1. BEST’S REV
EmergingRisk:E-cigarettes
L
ooming risks arising from e-cigarettes
are sending smoke signals across the
insurance industry.
Smoking has always been stigmatized
as risky business due to the proven health
effects linked to the addictive habit.In fact,
theAmerican Cancer Society says tobacco
use is responsible for nearly one in five
deaths in the United States,and smoking
cigarettes kills moreAmericans than alcohol,
car accidents,suicide,AIDS,homicide and
illegal drugs combined.
That’s had a huge impact on insurers
over the years.However,the blow is
softening as the number of cigarette users
continues to decline.
In 2007,a new form of smoking entered the U.S.
market,with advertisers touting e-cigarettes,which turn
nicotine into a vaporized liquid,as“a healthy alternative
to actual cigarettes.”But the tobacco-free electronic
inhalers designed to help curb the smoking habit come
with some risks of their own,and that has insurers facing
the potential impact those exposures may have on their
industry.
In its 2014 SONAR report,Swiss Re named e-cigarettes,
which consist of a rechargeable lithium-ion battery,a
cartridge and an LED that lights up when a user puffs
on the device,as one of 26 new emerging risks for
insurers.The SONAR process uses Swiss Re’s internal
risk management expertise to identify
new,emerging risks,along with other
sources like the Chief Risk Officer Forums’
Emerging Risk Initiative.
With the growing popularity of the
nicotine delivery“vaping”devices,“the
question now is,‘Can you insure this new
form of smoking or will it be treated in a
similar fashion as traditional cigarettes?’”
said Reto Schneider,head of emerging risk
management at Swiss Re.
A number of coverage lines could feel
the direct effects of e-cigarettes.
“On the life side,it’s mortality and how
many years will your life be shortened by
e-cigarettes,”Schneider said.“With health,
inhaling something is the second most intimate contact
you can have with a foreign substance,but there may
be some inherent medical dangers in these products.
And on the casualty side,it’s product liability,especially
given the unknowns of where many of these products
are coming from.” Today,China remains the primary
manufacturer of e-cigarettes globally,and the products
are sold under several hundred different brands in the
United States through retail stores or online.
Product malfunctions,which have led to several
bodily injury/property damage claims,“were from
the earlier generation of e-cigarettes,”said Sarkis
Kaladzhyan,president of Calco Commercial Insurance
Services,a program broker and risk manager to the
vapor/e-cigarette industry.“If the end user does not
Lori Chordas is a senior associate editor. She can be reached at
lori.chordas@ambest.com
Key Points
The Situation: Use of
e-cigarettes is on the rise.
The Back Story: Product
malfunction is one of the
risks; however, long-term
health effects remain
unknown.
The Trend: Coverages,
such as product recall,
property, transit and cyber,
are vital for e-cigarette
manufacturers, distributors
and retailers.
Smoke SignalsCarriers are studying the possible risks of e-cigarettes.
by Lori Chordas
Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic
form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer
to our Terms of Use available at the A.M. Best Company website: www.ambest.com/terms.

2. 37BEST’S REV
follow the manufacturer’s warnings and
instructions,such misuse can cause these
products to burst,catch on fire or burn.
However,considering the hundreds of
millions of devices in the marketplace today,
the small number of incidents which have
occurred validate that the safety and efficacy
of vapor products are on par or superior to
other consumer products.”
Some cases,however have arisen over the
years,including the 2014 death of a 62-year-
old U.K.man after his e-cigarette exploded
and ignited oxygen equipment he was using.
In the United States,the U.S.Food and Drug
Administration received reports of more than
50 adverse events relating to e-cigarettes,
including burns and nicotine toxicity,
between March 2013 and March 2014.
Potential exposures don’t end there.
“E-cigarettes and their ingredients are largely
unregulated,do not contain any health
warnings and may contain ingredients known
to be toxic to humans,”said Markus Kalin,
head of casualty engineering at XL Catlin.
The jury is still out on the severity of that
toxicity.E-cigarettes,which were developed
by a Chinese pharmacist in 2003,“haven’t
been around long enough yet to understand
what long-term health effects they could
pose,”Schneider said.
In 2009,the FDA discovered that a small number of
e-cigarette samples contain“detectable levels of known
carcinogens and toxic chemicals to which users could
potentially be exposed.”Among those was a small trace of
diethylene glycol,an ingredient used in antifreeze.
E-liquids,the key ingredients in e-cigarettes,could
also add fuel to fire,Schneider said.According to Swiss
Re’s SONAR report,when the neurotoxins like nicotine
are absorbed through the skin or ingested,they can
cause seizures,vomiting or even death.In 2014,a
Fort Plain,N.Y.,toddler died after drinking from what
is thought to have been an e-cigarette glass bottle
containing liquid nicotine.
“[E-liquids] also represent a serious workplace hazard
for those preparing and selling them if proper precautions
are not taken,such as wearing gloves while mixing
e-liquids,”according to the report.
While it’s unclear what impact e-cigarettes’ingredients
may have,not everyone agrees with those concerns.“The
two ingredients that serve as the base of the e-liquid are
propylene glycol,which is an ingredient in InfantsTylenol,
and vegetable glycerin,which is used in food applications,”
Kaladzhyan said.“They serve as a delivery platform for the
nicotine much like other nicotine therapies such as gums,
lozenges or patches available over the country without
a prescription.Tar kills people,not nicotine,propylene
glycol or vegetable glycerin.”
Morgan Cole,a commercial broker atVeracity
Insurance Solutions,said when his company
underwrites an e-cigarette policy“we ask for
product labels to ensure that the ingredients
contain no harmful stimulants,as well as
proper warning labels.”
Seeking Cover
Pollution and property policies should
be part of e-cigarette manufacturers’
and retailers’must-have list of insurance
coverages,Cole said.
“It’s very difficult to find insurance for
transportation of high-value products like
this.However,we have the ability to offer
property coverage that includes transit,
covering a temporary transport between
stores or imported products being shipped to
a warehouse,for instance,”Cole said.“Carriers
decide if they’ll provide theft coverage after
assessing what protections companies have in
place,like central alarm systems.”
E-cigarette manufacturers and retailers
should also consider cyber liability as a
coverage option,“especially because most
e-cigarette products are now sold online,”
Cole said.
“Also,some retailers have requirements for
their manufacturers to have product recall
coverage,”Cole said.“Sending out notifications
about third-party purchases after a recall,replacing
products and the costs that come from that can be
quite substantial and harmful to their business and their
reputation.”
E-cigarette advertising,which remains unregulated,is
on the rise.According to a study by research institute RTI
International,ad spending rose from $6.4 million in 2011
to more than $18 million the following year.
Potential liabilities arising from the advertising of
e-cigarettes,and the absence or misinformation of
potential health effects in those ads,could present
some problems“down the road,especially without the
existence of a warning label,”Cole said.
Puffing Out Problems
Is the insurance industry ready for potential liabilities
that may arise from e-cigarettes?
At XL Catlin,“we’re constantly reviewing the
developments of this emerging risk and take measures
to underwrite appropriately,”Kalin said.Although the
company,which underwrites insurance and reinsurance
for industrial,commercial and professional firms,
insurers and other enterprises globally,doesn’t have a
product specifically designed for e-cigarettes,he said,
“underwriters may consider it as part of an overall
products risk submission.”
XL Catlin has amended itsTechnical Underwriting
Regulations with a specific chapter on how to underwrite
e-cigarettes,Kalin said.“These regulations describe which
E-cigarette
manufacturers
and retailers
should consider
cyber liability as a
coverage option,
“especially
because most
e-cigarette
products are
now sold online.”
Morgan Cole,
Veracity Insurance
Solutions

3. 38 BEST’S REV
EmergingRisk:E-cigarettes
information is required to assess the liability
risks of e-cigarettes,”Kalin said.“Depending
on the available information and resulting
assessment,the exclusion of e-cigarettes is
an option.”
“As complex an industry as it is,
underwriting e-cigarette insurance is fairly
straightforward,”Cole said.“We use a detailed
e-cigarette application to identify who is
actually manufacturing the electronic devices
and what ingredients are used.Once we get
that information,our underwriters know
and understand those manufacturers and
their exposures,which help us to determine
premiums.”
“Reinsurers may not immediately see
problems,but on the direct side the risk is
often mitigated by an exclusion,”Schneider
said.“And because you order these products
over the Internet,the question is,‘Who is your
OEM [original equipment manufacturer],who
is the insured party and who shall be sued in
case bodily injuries will occur?’”
Life writers are starting to examine what
effects e-cigarettes could have on their sector.
Currently,Prudential Insurance Co.is one—if
not the only—carrier that allows nonsmoker
rates for e-cigarette users who use the products and have
not smoked conventional cigarettes for at least 12 months.
As for its peers,almost 90% of 151 life underwriters
said they consider an e-cigarette user a smoker,according
to a 2014 MunichAmerican Reassurance Co.survey.
Heating Up
Despite a very competitive market environment,“the
insurance industry seems to still have rather little appetite
to provide insurance cover for e-cigarettes,”Schneider said.
“One of the things that makes us different from
many other providers is that we don’t have a health
hazard exclusion on our policies,”Veracity Insurance’s
Cole said.Health hazard exclusions typically exclude
bodily injury resulting from tobacco,tobacco smoke or
by-products of tobacco use or consumption as well as
any e-cigarette,electronic smoking device,and nicotine
vaporizers,atomizers or cartomizers,he said.The FDA
defines an e-cigarette as a tobacco product,“but under
our policy,we have carved out e-cigarettes and e-liquids
from the tobacco exclusion,”Cole added.
So far,the industry has not seen significant claims
activity stemming from e-cigarettes,
Schneider said.“However,if masses of
consumers are injured and after 10 to
20 years people develop health-related
symptoms,then it could become a much
bigger issue for the sector.”
“The role model for possible exposures
was tobacco,”Schneider said.“Tobacco
companies were aware of health risks
associated with smoking but some hid
relevant studies and this triggered liabilities.If
the industry again withholds findings about
e-cigarettes that would become a similar issue.”
Rising From the Ashes
While the big question remains,whether
outcry about potential e-cigarette-related
health problems is a looming concern or
simply smoke and mirrors,one thing is for
certain.Use of the devices continues to rise.
In fact,Research and Markets projects U.S.
e-cigarette sales will grow 24.2% annually
through 2018.
“The problem is that younger consumers
are being heavily targeted by advertisements
and the lure of flavor additives,like
strawberry and chocolate,in e-cigarettes,”
Schneider said.According to the CDC,the
number of youths who never smoked a
cigarette but used e-cigarettes rose from
79,000 in 2011 to 263,000 in 2013.
But Kaladzhyan believes there’s“much
propaganda”to those claims.“The CDC has
misrepresented the facts on several occasions
and failed to produce evidence that we have
a new generation of youth who vape every
day.”About 40 states currently forbid e-cigarette sales to
those under 18.
“The big challenge is that e-cigarettes remain an
unregulated industry,”Cole said.However,some countries
are taking their own stance.Nations like Brazil and
Singapore have banned the devices and,beginning in
mid-2016,the European Union will begin prohibiting the
advertising of e-cigarettes and require the products to be
childproof,carry safety warnings and contain no more than
20 mg/ml of e-liquid.Even theWorld Health Organization
recently weighed in,calling on governments to ban
e-cigarette products indoors and in public places until more
research is released on secondhand vapor health effects.
In 2014,the FDA proposed to extend its oversight of
the tobacco industry to include additional products that
meet the legal definition of a tobacco product,such as
vaporized cigarettes.If the rules become final,sales to
minors will be prohibited,marketing of new tobacco
products will be allowed only with FDA review and
e-cigarette manufacturers will be required to register with
the FDA and report product and ingredient listings.
“If e-cigarettes are proven to be more harmful to
health than presumed today,respiratory
diseases or other health problems may
increase and trigger liability claims similar
to tobacco claims in the past,”according to
Swiss Re’s SONAR report.Also,carriers may
see increased mortality among e-cigarette
smokers,the report adds.
E-cigarettes are more than a passing fad,
Schneider said.“They’re here to stay.” BR
“E-cigarettes and
their ingredients
are largely
unregulated, do
not contain any
health warnings
and may contain
ingredients
known to be
toxic to humans.”
Markus Kalin,
XL Catlin
Learn More
XL Group plc
A.M. Best Company # 052919
Distribution: Agents and brokers
For ratings and other financial
strength information visit
www.ambest.com