October 16, 2009 by David Taylor

Richard Owen from the University of Westminster together with their colleagues, Trevor Maynard & David Baxter from the Emerging Risks Team at Lloyds, and Mike Depledge from the Peninsula Medical School have published this thought provoking article in the Viewpoint section of Environmental Science and Technology.

It discusses the dilemma faced by a society that wishes to encourage rapid innovation but simultaneously requires that these innovations do not pose any unacceptable risk to human beings or the environment. The key problem is that the risks associated with new innovations are often not immediately apparent and the conventional regulatory procedures are evidence driven and thus relatively slow to react.

Historically this was of little consequence since if things did go wrong, any adverse impacts were likely to be local, or at worst regional, and in most cases reversible. However starting with the atomic weapons testing of the 1940s we have demonstrated that our species now has the ability to contaminate and potentially damage the whole global environment. Since the pace of technological innovation is increasing the potential for adverse consequences is now accelerating.

The authors conclude that conventional regulation, although necessary, is always going to be inadequate to deal with this and suggest that two areas need to be further developed; better foresight (horizon scanning) subsequently coupled to new methods of risk governance.

The future cannot, of course, be predicted even by Derren Brown and the progress of human society can be expected to continue to suffer periodic discontinuities as a result of unpredictable “Black Swan” events. Nonetheless it is clear that the application of improved horizon scanning techniques can avoid individuals and businesses falling into elephant traps that are frequently staring them in the face. The article provides useful information on the way in which horizon scanning techniques are improving and being more closely linked into iterative and socially framed risk analysis. At wca we are involved in work along these lines with our clients, subsequently using multi criteria decision analysis tools to prioritise the range of risks and produce a practical risk management action plan.

The last part of the article introduces a novel concept in risk governance: that of using insurance as a driver for the innovator to reduce the uncertainties in estimates of human or environmental impact in advance of any regulatory requirements.

Society wants responsible innovators who will do all the necessary work to assess the implications of their product on human health and the environment. The immediate problem is the discontinuity, in advance of any regulation, between what needs to be done to satisfy the innovator compared to what needs to be done to satisfy other stakeholders. The article suggests that this can be addressed by the insurer who will assess the information available (already sufficient to satisfy the producer) compared to what society might require. The insurer then prices the overall residual risk and identifies the premium that is needed. A feedback loop would ensure that the innovator would gain a better understanding of what the key risk issues are for society, enabling further work to be done in those areas leading to a reduction in the premium.

This is a fascinating and novel idea but could potentially have very serious impacts on innovation.

We always need to bear in mind that the word “innovation” consists of two concepts: “invention” (or research) and “development”. There is no shortage of invention as a glance at the patent literature will quickly reveal, however, turning these “novel ideas” into marketable products is a different matter. Although Emerson is quoted as saying “Build a better mousetrap and the world will beat a path to your door” this is conditional on the world actually needing a better mousetrap and being prepared to pay a higher price than for the existing solution.

Many people believe that “market need” is the key driver for product development, but although this is a necessary condition it is by itself insufficient. The fact that society has a need for a product does not mean that this will become available, even if the relevant invention already exists. The key parameter that determines if an invention becomes a product is cost.

In simple terms if the cost of development cannot be recovered from the first few years of eventual product sales, then the innovation will not occur. For example the development of new biocides in the European Union has effectively stopped since the approval of the Biocidal Products Directive in 1998 which dramatically increased development costs for products with relatively low sales volumes and margins.

This proposal would significantly increase the cost of development and is effectively a tax on innovation since the innovator either pays the premium or reduces the premium by paying for further research. Furthermore this “tax” is set by a third party in a field where there is little risk experience and thus the likelihood is that premiums will initially be set to include a very high degree of precaution.

The authors recognise these problems to some extent, but believe that they will eventually be self correcting. However, the difficulty here is that the impact on innovation is likely to be invisible. Decisions on commercialisation of products are taken within a business and without reference to the wider stakeholder community. Increasing innovation costs simply raises the hurdle that any new product has to clear, thus reducing the number of products coming to market. This is one of the reasons why innovation in the pharmaceutical industry has been declining over the last ten years.

This proposal also has the potential to exacerbate another major problem in innovation & development. Commercialisation decisions are usually made on the basis of the immediate return on the innovative product. However, the actual potential of many paradigm shifting innovations did not become apparent for many years. The transistor, silicon chip and computer are obvious examples. If new products are still-born because of additional, possibly unnecessary, costs the chances of missing major innovative technology increases.