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1 The material in this webinar presentation is for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc.

2 NANOTECHNOLOGY UNDERWRITING AND RISK MANAGEMENT CONSIDERATIONS July 26, 2012

3 Presenters Randy Coppola Senior Vice President Client Manager Reinsurance Division Gerry Finley, CPCU Senior Vice President Casualty Treaty Underwriting Underwriting Services Division 3

4 Agenda Nanotechnology Webinar Definition Market - Key Technology of 21 st Century Exposures/Loss Scenarios Legal and Regulatory Landscape Underwriting and Risk Management Considerations 4

5 NANOTECHNOLOGY DEFINED

6 Nanotechnology Defined Definition National Nanotechnology Initiative 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. Image source: National Nanotechnology Initiative 6

7 Nanotechnology Defined 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. Nanotechnology is a new industry that impacts many other industries and has enormous positive potential as well as challenges 7

8 Nanotechnology Defined Size of the Nanoscale Comparative size chart Source: CRO Forum Briefing nanotechnology November

9 Nanotechnology Defined Nanoparticle Categories 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 9

10 Nanotechnology Defined Nanotechnology Value Chain Nanotechnology Value Chain Nanomaterials Nanotools Nanoproducts Minimally processed Engineered nanostructures Intermediate products Incorporate nanomaterials or material constructed at a nanoscale Finished goods Incorporate nanomaterials or nanointermediates 10

11 NANOTECHNOLOGY MARKET

12 Market - Key Technology of 21 st Century Nanotechnology Market Global Nanotechnology Market, US$m 20,000 15,000 10,000 5, Nanomaterials Nanotools Nanodevices Source: BCC Research 12

13 Market - Key Technology of 21 st Century Generation Characteristics Generation 1st Generation: Passive From nd Generation: Active (evolving function) From rd Generation: Integrated nanosystems From th Generation: From Generation Characteristics Behavior - Passive, Stable Use Cosmetics; Food-related Products Risks High Exposure Rates in Production settings Behavior: Active, Changing During Operation. Use: Drugs; Pesticides Risks: Behavior is variable, potentially unstable resulting in unintended outcomes 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 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. Source: International Risk Governance Council White Paper on Nanotechnology: 13

14 Market - Key Technology of 21 st Century Origin of Nanotechnology Patents Country of Inventor s Address for Nanotechnology Patent Literature Country 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% The US Accounts for the Bulk of Nanotechnology Intellectual Property *- 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 14

15 Market - Key Technology of 21 st Century US Development Top 15 states with nanotechnology companies California Massachusetts New York Texas Michigan Pennsylvania Illinois Ohio New Jersey Virginia Florida Maryland New Mexico Washington Minnesota Source: Nano Science and Technology Institute - As of May

16 Market - Key Technology of 21 st Century Market Scope Market Scope Transforming manufacturing processes To date: Over 1,300 nano-influenced products in the marketplace Many more are being developed Current Major Applications 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

17 Market - Key Technology of 21 st Century Product Growth Total Products Listed Source: Project on Emerging Nanotechnologies (PEN) March 2011 Report: Inventory of Nanotechnology Consumer Products 17

18 Market - Key Technology of 21 st Century Product Categories Product Category (as of March 2011) Source: Project on Emerging Nanotechnologies (PEN) March 2011 Report: Inventory of Nanotechnology Consumer Products 18

19 Market - Key Technology of 21 st Century Product Categories Health and Fitness Health and Fitness Subcategory (as of March 2011) Source: Project on Emerging Nanotechnologies (PEN) March 2011 Report: Inventory of Nanotechnology Consumer Products 19

20 Market - Key Technology of 21 st Century Examples of Nanotechnology Use Current nano uses - A sample list 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. Source: NNI (Nano.gov) 20

21 Market - Key Technology of 21 st Century The Future Some Recent Headlines World's Smallest Electric Motor Made from a Single Molecule ScienceDaily (Sep. 4, 2011) 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. 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. Source: Tufts University. "World's smallest electric motor made from a single molecule." ScienceDaily, 4 Sep Web. 16 Jul

22 Market - Key Technology of 21 st Century The Future Some Recent Headlines (continued) 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) Researchers use nanotech to make cancer 3mm times more detectable (Computerworld 7/9/12) Nanotechnology Catapults Battery Technology Forward, Once Again (Nicholas Brown 11/24/11) How nanotechnology can improve paint and detect structural flaws (Daily Commercial News 3/9/12) How Nanotechnology Can Help Detect Disease Earlier (ScienceDaily 5/22/12) 22

23 Market - Key Technology of 21 st Century The Future of Nanotechnology The Future An Example: Batteries Key technology Alternative energy storage, hybrid vehicles, portable electronic devices Nanoparticle matrices in battery electrodes can drastically increase their ability to store lithium ions, increasing the storage density of the battery. Image credit: Argonne National Laboratory 23

24 EXPOSURES/LOSS SCENARIOS

25 Exposures/Loss Scenarios Nanotechnology Exposures Passive Nano = Decreased Human Health Exposure 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 Source: CRO Briefing - Emerging Risks Initiative Position paper (November 2010) 25

26 Exposures/Loss Scenarios Nano Particles and Health Exposures Active nano particles and health exposure 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. Source: CRO Briefing - Emerging Risks Initiative Position paper (November 2010) 26

27 Exposures/Loss Scenarios Major Risk Categories 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 Nanofilms and lateral nanostructures, e.g., computer and electronics Nanocomposites, e.g., sporting goods or other solid bodies that contain nanoparticles Nanoparticles and nanofibres, e.g., cosmetics, clothing Free particles or nanodispersens, e.g., sprays Greater exposure 27

28 Exposures/Loss Scenarios Major Risk Categories Other Potential Risk Categories Environmental Financial Defense expense 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 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. 28

29 Exposures/Loss Scenarios Health Exposures Active Nano Particles and Health Exposure Source: Nanotechnology Applications, Prospects and Application CRC Study 29

30 Exposures/Loss Scenarios Two Sides of the Issue Nanotechnology : Two Sides of the Issue Neither is a Certainty Nanotechnology in Sunscreens is Safe (American Academy of Dermatology) Mesothelioma linked to Nanotechnology (Woodrow Wilson International Centre for Scholars) 30

31 Exposures/Loss Scenarios Examples Example: Carbon Nanotubes CNT application Industry affected Manufacturing Customer End-of-life Coating Automotive, consumer electronics, textiles, packaging Composite Catalysts Display Drug delivery Energy storage Memory Solar cells Sensors Therapeutics Automotive, aerospace, cons. goods, construction, textiles, packages Energy, automotive Consumer electronics Pharma Consumer electronics, automotive IT Energy IT, pharma Pharma High Exposure Medium Exposure Low Exposure Source: CRO Forum Briefing Nanotechnology November

32 Exposures/Loss Scenarios Value Chain/Life Cycle Nanotechnology commercial value chain / life cycle and related exposure Source: CRO Forum Briefing Nanotechnology November

33 LEGAL AND REGULATORY LANDSCAPE

34 Legal and Regulatory Landscape Current State of Litigation Minimal Litigation To Date 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. Significant Future Litigation Potential 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 34

35 Legal and Regulatory Landscape Regulatory Challenges 1 Too little = Public harm 2 Who is best qualified? Too much = Progress stalled How effective will it be? Multiple agencies involved: coordination is critical 35

36 Legal and Regulatory Landscape Federal Regulation Federal : Who is regulating (educating about) nanotechnology? FDA EPA OSHA NIOSH NTP 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 nanoenabled cosmetics and food ingredients/packaging. 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 Regulates worker safety Part of the Centers for Disease Control Issued guidelines on to address the hazards to workers in a nanotechnology environment 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 36

37 Legal and Regulatory Landscape National Nanotechnology Initiative (NNI) What it is What it does Coordinating arm for various federal agencies that are involved in nanotechnology regulation and research (21 participating agencies). Allocates funds for various federal agencies nanotech activities Shares information, educates, develops 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 37

38 UNDERWRITING AND RISK MANAGEMENT CONSIDERATIONS

39 Underwriting and Risk Management Considerations Insurance Coverage Loss Scenarios Most Likely Possible Examples Health risks Environmental risks New or increased existing risks Workers and consumers Lungs, digestive tract, skin Toxic nanoparticle byproducts, waste or accidentally released Contaminated air, water, and agricultural 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 Environmental Liability Directors and Officers Intellectual Property GL, Products, Product Recall (Umbrella) Medical Malpractice Cyber /Internet Liability Life and Health 39

40 Underwriting and Risk Management Considerations Three Stages of Insurance Coverage Insurance as Enabler Supports the development of new technologies by managing and financing risk Three Stages of Insurance Coverage 1 Early study period Efforts to understand exposure Risks may unknowingly be covered 2 3 Apprehensive phase Mature phase Initial risk knowledge leads to concerns Insurers look to reduce/contain coverage Increased risk knowledge = enhanced understanding, leading to Risk management, customized coverage & other approaches, at reasonable prices Source: R. Blaunstein Unfamiliar Exposure, Insurance Networking News,

41 Underwriting and Risk Management Considerations Key Coverage Issues Standard CGL / Umbrella Timing of Loss Defense Scope of Coverage Latency Exposure Occurrence Trigger Uncertain Court Application Potentially Unlimited Untested - Emerging Nature of Claims All Risk Exclusions Critical 41

42 Underwriting and Risk Management Considerations Insurance Coverage - Exclusions Nanotechnology Exclusions Continental Western Insurance Group ISO Pollution Exclusion ISO Classifications 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. Probably applies to nano-pollution, but not court tested in a nano-case yet 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 42

43 Underwriting and Risk Management Considerations Risk Management Considerations Nanotechnology Inherent Nature + Rapid Growth + Constant Evolution + Immature Legal Environment + Coverage Uncertainty The Nanotechnology Underwriting Challenge 43

44 Underwriting and Risk Management Considerations Risk Management Framework International Risk Governance Council 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 nanoengineered 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 Source: CRO Forum Briefing Nanotechnology November 2010; International Risk Governance Council White Paper on Nanotechnology 44

45 Underwriting and Risk Management Considerations Fundamental Risk Assessment Steps 1 Hazard Asses the specific engineered nanomaterial based on the use and the scientific /expert analysis of hazard 2 Industry Determine the specific industries and industry segments that are exposed based on how the nanomaterial is used 3 Exposure Asses the exposure throughout the entire life cycle of the product 4 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 Source: CRO Forum Briefing Nanotechnology November

46 Underwriting and Risk Management Considerations Risk Management Considerations 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

47 Underwriting and Risk Management Considerations Nanotechnology In Perspective Nanotechnology: Tremendous Benefits for Society and the Economy Some Examples Workers Compensation and Employers Liability Life and Health Environmental Liability Auto Property Improved respiratory or other safety equipment Enhanced and new forms of treatments for life altering diseases and injuries Nanoparticles may be used to reduce environmental risks decontaminate chemically contaminated soil or water. Improved materials - make vehicles more energy efficient, durable and safer Damage resistant building material (steel, concrete, glass, etc.) Wireless monitoring of structures early detection of defects Opportunities for insurers, if risks understood 47

48 Summing Up Nanotechnology An area of enormous economic significance 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. 48

49 Summing Up Nanotechnology The bottom line 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. Understand the Risks, Develop solutions Not If, But How 49

50 More Information Client Resources Emerging Exposure Newsletter 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 Connect Extranet Site 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 Client Visit Discuss specific emerging exposures Your company s Munich Re Client Manager is your first point of contact to discuss all of these services. 50

51 THANK YOU FOR ATTENDING

52 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.