Emerging nanotechnol-ogies have the potential to influence and change our lives in ways we could not have imagined as recently as a decade ago. A generic term for applications at the molecular level, nanotechnology will eventually influence every aspect of our lives; from the way we communicate to the methods used to diagnose and treat illness. Nanotechnology will improve efficiencies in energy, computer storage capacity and data processing, security, clothing, food, and shelter.The potential of nanotechnology is reflected by the amount of revenue currently projected for these technologies, between $1 trillion and $2 trillion within the next 10 to 15 years. And just in time, because according to World Resources 2000 and United Nations press releases, within the next 50 years-less than one lifetime-the world population is expected to grow by 50%, world economic activity is expected to grow 500% and world energy and materials use is expected to grow by 300%.

The global ramifications of these projected numbers are staggering, and the development of new ways to respond to these burgeoning demands is critical.

As optimistic as researchers may be, growing evidence suggests that nanoparticles - the building blocks of nanotechnology and the tiniest of materials ever engineered and produced - may pose environmental, health and safety risks, which in turn engenders the concern of the insurance and reinsurance industry.

ROLE OF INSURANCE TO EMERGING TECHNOLOGIES

By helping businesses manage the risks associated with product development and deployment, the insurance industry has always been an "enabler" of new technology, an aspect often overlooked by the industry and its detractors. Consequently, if the insurance industry is to support these new nanotechnologies, while not incurring major long-term losses, the industry must be able to assess potential property damage, bodily injury to workers and the public, and the environmental liabilities associated with businesses handling and using nanomaterials.

To be able to make such assessments the insurance industry needs to become educated (see "What is Nanotechnology") and:

* Understand nanomaterials and nanotechnologies, and have access to accurate data and information that permit a quantifiable evaluation of the probability and severity of losses;

* Operate in a regulated environment so there are controls over the use and disposal of harmful nanomaterials.

UNDERSTANDING THE RISK

Although there are currently only a limited number of products in the marketplace that contain engineered nanomaterials, the pace of nanotechnology development ensures that this will not be the case for long. Consequently, industry, government and insurers are concerned about the associated environmental, health, and safety impact and are working together to develop a better understanding of nanomaterial's properties and risks.

Some of the special features of nanomaterials that allow for positive, useful properties also give rise to a number of unknown exposures:

* Size of particles. The extremely small size of nanoparticles makes them incapable of being measured by most current techniques.

* Increased reactivity. Nanoparticles are more reactive than are particles larger in size. As such, materials that have been benign in the past may become reactive and potentially toxic in nanoparticle form.

* Routes of exposure. Because of their size, nanoparticles can be inhaled, ingested and may even enter the body through the skin.

To predict the health risks associated with nanomaterials, facts such as routes of exposure, the number of particles actually absorbed, movement of materials once they enter the body, and their impact on the body's regulatory and defense systems must be known. Adequate information is not yet available to determine with any certainty whether, or how, nanomaterials can affect our health.

Because nanoparticles behave differently from larger particles, concerns are being expressed about whether they can pollute the air, water supply or damage crops during processes that release these particles into the air, soil or water.

In the short term, the major health and safety risks will be to researchers in laboratories and production staff exposed during the manufacture of nanomaterials.

People in these occupations must be made aware of the potential hazards of using materials having unknown properties and must take measures to mitigate their risks. However, their activities are currently contained and generally do not pose a threat to the public or to the environment.

STATUS OF REGULATION

Regulators in the United States and elsewhere around the world assert that nanoparticles represent an entirely new risk and, therefore, it is necessary to carry out an extensive analysis of the risk. Such studies can then form the basis for government and international regulations.

Existing regulations may prove to be grossly inadequate for the task of providing a safe environment in a world of nanotechnology products.

In a white paper issued on its concerns about nanotechnology, the EPA asserts that to assess the risk of exposure to nanomaterials, their fate in air, water and soils must be understood. That is, diffusion and dispersion rates, agglomeration, wet and dry deposition, gravitational settling, solubility and mobility are examples of some of the parameters required to apply EPA's current environmental fate and transport models. Even the applicability of the fate and transport models themselves has been brought into question, since there is so little experimental data on nanomaterials.

The Occupational Safety & Health Administration (OSHA) has promulgated regulations relating to exposure to certain ultrafine particles, which are defined as having dimensions of less than 100 nanometers, making them essentially identical to nanoparticles. Unfortunately, most industrial workplace regulations are based on data relating to larger particle sizes, microns, hence regulations for ultrafine/nanoparticles may be useless.

Because nanoproducts are still very limited in the marketplace, population exposure is likewise limited at this time. However, that may soon change.

Commenting on the EPA white paper, the Environmental Law Institute (ELI) in January of this year alleged that although research and development is critical at this stage, there must be an effort to create an appropriate foundation for environmental, health and safety (EHS) governance related to nanotechnologies.

ELI suggests a multi-faceted approach that incorporates some existing environmental statutes, voluntary programs, corporate stewardship, tort liability, voluntary standards, disclosure and liability insurance.

ELI points out that, because there are no nanotechnology-specific laws and it is unlikely to have any soon, it will be necessary to use current programs and existing legal authorities to regulate nanotechnologies. A multi-statute approach will be required, certainly in the near-term.

POSITION OF INSURERS AND REINSURERS

Nanotechnology risks are covered under a wide variety of insurance policies, including product liability, workers' compensation, professional liability and general liability.

Establishing direct relationships and definitive conclusions between exposure to manufactured nanoparticles and health and environmental effects may take years, making broad and sweeping decisions about exclusions of nanotechnologies from policy cover is complicated by the fact that:

* The various nanotechnologies encompass a broad array of activities without a uniform description and have very different risk characteristics;

* We do not possess enough data and analysis about nanotechnologies to make appropriate risk evaluations, and will not, before the insurance industry is asked to make judgments governing risk.

Over time, as the specific risks posed by nanomaterials are studied, knowledge will grow, and customized covers will be developed. Insurance cover for nanotechnology may likely evolve in three stages:

The Early Study Period.

Characterized by continued cover under existing policies and by efforts of insurers and reinsurers to become more familiar with the special risks posed by nanotechnology, this stage is already under way.

The scarcity of data about nanotechnology makes it a challenge to anticipate and respond to its risks, as it may be some years before we can establish direct relationships and definitive conclusions between exposure to manufactured nanoparticles and health and environmental effects. The federal government is funding research into nanotechnology's EHS impacts.

Concurrent with government research, insurance companies are gathering information about businesses that produce, use, store or dispose of nanomaterials and products containing nanomaterials. In particular, the insurance industry is assessing potential property damage, bodily injury to workers and public, and environmental liabilities associated with businesses handling and using nanomaterials.

The Apprehensive Phase.

In this stage, insurers and reinsurers begin to harbor serious concerns that the nanotechnology risk may be higher than earlier estimated. Insurers and reinsurers begin to look at reducing cover, and pressure develops to contain risk transfer by the use of sub-limits and "claims made" covers.

Given that studies of the long-term health impacts of nanomaterial exposure are in their infancy, it is difficult to predict how long this stage will last.

While we are always looking for "smoking guns," there is no evidence of mass health deterioration, as, for example, experienced with toxic substances like asbestos or lead. Whether this is because the exposure to nanomaterials is still very low, or because of the paucity of data, is still a matter of conjecture.

Given the importance of nanotechnology to the growth of developed economies, we may see governments proposing solutions to problems concerning a lack of available insurance, such as state-run pools, which can assume the most volatile aspects of writing nanotechnology-related business by mutualizing and balancing the funding of exposures across all constituencies.

And until such time as the associated risks can be quantified, the government may act as a backstop to limit the liability of those industries that design or use nanotechnology-driven products or processes.

Establishing a no-fault system in which the industry funds the first layer of insurance according to a predetermined scheme and the government funds any claims above that agreed-upon amount may be yet another solution.

The Mature Phase.

In this stage, customized solutions are likely to be available at reasonable rates in both the insurance and reinsurance markets. Insurers will know with more precision the types of losses this new technology can produce and how frequent and severe these losses might be.

When these risk components can be more accurately determined, insurers can better predict future losses and calculate an appropriate premium.

DEVELOPING A STRATEGY

As is the case with most emerging areas of risk, nanotechnology challenges us with many unknowns. These challenges are complicated by the fact that few risk-related forecasts have been scientifically confirmed.

Many industries are optimistic about the opportunities associated with nanotechnology; and if they are not currently exploring its potential, they are likely to do so in the near future.

Because insurers play such a critical part in enabling new and beneficial technologies, it is critical that they develop a strategy of working with manufacturers, the government, scientists and regulatory agencies to identify and quantify nanotechnology's risks.

Public response to this new technology, and ultimately the legal climate, will depend upon how much accurate information is available.

Managing the unknowns associated with the development and use of nanotechnology will not be much different from gauging the risks involved with environmental liability or employee practices liability.

Standard, affordable coverage will eventually be available. In the meantime, by using claims-made forms and setting appropriate deductibles and limits that are commensurate with unknown risks, insurers can mitigate their potential losses and still participate in this exciting new market.

What is Nanotechnology?

"Nano" means, one billionth, 1/1,000,000,000. One nanometer, abbreviated as, 1 nm, is one billionth of a meter. (A meter is about one yard.) This is a very, very small number. A nanometer is a million times smaller than a millimeter and 10,000 times smaller than anything the human eye can see. A red blood cell is about 5000 nm, while the hemoglobin molecule inside the red blood cell is 5 nm. A bacterial cell is several hundred nanometers, a transistor on a microchip is about 90 nm, and a DNA molecule is 2.5 nm. Ten hydrogen atoms in a line make up 1 nm.

Nanoscience, by definition, is the study of molecules and structures with one dimension between 1 and 100 nm. Nanotechnology is the application of these nanostructures into useful materials and devices. In other words, nanotechnology is the development and manufacture of materials and products on the atomic and molecular scale.

When bulk materials are reduced in size to the order of nanometers we enter the atomic and molecular realm. At this size materials no longer exhibit the same properties they did at the micrometer and larger scale. They begin to exhibit new, exciting, often useful properties. For example, some materials change their physical properties by exhibiting extraordinary electrical conductance or resistance or new magnetic properties, some become bactericides, others exhibit exceptional strength, and water-repellency. Certain nanomaterials can even interact with biomolecules, which enable them to improve medical diagnosis and tissue or organ replacement.

Nanotechnology-driven processes are spreading rapidly, with positive uses that may be limited only by our imagination. Some of the current and longer-term benefits are likely to be realized in the following areas:

* Manufacturing: Manufacturing will consist of creating materials and products of superior strength, decreased weight and size, and impervious coatings, molecule by molecule.

* Environment: Nanotechnology-based processes promise higher agricultural yields, diminished pollution, and renewable energy sources. The EPA reports in its draft white paper on this subject that nanotechnology could reduce worldwide energy consumption by as much as 14.6%. Nanotechnologies can reduce the stress on our environment through contaminant detection and waste site remediation and treatment.

* Energy: Nanotechnology can contribute to reduced energy demands by creating lighter materials for transportation vehicles, increasing the reflectivity of roofing material, improving the use of alternative energy technologies such as solar energy, allowing the molecular-level control of industrial catalysis and reducing electrical transmission line losses.

* Medicine: Some of the most promising findings have been in the area of health and medicine, where nanotechnology is expected to revolutionize the ways that we detect, prevent and treat diseases and medical conditions.

* Information Technology: Nanotechnology offers tremendous benefits to the computer industry. Many of the major companies are currently working with nanostructures to create significantly smaller storage devices than those currently available as well as processors that will run many times faster than those on the market without any additional power consumption.

Robert Blaunstein is the director of loss control and underwriting manager for the Environmental Division of American Safety Insurance Holdings Ltd., Hamilton, Bermuda. Dr. Blaunstein co-authored a report on this subject entitled "Nanotechnology: The Plastics of the 21st Century" with Guy Carpenter, a New York risk and reinsurance specialist.

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