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NANOTECHNOLOGY UNDERWRITING AND RISK MANAGEMENT CONSIDERATIONS

July 26, 2012

Presenters

3

Gerry Finley, CPCU Senior Vice President Casualty Treaty Underwriting Underwriting Services Division

Randy Coppola Senior Vice President Client Manager Reinsurance Division

Agenda – Nanotechnology Webinar

Definition

Market - Key Technology of 21st Century

Exposures/Loss Scenarios

Legal and Regulatory Landscape

Underwriting and Risk Management Considerations

4

NANOTECHNOLOGY DEFINED

Definition

§ Nanotechnology is the understanding and control of matter at the nanoscale, at dimensions between approximately 1 and 100 nanometers, where unique phenomena enable novel applications.

§ Encompassing nanoscale science, engineering, and technology, nanotechnology involves imaging, measuring, modeling and manipulating matter.

National Nanotechnology Initiative

6 Image source: National Nanotechnology Initiative

Nanotechnology Defined

Nanotechnology is a new industry that impacts many other industries and has enormous positive potential as well as challenges

Understanding the Key Terms

“Nanotechnology” = Totality of techniques used in the investigation, production, processing and use of …

“Nanoparticles” = The specific nano material or particles used in the manufacturing process leading to…

“Nanoproducts” = The Products/processes that contain knowingly manufactured or utilized functional nano components.

7


Source: CRO Forum Briefing nanotechnology November 2010

Comparative size chart

Size of the Nanoscale

8


Categories Category 1 § Newly designed nanoparticles that are manmade rather

than naturally-occurring § e.g., polyacrylate

Category 2 § Nanoparticles that are manufactured industrially on the basis of time-proven manufacturing processes

§ e.g., carbon black manufacture

Category 3 § Ubiquitous anthropogenically created nanoparticles (created by human activity and existing constantly and broadly)

§ e.g., Automotive exhaust gas; domestic emissions, cigarette smoke

Category 4 § Naturally occurring nanoparticles § e.g., smoke, volcanic ash

Nanoparticle Categories

9


Nanotechnology Value Chain

Nanotechnology Value Chain

§ Minimally processed § Engineered

nanostructures

§ Intermediate products § Incorporate

nanomaterials or material constructed at a nanoscale

§ Finished goods § Incorporate

nanomaterials or nanointermediates

10

Nanomaterials Nanotools Nanoproducts


NANOTECHNOLOGY MARKET

0

5,000

10,000

15,000

20,000

2009 2010 2015

Nanomaterials Nanotools Nanodevices

Nanotechnology Market

Source: BCC Research

US$m

12

Global Nanotechnology Market, 2009-2015


Source: International Risk Governance Council White Paper on Nanotechnology: 13

Generation

Generation Characteristics

1st Generation: Passive From 2000 –

Behavior - Passive, Stable Use – Cosmetics; Food-related Products Risks – High Exposure Rates in Production settings

2nd Generation: Active (evolving function) From 2005 –

Behavior: Active, Changing During Operation. Use: Drugs; Pesticides Risks: Behavior is variable, potentially unstable resulting in unintended outcomes

3rd Generation: Integrated nanosystems From 2010 –

Behavior: Passive and/or active; integrated into systems using Use: New applications will develop - biotechnology, information technology and the cognitive sciences; e.g., artificial organs built from the nanoscale; evolutionary nanobiosystems Risks : Complexity of systems and types of interactions may result in mutations leading to unintended outcomes

4th Generation: From 2015 – 2020

Behavior: Engineered Nanosystems are Created; New Functions and Processes Emerge Use: Not Clear but likely to include Genetic therapies, Molecular devices, atomic design & other emerging functions. Risk characteristics: Potential risks include changes to biosystems and intrusive information systems.


Generation Characteristics

*- Percentages represent the % of total patents having at least one inventor with an address from the designated country Source: “Nano Technology : Who will be the leaders in the fifth technology revolution” (May 30, 2012) McDermott, Will and Emery

Country 2011 2005 United States 53%* 64% South Korea 8% 6% Japan 7% 8% Germany 7% 7% France 4% 4% China 4% 1% Taiwan 3% 3% Canada 3% 2% Great Britain 3% 2% Australia 2% 1% India 1% 1% Israel 1% 1% Spain 1% < 1% Russia 1% < 1%

Origin of Nanotechnology Patents

14

Country of Inventor’s Address for Nanotechnology Patent Literature

The US Accounts for the Bulk of Nanotechnology Intellectual Property


464

187

135 125 95 81 77 65 64 53 46 41 35 32 31

0

100

200

300

400

500

Cal

iforn

ia

Mas

sach

uset

ts

New

Yor

k

Texa

s

Mic

higa

n

Penn

sylv

ania

Illin

ois

Ohi

o

New

Jer

sey

Virg

inia

Flor

ida

Mar

ylan

d

New

Mex

ico

Was

hing

ton

Min

neso

ta

Source: Nano Science and Technology Institute - As of May 2012

US Development

15

Top 15 states with nanotechnology companies


§ Transforming manufacturing processes § To date: Over 1,300 nano-influenced products in the marketplace § Many more are being developed

§ Materials: Enhanced strength with reduced weight § Coatings: Improved properties such as thermal barriers, flame retardant,

ultraviolet resistance, friction resistant, etc. § Energy Collection and Storage: Improved surface to volume ratios of

nanoparticles use light more efficiently and improve the cost and efficiency of solar panel § Lighting: Quantum dots enabled the manufacture of LED lights § Manufacturing Processes: Self-assembly uses of nanotechnology add

precision and are evident in computer chips and biological system constructs.

Source: SME NanoManufacturing Conference, March 2012

Market Scope

Current Major Applications

Market Scope

16


Source: Project on Emerging Nanotechnologies (PEN) March 2011 Report: Inventory of Nanotechnology Consumer Products

Total Products Listed 2005-2010

Product Growth

17



Product Category (as of March 2011)

18


Product Categories


Health and Fitness Subcategory (as of March 2011)

19


Product Categories – Health and Fitness

§ Composite material: baseball bats, tennis rackets, motorcycle helmets, automobile bumpers, luggage, and power tool housings making them stronger, lighter and scratch resistant

§ Fabric treatments: resistive to wrinkling, staining, and bacterial growth; personal body armor

§ Glass treatment: eyeglasses, computer and camera displays, windows, and other surfaces to make them resistant to dirt and damage

§ Cosmetic products: sunscreens, cleansers, complexion treatments, creams and lotions, shampoos, and specialized makeup

§ Food containers and packaging: Enhance the quality and safety of food § Automotive applications: products involving rechargeable battery systems; temperature

control; lower-rolling-resistance tires; sensors and electronics; solar panels; fuel additives/improved catalytic converters.

§ Household products: degreasers; stain removers; environmental sensors, air purifiers and filters; antibacterial cleansers; and specialized paints and sealing products.

§ Coatings: coatings that extend the lifetimes of moving parts in everything from power tools to industrial machinery.

Examples of Nanotechnology Use

Current nano uses - A sample list

Source: NNI (Nano.gov)

20


The Future Some Recent Headlines

21

World's Smallest Electric Motor Made from a Single Molecule ScienceDaily (Sep. 4, 2011)

Source: Tufts University. "World's smallest electric motor made from a single molecule." ScienceDaily, 4 Sep. 2011. Web. 16 Jul. 2012.

“In research published online Sept. 4 in Nature Nanotechnology, the Tufts team reports an electric motor that measures a mere 1 nanometer across, groundbreaking work considering that the current world record is a 200 nanometer motor.”

“Chemists at Tufts University's School of Arts and Sciences have developed the world's first single molecule electric motor, a development that may potentially create a new class of devices that could be used in applications ranging from medicine to engineering.”


“How nanotechnology can improve paint and detect structural flaws” (Daily Commercial News 3/9/12)

“Delivering Drugs via Skin Moisturizers” (Science Blog 7/3/12)

“New ‘Power Felt’ could charge your phone with body heat”(techland.time.com 2/23/12)

“6 Amazing Inventions Made Possible by Nanotechnology” (Inhabitant 3/21/12) • Water Purifying Teabags • Artificial Muscles to propel nanobots through the body • Self Heating Roads • Improving methane energy output by 20X • Catalytic Clothing improves air quality • Solar Panel Clothing

“Nanotechnology delivers chemotherapy to prostate cancer cells”(Cancer News 1/10/12)

“Nanotechnology Catapults Battery Technology Forward, Once Again” (Nicholas Brown 11/24/11)

“How Nanotechnology Can Help Detect Disease Earlier” (ScienceDaily 5/22/12)

“Researchers use nanotech to make cancer 3mm times more detectable” (Computerworld 7/9/12)

22

The Future Some Recent Headlines (continued)


Image credit: Argonne National Laboratory

The Future of Nanotechnology

23

The Future – An Example: Batteries

Nanoparticle matrices in battery electrodes can drastically increase their ability to store lithium ions, increasing the storage density of the battery.

Alternative energy storage, hybrid vehicles, portable electronic devices Key technology


EXPOSURES/LOSS SCENARIOS

Group I Free

Nanoparticles or nanotubes

and Active NanoProducts

Group II Nano Products

in Food and Drugs

Group III Nanoparticles or Nanotubes that

can be freed when the product is

used, applied or disposed of

Group IV Nano Products that are fixed or

embedded in the product

Group V Conventional Nano Products or Nano

Materials

Passive Nano = Decreased Human Health Exposure

Source: CRO Briefing - Emerging Risks Initiative Position paper (November 2010) 25

Nanotechnology Exposures Exposures/Loss Scenarios

Group I Free

Nanoparticles or Nanotubes; and

Active Nanoproducts

Small Size allows entry into the human body in 3 ways: 1. Crossing the Blood-brain barrier:

accumulate in the brain, lungs or other internal organs – ultimate effect is unknown

2. Crossing the Skin-blood barrier: penetrate and accumulate through absorption by contact

3. Crossing the Blood-air barrier: accumulate directly in the lungs – lungs and all affected organs can be severely damaged.

Extensive global research is ongoing. Initial indications are that nanotubes can penetrate the walls of the lungs, damaging lung tissue.

Active nano particles and health exposure

26

Nano Particles and Health Exposures Exposures/Loss Scenarios

Source: CRO Briefing - Emerging Risks Initiative Position paper (November 2010)

Potential Major Risk Categories - Personal/Bodily injury

Workers

§ Most prominent health exposure to date § Manufacturing and processing § Disposal and recycling (including incineration) § Firefighting/first responders

Consumers

§ Lack of awareness makes choice & “intelligent consumption” difficult § e.g., potential skin absorption – clothing, cosmetics, skin creams, etc.

Healthcare recipients

§ Most prominent “consumer” exposure § Release/escape of nanoparticles used in medical applications § e.g. – dental fillings,

Mental anguish and emotional distress

§ Fear of disease (workers and consumers)

Less exposure

Greater exposure

Nanofilms and lateral nanostructures, e.g., computer and electronics

Nanoparticles and nanofibres, e.g., cosmetics, clothing

Nanocomposites , e.g., sporting goods or other solid bodies that contain nanoparticles

Free particles or nanodispersens, e.g., sprays

Major Risk Categories

27


Major Risk Categories

Increased Existing Risks

§ Terrorism – Smaller more powerful bombs § Cyber - Development of quantum computers making

current computer data encoding methods less effective & cyber crime easier or more effective.

§ Production process handling by-product release into the air or water § Waste disposal § May lead to health

effects (drinking water or agriculture contamination)

§ “Economic Bubble” potential…. >>> § False/Misleading

statements ….>>> § Unrealistic

Investment Expectations….>>> § Securities Claims

and Shareholder Suits

§ Uncertainty regarding harm § Multiple Injury

Configurations § Novel Loss

Scenarios § Untested Coverage

Other Potential Risk Categories

Environmental Financial Defense expense

28


Active Nano Particles and Health Exposure

Health Exposures

29


Source: Nanotechnology Applications, Prospects and Application CRC Study

Nanotechnology : Two Sides of the Issue – Neither is a Certainty

Two Sides of the Issue

Nanotechnology in Sunscreens is Safe (American Academy of

Dermatology)

Mesothelioma linked to

Nanotechnology (Woodrow Wilson

International Centre for Scholars)

30


Example: Carbon Nanotubes

CNT application Industry affected Manufacturing Customer End-of-life Coating Automotive, consumer

electronics, textiles, packaging

Composite Automotive, aerospace, cons. goods, construction, textiles, packages

Catalysts Energy, automotive Display Consumer electronics Drug delivery Pharma Energy storage Consumer electronics,

automotive

Memory IT Solar cells Energy Sensors IT, pharma Therapeutics Pharma

Source: CRO Forum Briefing Nanotechnology November 2010

Medium Exposure Low Exposure High Exposure 31

Examples Exposures/Loss Scenarios

Nanotechnology commercial value chain / life cycle and related exposure


Value Chain/Life Cycle

32


LEGAL AND REGULATORY LANDSCAPE

International Center for Technology Assessment, et al v. Margaret A. Hamburg, M.D

§ Administrative Procedure Act case seeking declaratory and injunctive relief.

§ Demands that the FDA respond to petition that the plaintiffs filed with the FDA (2006) that claimed: 1] there was scientific evidence of nanomaterial risks; and, 2] requested the FDA take regulatory action.

§ FDA has formally responded to the Plaintiffs and the Suit has been dropped.

Future Mass Tort Potential… …fueled by:

§ Warnings (often speculative) about nanotechnology risks have been publicized by various interest groups & even some governmental agencies …sets the stage…feeds public and political perception

§ Even with uncertainties about the actual health/environmental risks…the legal industry (plaintiffs bar) has established an infrastructure geared to extensive litigation of new exposures

At a minimum, defense costs will be high initially

Current State of Litigation

34

Minimal Litigation To Date

Significant Future Litigation Potential


Regulatory Challenges

35

1

Multiple agencies involved: coordination is critical

Too much = Progress stalled

Too little = Public harm

2

How effective will

it be?

Who is best qualified?


Federal : Who is regulating (educating about) nanotechnology? FDA

§ Regulates specific products (Mfg. must inform FDA of the existence of nano) § June 2012 – Announced a new “Nanotechnology Safety Program” § April 2012 – Released new guidelines for manufacturers that produce nano-

enabled cosmetics and food ingredients/packaging. EPA § Regulates the environmental safety

§ Views carbon nanotube as a new chemical § Regulates nano-based pesticides § Clean Air Act, Clean Water Act, Toxic Substance Control Act and Superfund

Laws apply to nanomaterial OSHA § Regulates worker safety NIOSH § Part of the Centers for Disease Control

§ Issued guidelines on to address the hazards to workers in a nanotechnology environment

NTP

§ Part of the Department of Health and Human Services § Examines the potential health effects of nano-influenced products.

Note: While there is some individual state regulation, federal regulation is more efficacious due to the nature of nanotechnology

Federal Regulation

36


§ Allocates funds for various federal agencies nanotech activities § Shares information, educates, develops

Coordinating arm for various federal agencies that are involved in nanotechnology regulation and research (21 participating agencies).

What it is

What it does

Stated goals 1. Advance world class R&D 2. Foster the transfer of new

technologies into beneficial products

3. Develop and sustain nanotechnology education, workforce and infrastructure

4. Support responsible development of nanotechnology

National Nanotechnology Initiative (NNI)

37


UNDERWRITING AND RISK MANAGEMENT CONSIDERATIONS

Loss Scenarios – Most Likely Possible Examples Health risks § Workers and consumers

§ Lungs, digestive tract, skin Environmental risks

§ Toxic nanoparticle byproducts, waste or accidentally released § Contaminated air, water, and agricultural

New or increased existing risks

§ Terrorism – smaller more powerful bombs § Cyber – development of quantum computers making current

computer data encoding methods less effective and cyber crime easier or more effective

Coverage Scenarios – Most Likely Possible Examples Workers Compensation GL, Products, Product Recall (Umbrella) Environmental Liability Medical Malpractice Directors and Officers Cyber /Internet Liability

Intellectual Property Life and Health

Insurance Coverage

39


Insurance as “Enabler” Supports the development of new technologies by managing and financing risk

Source: R. Blaunstein – Unfamiliar Exposure, Insurance Networking News, 2006

Mature phase

Apprehensive phase

Early study period

§ Increased risk knowledge = enhanced understanding, leading to…

§ Risk management, customized coverage & other approaches, at reasonable prices

§ Initial risk knowledge leads to concerns § Insurers look to reduce/contain coverage

§ Efforts to understand exposure § Risks may unknowingly be covered 1

2

3

Three Stages of Insurance Coverage

Three Stages of Insurance Coverage

40


Standard CGL / Umbrella

Key Coverage Issues

Timing of Loss Defense

§ Potentially Unlimited

§ Untested - Emerging Nature of Claims

Scope of Coverage

§ All Risk

§ Exclusions Critical

§ Latency Exposure

§ “Occurrence” Trigger

§ Uncertain Court Application

41


Insurance Coverage - Exclusions

42


Nanotechnology Exclusions

Continental Western Insurance Group

§ Nanotubes And Nanotechnology Exclusion § Introduced in 2008 § Applies to BI, PD, PI, AI § Very Broad - Applies to: “presence of or exposure to “nanotubes” or

“nanotechnology” in any form, or to harmful substances emanating from “nanotubes” or “nanotechnology”. § Key Definitions:

‒ “Nanotubes” means hollow cylinders of carbon atoms or carbon fibers or any type or form of “nanotechnology” which contain remarkable strength and electrical properties used in any products, goods, or materials.

‒ “Nanotechnology" means engineering at a molecular or atomic level.

ISO Pollution Exclusion

§ Probably applies to nano-pollution, but not court tested in a nano-case yet

ISO Classifications

In 2011 introduced a nanotechnology General Liability Classification § Nanomaterial Distributors – Risks that sell naomaterials to others § Nanomaterial Manufacturing – Risks that manufacture or engineer nanomaterial for others

Inherent Nature

+ Rapid Growth

+ Constant Evolution

+ Immature Legal Environment

+ Coverage Uncertainty

______________________________

The Nanotechnology

Underwriting Challenge

43

Risk Management Considerations

Nanotechnology


Source: CRO Forum Briefing Nanotechnology November 2010; International Risk Governance Council White Paper on Nanotechnology

Hazard recommendations Exposure recommendations Risk recommendations § Testing strategies and

metrics for assessing (eco-) toxicity

§ Nomenclature which includes novel attributes, such as surface area

§ Pre-market testing and full lifecycle assessment (incl. secondary risks)

§ Disposal and dispersion methods for nano-engineered materials

§ Identifying hazards using scenarios

§ Matrix for assessing the identified hazards

§ Exposure monitoring methodologies

§ Methods for reducing exposure and protective equipment

§ Estimation of exposure for events with great uncertainties

§ Risk assessment methodologies

§ International guidelines and best practices

§ Evaluation of probability and severity of risks, including loss of benefits

§ Balanced knowledge-based communication of EHS methods

§ Developing capacity to address uncertain/unknown and ambiguous developments at national and global levels

§ Identifying and analyzing controversial developments

44


Risk Management Framework International Risk Governance Council

1

2

3

4

Hazard Asses the specific engineered nanomaterial based on the use and the scientific /expert analysis of hazard

Industry Determine the specific industries and industry segments that are exposed based on how the nanomaterial is used

Exposure Asses the exposure throughout the entire life cycle of the product

Insurance Impact

Determine the specific lines of business that may be impacted, the extent to which they will be impacted, and how best to manage the impact

45


Fundamental Risk Assessment Steps


Understand Risks

§ Proactively monitor relevant developments § Science, legal, market, etc

Risk Selection Criteria

§ Understand the specific exposures, understand insured operations ‒ What, where, how is nanotechnology used § Need specific disclosure of the nature and size of the nano materials

used as well as the process that is used. ‒ How is exposure managed by the insured– wc, products, pollution, etc.

§ Risk appetite?? How much???

Coverage

§ Where there is significant exposure and/or exposure that is not adequately managed: adapt coverage, e.g., ‒ Sublimit or exclude (definitional challenge) ‒ Coverage triggers (e.g., claims made) ‒ Defense cost containment

§ Manage exposed limits in the portfolio (establish a budget )

46

Risk Management Considerations Underwriting and Risk Management Considerations

Nanotechnology: Tremendous Benefits for Society and the Economy Some Examples

Workers Compensation and Employers Liability

§ Improved respiratory or other safety equipment

Life and Health § Enhanced and new forms of treatments for life altering diseases and injuries

Environmental Liability

§ Nanoparticles may be used to reduce environmental risks – decontaminate chemically contaminated soil or water.

Auto § Improved materials - make vehicles more energy efficient, durable and safer

Property § Damage–resistant building material (steel, concrete, glass, etc.) § Wireless monitoring of structures…early detection of defects

Opportunities for insurers, if risks understood 47

Nanotechnology In Perspective Underwriting and Risk Management Considerations

Exposures § Main exposure at present is workers’ compensation and employers' liability. § Traditional product liability & product recall risk is unchanged but possibly elevated Risk Management § Continual monitoring of developments, exposures and opportunities is essential. § Risk analyses have to be adjusted regularly to the new products being produced § Before production starts, manufacturers must develop early-warning systems and

endeavour to carry out loss prevention. § Enterprise risk management has to be carried out parallel to the manufacture of

nanoproducts and in terms of the service life of these products. § Quality assurance must be seen as integral to R&D, production, and consumer use § Risk dialogue and information programs can make an important contribution to raising

public awareness and improving risk management. § Safe, certified nanoproducts lead to higher consumer confidence in nanoproducts Coverage § Should risks elevate, consideration should be given to separating the risk from existing

policies and/or creating special coverage.

Summing Up Nanotechnology

48

An area of enormous economic significance

Understand the Risks, Develop solutions Not If, But How

Summing Up Nanotechnology

Nanotechnology is not going away It has tremendous positive potential: >> Innovation…leading to… §Jobs §Economic Growth

Insurers need to embrace our traditional “enabling” role Work with manufacturers, scientists, government to identify, understand and quantify nanotechnology’s risks.

49

The bottom line

Discuss specific emerging exposures

§ Resources and information concerning lines of business, industry topics, claims, timely insurance news, and training § Munich Re publications, presentations, newsletters, white papers,

state profiles, and more

§ Produced quarterly § Provides the latest news, reports, and publications available on

many emerging issues that could have an effect on future claim and underwriting activity

Emerging Exposure Newsletter

More Information Client Resources

Connect – Extranet Site

Client Visit

Your company’s Munich Re Client Manager is your first point of contact to discuss all of these services.

50

THANK YOU FOR ATTENDING

© Copyright 2012 Munich Reinsurance America, Inc. All rights reserved. "Munich Re" and the Munich Re logo are internationally protected registered trademarks. The material in this presentation is provided for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc. or Munich Re. This material is not intended to be legal, underwriting, financial, or any other type of professional advice. Examples given are for illustrative purposes only. Each reader should consult an attorney and other appropriate advisors to determine the applicability of any particular contract language to the reader's specific circumstances.

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