quotes commentators who have noted REACH exposure thresholds are not specifically tailored to nanoscale materials, and occupational exposure limits for nanoscale materials should not be established using existing methods. Lloyd's also softly lobbies for new nano-specific regulation, arguing that a “[l]ack of regulation is never helpful to liability insurers and the insurance industry should lobby for clarity.” In passing, Lloyd mentions "the United States and Japan prefer a lighter regulatory touch . . . because [regulation] puts SME’s at a disadvantage due to the relatively higher costs and resources required to meet the regulations." That's one spin on the issue.
Finally, Lloyd's concludes that “. . . as the insurance industry is often only exposed to the downside, it must protect its long term solvency for the benefit of society as a whole. Our exposure to nanotechnology must therefore be considered and examined very carefully.”
While the report clearly hints at the direction Lloyd's is headed regarding coverage for some nano-related insurance risks, it presents more substance to back up its suggestions than some other recent coverage of the issue. It is well worth reading.