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Are Actuaries Prepared for Nanotech, Avian Flu, Other Emerging Risks?

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  • Are Actuaries Prepared for Nanotech, Avian Flu, Other Emerging Risks?

    Are Actuaries Prepared for Nanotech, Avian Flu, Other Emerging Risks?

    December 10, 2006

    Actuaries should draw on the lessons learned from the notorious exposures of asbestos and pollution to be better prepared to handle new emerging risks like nanotechnology and the avian flu, attendees at the CAS Annual Meeting were told.

    Harrison Oellrich, managing director with Guy Carpenter, told attendees that nanotechnology is an example of an emerging exposure with enormous potential benefits as well as risks.

    Oellrich cited estimates that 15 percent of global manufacturing worldwide could be made by nanotechnology by 2014. "In the research area, the National Nanotechnology Initiative (NNI) estimates federal spending for nanotechnology R&D at already nearly $1 billion," he said.

    Currently around 200 consumer products on the market incorporate nanomaterials, from sun-tan lotions to stain-resistant clothing to tennis racquets, Oellrich noted.

    "These undeniable benefits are accompanied by risks, some known and some unknown. We need to be thinking about them so they don't catch us as an industry unawares," he said.

    According to the United States' National Nanotechnology Initiative (NNI), "nanotechnology is the understanding and control of matter at dimensions of roughly 1 to 100 nanometers, where unique phenomena enable novel applications."

    While it is still in doubt whether nanotechnology will be revolutionary, Oellrich urged insurers and reinsurers as enablers of new technologies to better understand the technology and processes underlying this emerging exposure.

    "Insurers need to understand the risks, do the research into the possible, even critical risks, and begin to formulate products and coverage to respond to clients' needs," he said.

    Al Fine, managing director, Willis Risk Solutions, said the avian flu is an emerging exposure, but it is too soon to tell whether it will be a Y2K or 9/11-type event.

    "Everyone knows what the potential of an avian flu pandemic could be. The attack rate should it become out of control would be potentially 25 percent of the workforce on a global basis. There would be broken supply chains and border closings," Fine said.

    However, from the financial perspective, he noted that the potential loss impact of an avian flu pandemic on the insurance industry remains uncertain.

    "While workers compensation/general liability flu claims would go up, the workers' compensation/general liability non-flu-related claims would go down as businesses would shrink or close," Fine said.

    Avian flu has significant potential coverage implications for insurers and reinsurers, he noted. "There is the possibility of creating new exclusions and the opportunity to create new policies that explicitly provide coverage."

    "Eventually these things will be resolved in court and then the issue begins there," Fine noted.

    Raji Bhagavatula, principal and consulting actuary, Milliman, Inc. observed that when it comes to underwriting emerging risks, there are three key questions that should be asked: "Are the risks insurable, can they be underwritten, and are you able to price for these exposures?"

    She related that history has taught that the extent of losses associated with asbestos were known to underwriters in hindsight rather than at the time the risks were accepted. Asbestos was never intended to be covered and was not insurable at the time the risk was written.

    Claims for emerging risks such as asbestos got paid because of the "all risks" feature of the general liability policy where uninsurable risks have to be handled through exclusions. This is a difficult task as it would require the underwriter to be able to envision future risk scenarios associated with the products at the time of underwriting, she pointed out.

    Bhagavatula noted that the insurance industry can be an enabler of new technologies only if it is able to charge enough premium for the risk. She went on to observe that actuaries have a key role to play in facilitating the underwriting process for new emerging exposures.

    "When you think about the potential risks associated with emerging exposures, the experience with asbestos and pollution is really helpful as you can draw comparisons. Always ask how can I as an actuary be helpful with this?" Bhagavatula said.

    The session was moderated by Gail Ross, principal and consulting actuary, Milliman, Inc.

    Source: The Casualty Actuarial Society
    "In the beginning of change, the patriot is a scarce man (or woman, and brave, and hated and scorned. When his cause succeeds, the timid join him, for it then costs nothing to be a patriot."- Mark TwainReason obeys itself; and ignorance submits to whatever is dictated to it. -Thomas Paine