8-Misc: Biotechnology risk perception in liability insurance

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TITLE:  Biotechnology risk perception in liability insurance
SOURCE: Center for International Development at Harvard University (CID)
ÊÊÊÊÊÊÊÊby Thomas Epprecht
        http://www.cid.harvard.edu/cidbiotech/comments/comments86.htm
DATE:   November 2000

------------------ archive: http://www.gene.ch/genet.html ------------------


Biotechnology risk perception in liability insurance

As a rule, biotechnology is currently insured under the many existing 
liability insurance policies of the insurance industryÕs large industrial 
clients. Insurers are, however, facing a global challenge from rapid 
technological innovation in this field. From a scientific point of view, 
biotechnology has not brought about an accumulation of losses. Positive as 
this may be, from the insurerÕs point of view it translates into a lack of 
clear loss experience, an important requirement for traditional risk 
transfer. For this reason, the insurance industry finds new and often 
controversial technologies with no loss history difficult to evaluate and 
to measure.

In fact, the less influence insurers are able to exert on the risk they are 
asked to cover, the more they find themselves in the company of other 
affected parties who have no voice in the matter. The risk profile of a new 
and still controversial technology such as biotechnology is determined more 
by uneasy dissent in terms of risk perception than by agreed consent among 
stakeholders regarding the resultant opportunities. The question, 
therefore, is not whether biotechnology is dangerous, but whether it is 
perceived as being dangerous.

The accelerated societal response to biotechnology and the lack of loss 
history together create a fundamentally new risk profile. Interest groups 
are calling for mechanisms to reconcile conflicting interests, arguing that 
those affected by adverse side effects of the technology should be 
compensated. This translates into tighter liability regulations, which are 
increasingly based on anticipated or potential losses, rather than on any 
losses actually sustained.

When assessing the risks and the possible exposure of biotech companies, 
professional risk carriers have begun to pay more attention to the 
psychological and societal aspects of the comprehensive risk landscape. 
Even though they may well seek a sustainable balance among stakeholders and 
their interest, they cannot be expected to grant compensation for an 
alteration in this balance.

Many lawmakers believe that liability regulations and the imposition of 
statutory requirements for insurance cover are the key to settling such 
conflicts of interest. On closer analysis, this seems undesirable. From an 
economic viewpoint, for instance, it binds increasing amounts of investment 
capital. But it also turns the very principle of insurance upside down, by 
blocking new channels of action rather than opening them up. Moreover, it 
does not actually contribute to safety, since those receiving automatic 
cover tend to accept greater risks than those who are obliged to compete 
for it.

Meanwhile, liability insurers will avoid being used as carriers of 
politically undesired risks, striving instead for a clear delimitation, 
excluding banned risks which must be subject to criminal law. Strict 
liability is not the appropriate way to draw the line between risks which 
are politically acceptable or even desirable, and those which are not. Any 
liability-prone activity requires some form of license to innovate, and 
should be subject to strict regulatory control, preferably on a case by 
case basis, especially where controversial technical innovation is 
concerned.

In the meantime, interest groups are increasingly putting pressure on the 
biotech industry and its insurers through class action lawsuits. This 
development would indicate that the possibility of legal action is 
primarily a question of societal acceptance and less of the risk actually 
being taken. A rapidly growing problem here is the cost of defending 
unjustified claims. The insurance industry believes, however, it is not 
their task to satisfy claims which arise from a change in societal values. 
This risk is surely a business risk falling to the manufacturer.

If an insurer should decide to refuse coverage of a given risk in 
biotechnology, it will be because he considers the risk economically 
uninteresting, or because he is unable to calculate the exposure involved. 
In this regard, uninsurable risks need not necessarily be "too high" or 
"too dangerous". Insurability does not depend on the size of a potential 
loss, but rather on its known probability, on the resources available, on 
possibilities of spreading the risk, and on a fair, risk-based premium. 
These economic criteria traditionally prompt an insurer to accept a risk.

An important completion should be made in terms of the societal context: 
Since insurers also take on responsibility when they absorb risk, they 
cannot afford just to stand aside and watch. In the medium term, 
biotechnology will remain a public issue. The insurance industry therefore 
faces two fundamental tasks: selecting risk and influencing risk. In other 
words, risk management and issue management. Traditional risk management is 
based on the identification and the technical assessment of risks. Issue 
management involves the early recognition of signals from a sensitive 
public and an analysis of the likely effects on oneÕs own company and on 
other stakeholders involved. The onus would now appear to be on responding 
to societyÕs changing values and contributing to how these will evolve.

Reference

Epprecht, T. (1998) Genetic engineering and liability insurance. The Power 
of public perception. SwissRe, Zurich. http://www.swissre.com/e/
publications/publications/flyers1/genetic.html

Epprecht, T. (2000) Global Markets, Phantom Risks, and Globalised Losses: A 
Challenge for the Insurance Industry in the Swiss Political Science Review 
vol. 6/3 (forthcoming) http://www.ib.ethz.ch/spsr/ (debates)

CONTACT:
Thomas Epprecht, Ph.D.
Thomas_Epprecht@swissre.com
Risk Expert
Swiss Reinsurance Company
Zurich, Switzerland




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