Emerging risks evolve through three phases: emerging interest, emerging damage and emerging litigation.
During the “emerging interest” phase, scientists, regulators or legal scholars first flag the potential for the risk to harm humans or the environment and publish their findings. In some cases, these initial studies seed larger scientific literatures that investigate the harms in depth and examine the pathways of exposure, causing the risk to enter the “emerging damage” phase.
Executive SummaryOut of hundreds of risks being investigated by scientists, most are likely to be safe and few will ever see litigation. That means that reacting to these risks at an early “emerging interest” stage by taking underwriting actions has a big downside, Praedicat executives advise. Here, they also describe the too-late “emerging litigation” stage and the just-right “emerging damages” stage, highlighting one particular chemical compound in that middle stage—melamine—explaining that carriers now have an opportunity to take actions to manage and price the risk while still writing it.
The progression to this “emerging damage” phase is an indicator of elevated litigation risk. The scientific work done during this phase implicitly contains the blueprints for any future litigation but also inevitably reveals the gaps that must be filled before litigation can begin. Since these gaps depend on scientific findings that emerge only infrequently, emerging damage risks are unlikely to graduate to the third phase. However, in a small number of cases, the scientific and regulatory literature closes the gap, and the “emerging litigation” phase begins.
Harnessing the data available during each of the emerging risk phases is the task of any proactive emerging risk function. In this article, we describe the evolution of an emerging damage agent: melamine.
Too frequently in casualty insurance, risks only begin to be managed in the emerging litigation phase, which is too late. The exposure was not known at the time of underwriting, aggregations weren’t managed, and the risk was not priced, potentially resulting in catastrophic consequences.
Emerging interest risks, on the other hand, can be identified by “horizon scanning.” But out of hundreds of risks being investigated by scientists, most are likely to be safe and few will ever see litigation. Reacting by taking underwriting actions at the emerging interest stage has a big downside in that it could quickly appear that nothing is safe to write.
- In February 2019, the International Agency for Research on Cancer (IARC) designated melamine as “possibly carcinogenic” due to rats developing bladder cancer when exposed to melamine.
- In July 2019, German consumer organization Stiftung Warentest found that when reusable melamine-bamboo cups are used for hot beverages, both formaldehyde and melamine leach into the liquid at levels exceeding regulatory standards.
- In 2020, the Swedish-based organization Chemsec added melamine to its “Substitute It Now” list, referring to it as the “next BPA.”
Emerging damage is the Goldilocks phase. Because scientists and regulators are beginning to investigate where and whether damage may have occurred, carriers have an opportunity to take actions to manage and price the risk while still writing it.
Although melamine plastics have been used since the mid-20th century, it took until 2008 for melamine to enter the emerging interest phase when a shocking increase in incidence of kidney disease among children in China was linked to melamine. Because melamine registers as protein in regulatory testing, some milk suppliers adulterated their powdered milk products with melamine so that their products could pass nutritional standards tests. Tens of thousands of children were hospitalized and six died. This incident firmly established that high amounts of melamine could cause serious kidney injury, but exposure to such high amounts outside of deliberate contamination is likely impossible.
The intervening years have been kind to melamine’s commercial fortunes. Melamine plastics like Formica are made by combining the chemical called melamine with formaldehyde, often combined with other materials to give the final product different properties. Melamine plastic is also familiar for its use in tableware, such as plastic cups and plates. Under normal conditions, melamine plastic should not expose consumers either to the chemical melamine or formaldehyde beyond trace amounts.
Melamine tableware has seen a resurgence in use the last few years because of the marketing boost of being labeled as “BPA-free” since it does not include the endocrine-disrupting chemical bisphenol A. Recently, bamboo fibers have been added to melamine to create reusable bamboo cups, which are marketed as both BPA-free and eco-friendly. In addition, melamine plastic’s versatility has led to a diverse and growing set of uses including textiles, furniture and building products such as countertops and wall paneling. The chemical is also used in adhesives and insulation. Magic foam erasers, which have become popular cleaning products, are made from melamine foam.
The scientific literature has not been as kind to melamine. It’s been investigated in recent years for a growing number of issues including neurological and cognitive impacts, liver damage, and endocrine disruption. While these literatures are immature, the scientific trends for several of these literatures are concerning, and levels of exposure considered safe for kidney damage may not be for other slow-developing injuries. Beyond kidney damage, neurological damage and endocrine disruption, in February 2019, the International Agency for Research on Cancer (IARC) designated melamine as “possibly carcinogenic” due to rats developing bladder cancer when exposed to melamine.
Scientists are also investigating melamine exposure in an increasing number of everyday environments, including recent studies examining melamine in drinking water, in household dust due to building products and in the dust of childcare facilities from melamine’s use in children’s nap mats.
These developments suffice to qualify melamine as an emerging damage risk.
The situation continues to get worse. In July 2019, the German consumer organization Stiftung Warentest (SW) published a report on reusable melamine-bamboo cups. While labeled as eco-friendly, the resulting cups are not biodegradable. SW found that when the cups are used for hot beverages, both formaldehyde and melamine leach into the liquid at levels that exceed regulatory standards and increase with the number of uses. The bamboo fibers seem to weaken the chemical bonds within the melamine plastic.
Then in 2020, the Swedish-based organization Chemsec added melamine to its SIN (Substitute It Now) list, referring to it as the “next BPA.” The reasons cited for adding it included the health effects, but also because melamine is a type of chemical called PMT: persistent, mobile and toxic.
- Persistent means the chemical does not break down quickly in the environment.
- Mobile suggests the chemical is water soluble and therefore difficult to remove by water treatment facilities.
- Toxic. We know what toxic means.
PMT chemicals are drawing increased regulatory and legal attention globally. In terms of litigation, PMT agents can lead to water cleanup lawsuits, like the litigation that is currently spreading over the perfluorinated chemicals. Since BPA is neither persistent nor water soluble, Chemsec’s “next BPA” may be worse than the original.
There likely won’t be litigation over melamine, just as there likely won’t over any emerging damage agents. The scientific literatures for bodily injury remain immature, and outside kidney damage for high exposures, specific harms have yet to be identified. However, with this explosion of scientific and regulatory investigation of melamine, we estimate that the probability of litigation over melamine is now larger than 1 percent and continues to grow. With its large industrial footprint and its potential to be involved in different kinds of litigation ranging from toxic torts to building products to water remediation, ignoring melamine even at 1 percent probability is unwise.
As with other emerging damage risks we have identified, we recommend that insurers use the information revealed by the litigation blueprint embodied in the scientific literature to underwrite and cover melamine as a named peril outside standard coverage and manage aggregations.