Nanotechnology - the science of the very small - is a fast-developing science which could prove one of the biggest revolutions for many aspects of human life This also means that re/insurers could find themselves facing new risks.

Virtually every sector of industry is receiving almost unbelievable predictions of what could be created by the emerging science of nanotechnology.

When this will happen and what the results will be in reality are open to debate, but speculated consequences range from the doubling of life expectancy to 150 years to out-of-control weapons of 'grey goo' that could consume all living matter.

Until about 200 years ago, the primary determinant of manufacturing was muscle control, especially in the human hand. But in the past 200 years, commercial scale manufacturing became increasingly precise, more diverse and less expensive - and automated. Early on came precision engineering machines such as lathes, then chemical process fabrications such as computer chip manufacture and chemical/pharmaceutical engineering. Nanotechnology is the next step.

Nanotechnology describes many types of research and, currently, a few commercial operations where the product is assembled from pieces with dimensions less than about 1,000 nanometres. Nano comes from the Greek for dwarf, and a nanometre is one billionth of a metre. The emerging - and potentially revolutionary - science of nanotechnology takes nature's basic building blocks, atoms, and one by one builds them up into finished products. The resulting products can be lighter, stronger, cleaner, less expensive and more precise than anything known before. The finest features will be made of small groups of individual atoms and molecules. There are claims that we will be able to make most things very inexpensively, at a dollar per kilogram or less.

Many early nanotechnology applications are about changing the atomic structure of materials, such as fabricating water-resistant glass or scratchproof lenses. Later, as an extreme example, we might make beef steaks with grass, water and feed stocks in a 'nanoblender', rather than via a cow. This form of Star Trek speculation is useful to sense the edge of possibilities.

But make no mistake; real practical applications are emerging today, and already atoms are being manipulated to construct prototypes of complex nanomachines to be used in disciplines such as medicine, computing and space exploration.

A big reality

In recent years, we have become accustomed to - even cynical about - new technologies that, it is claimed, will change the world. The research and advisory firm Gartner has developed a model of technology evolution that charts progress from a 'Technology Trigger' to 'Inflated Expectations' then through a 'Trough of Disillusionment' to 'Slopes of Enlightenment and Plateaus of Productivity'. In the case of nanotechnology, the trigger point has been passed.

Through the late 1970s and 1980s, nanotechnology existed only in academic articles and research laboratories. In the 1990s, the first glimmers of commercial application appeared in the breakthrough of the manipulation of individual atoms with the successful application of the scanning tunnelling microscope, which can image surfaces down to the atomic level.

Recent reports indicate there are now large-scale investments being made with both private and public funds. US President George W Bush has provided nearly $1bn for the multi-agency National Nanotechnology Initiative, doubling the funding levels from when the initiative first started in 2001. In December 2003, the President signed the 21st Century Nanotechnology Research and Development Act, and the research laboratories of industrial giants such as IBM have been taking a leading role. In Europe, the German Federal Ministry of Education and Research has been increasing its support of the technology since the end of the 1980s, and currently the government provides around EUR200m in sponsorship. Japan's Ministry for International Trade and Industry has run promotion programmes for more than a decade, and provided $396m in funding over a ten-year period. In addition, about 30 Japanese national and foreign industrial concerns have committed another $150m.

Insurers are showing an awareness of the possible ramifications of nanotechnology exposures. The International Cooperative and Mutual Insurance Federation (ICMIF) and the Centre Europeen de Prevention des Risques (CEPR) recently announced that they are setting up an international think tank of mutual insurers to focus on new risks, including those presented by nanotechnology.

Near-term promise

High-level experts are already suggesting that nanotech-based drugs, some currently being clinically trialled by the US's Food and Drugs Administration, could represent half of all pharmaceutical products by the end of this decade. In other medical areas, nanotechnology researchers are looking for disease prevention - rather than cure - for conditions such as diabetes and Alzheimer's. But this could well put immense pressure on the insurance industry. For instance, as diagnostic technology becomes more effective and less expensive, people's perception of risk - and thus their appetite for insurance - will change.

The timescales for these developments are unclear. The more considered projections include large-scale production of machines able to manipulate and position single atoms by 2011, and active nanoconstructions to deliver remedies and assist in transplants by 2015.

Long-term fears?

With all great promises come simple practical risks. For example, how will nanoproducts be labelled with their origin, producer, batch number, user instructions, nutritional content or health warnings? If there were no identifiers, how could we trace responsibility for losses? If nanoconstructions are active, in the sense that they have a power source and/or are able to move or replicate themselves, who pays if through design faults or unexpected consequences they wrongly convert matter, such as iron to rust, or crops to compost? These are new loss scenarios for insurers to consider.

Industry challenges

Nanotechnology is likely to bring new insurance dimensions to property damage, personal injury, third party liability, financial products, and many other areas.

The short- and long-term effects of nanotechnology on health cannot yet be widely understood. Re/insurers need to ask how likely are people to be injured or killed as a result of unimaginably small particles permeating their skin, or being ingested intentionally but with unexpected side effects?

The industry will consequently decide the extent to which it is prepared to accept this risk under policy terms for manufacturers and individuals.

The insurance industry is under increased pressure from stakeholders to demonstrate that it is, as far as possible, on top of these uncertainties.

Re/insurers could suffer if claims arise in the future at levels not anticipated at the moment, in much the same way it still finds itself a slave to asbestos-related disease claims. Nanotechnology challenges both the life and non-life sectors. Will people live longer or shorter lives? Will employers and product manufacturers be responsible for this shift and turn to their insurance policies for liability protection?

Reinsurers are grappling with some of these issues and are seeking greater dialogue with industry. There appears to be a growing feeling that if the life and non-life risks of nanotechnology cannot be quantified with much confidence, then insurers could at least underwrite on the basis of whether or not industry players are applying codes of conduct and standard operating procedures when using and developing nanotechnology. Greater dialogue should enable greater consensus on what those codes of conduct and standard operating procedures should be.

Here we have a classic stress test of a basic function of insurance - the transfer of difficult to quantify and possibly enormous risk to parties better able to take it. Nanotechnology might never turn out to be a health risk, but as a relatively unknown area of science, and against a backdrop of increased regulator scrutiny of insurance and reinsurance businesses, it is arguably a problem at the moment for those underwriting long-term business. If re/insurers exclude cover altogether or charge very high or prohibitive premiums, they might leave the risk with industry, which could inhibit further scientific advances. If they accept the risk (which is probably the default position), then insurers could find themselves retrospectively accused of not underwriting and/or reserving properly, and the regulatory penalties for this are becoming more severe.

Advances in nanotechnology risk assessment should enable all sides to feel more comfortable about the true volatility of exposure, enabling them to feel more confident about the decision to provide cover or not.

Risk management

For the next few years, public discussion is likely to be marred by serious inaccuracies and confusion, an unavoidable phase in widespread debate about a new technology. The most significant confusions are likely to centre on the nature of active self-replicating systems, such as those designed for nanomanufacturing purposes, and the capabilities of nanotechnology-based weapons systems. Fortunately, the full consequences of nanotechnology are unlikely to affect us for several decades.

There is the possibility of deliberate abuse. However, this is less likely for some time as the development of nanotechnology will take decades, and the early developers are likely to be only those very large organisations that can afford the substantial development effort.

There are already guidelines that insurers could use to establish benchmarks for risk management, such as those written by the Foresight Institute.

These include a technology assessment and an appraisal of the effects of each article produced with nanotechnology. Also covered is a differentiation between passive (e.g. material surfaces) and active (e.g. machines and robots) nanotechnology products. Manufacturing of active nanotechnology is advised to only occur under controlled, high security laboratory conditions.

Programs for action

In the initial stages of nanotechnology commercialisation there is little prospect of accurately calculating correct premiums, risk loadings or rebates, since claims costs cannot yet be estimated. According to Munich Re, some initial views in the insurance sector favour concentrating on developing risk management tools to help prevent and reduce losses. These tools can be condensed into product safety and crisis management systems, so that third-party liability insurers cover only residual risks. In-house and external expertise is required, as well as dialogue between insurers and the manufacturers and consumers of nanotechnology products. Munich Re has proposed one such model as follows:

- a technological assessment and an appraisal by the manufacturer of the effects of each nanotechnology produced product;

- differentiation between passive, e.g. materials and surfaces, and active e.g. powered and self-replicating;

- manufacturing of active products only under controlled, high security laboratory conditions;

- use of active products only occurs with guaranteed continuous monitoring;

- imposition of a lifecycle-monitoring obligation on the manufacturer, including recall processes and neutralisation options;

- decoupling of the function and the power supply in active products;

- compulsory identification tagging of products; and

- setting up of discussion and decision-making organs on social, corporate, ethical and political levels.


Conclusion

In 1917 the New Zealand physicist, Rutherford, proved the structure of atoms. By 1945 we learned to make huge bombs from atoms. By the 1990s we learned to move atoms around and join them together one at a time to make tiny constructions. If the nanotechnology pundits are correct, Albert Einstein's words about his identification of the atom will continue to apply: "This will change everything."

- Antony Smyth is a partner in Ernst & Young's technology and risk practice. Clive Martin is a senior manager in Ernst & Young's financial services practice.

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