Brighter outlook for life sciences sector
The global life sciences market may not be easy for multinational insurance buyers but most are able to get the cover they need for key risks, writes Ben Norris
There are signs that new capacity in the life sciences market is beginning to flatten rate increases while expanding options, experts say. A similar story seems to be playing out for risk managers at pharmaceuticals with US exposures, where recent ligation, particular over the opioid epidemic, saw the market harden, but again things are starting to look a bit brighter for buyers.
Insurers, brokers and alternative risk transfer experts also say that Covid-19 hasn’t had as big an impact on the life sciences market as some might think, with the sector better prepared for the pandemic than many others and one of the few to thrive financially.
Walker Taylor IV, senior managing director of AJ Gallagher’s life sciences practice, says broadly speaking, the life sciences insurance market is “open and stable” for multinationals, with “rates flattening for most lines of coverage after two years of sharp increases”.
“There is ample capacity and new players are still entering this market segment, which is keeping rates flat. We are even seeing rate decreases in some areas,” the broker explains. “Some recent communicable disease and opioid exclusions are starting to loosen as capacity continues to expand.”
Carriers are increasing their limits for pharmaceuticals, continues Taylor. “Where they used to offer a maximum of $5m primary, they may now offer up to $15m or $20m for good risks, with excess capacity readily available for attractive risks,” he says.
But Taylor notes that underwriters are carefully examining life sciences companies with poor loss history, as well as those involved in higher-risk activities or domiciled in higher-risk locations. “Marine cargo, cyber, management liability and certain property risks, depending on their exposure to natural catastrophe perils, can be more challenging. For instance, cyber coverages are being stripped out of packages and require standalone policies,” he says.
Ana Maria Insua, underwriting manager for life sciences in France at AXA XL, agrees that, like most areas of the commercial insurance market, the life sciences sector has seen an upward pricing trend over the last few year with tightened terms and conditions.
She says buyers can still get capacity but things remain more tricky. “Capacity is still available but most carriers are showing increased selectivity, especially for new programmes,” says the insurer.
Global life sciences product leader at Beazley Marc Amis says the market was soft for many years and suggests rates need to go higher still. But life sciences carriers are “dialling down” their limits or terms, he adds. “That said, most carriers are still willing to provide up to $10m coverage limit in many instances,” says Amis.
He and Insua both note that carriers are tending to exclude products containing cannabis, including cannabidiol and tetrahydrocannabinol. Amis also explains that carriers have been putting exclusions for N-Nitrosodimethylamine (NDMA) in polices related to nutraceuticals and pharmaceuticals. NDMA is a by-product found in the manufacturing process of nutraceuticals and pharmaceuticals that potentially causes cancer.
Neil Campbell, senior consultant in Strategic Risk Solutions’ risk consulting team and former risk manager, says his life sciences clients report a range of different markets for various risks.
He says the wider hard market has restricted capacity and increased rates for nat cat risk. D&O cover been a challenge after some big claims at the smaller end of the life sciences industry, explains Campbell. “D&O rates have gone up across all industries, and life sciences have certainly been at the worst end of that spectrum,” he says.
The former head of JLT’s global life science practice adds that cyber has become as tough for pharmaceuticals as it has for other sectors, with some of his clients facing “huge” premium increases and capacity reductions alongside much higher retentions.
Campbell, who was a risk manager at Zeneca and AstraZeneca for more than ten years, says the product liability class has long been tough for the life sciences sector, so this area hasn’t been as adversely affected by the recent wider hard market as some others. “Market conditions haven’t really changed that much compared to how the hard market might have affected other industries, because you were starting from different positions,” he says.
And Campbell doesn’t think that the life sciences liability market has been hugely impacted by Covid-19, or that other coverages have been hit that hard by the pandemic. “Clinical trials, which is a very important and often legally required coverage, has not really been adversely affected. There have been a lot of trials fast-tracked on vaccines but I haven’t heard much about disruption of trials, or inability of companies to buy insurance. So I don’t think the liability market has really changed through Covid,” he says.
“The whole vaccine push meant many pharmaceuticals were doing a lot better in terms of revenues. The higher valuations and dependence on suppliers will certainly have tested market capacity where product revenues were increasing substantially. A lot of manufacturing is outsourced, so I imagine there has been a shrinking of CBI appetite. But at the end of the day, I wouldn’t say there has been anything remarkable from a first-party manufacturing or even a transportation standpoint from Covid-19,” he adds.
Gallagher’s Taylor explains that insurance costs are now slightly higher for Covid-19 clinical trials, with underwriting focusing on protocols, informed consent, stage and country location. But he says there is market capacity.
AXA XL’s Insua says that while clinical trials can be covered under general liability policies, there are sometimes shortcomings with this approach. “If a claim not related to the clinical trial occurs, this could exhaust the limits of that general liability policy, potentially leaving the pharmaceutical company exposed,” she explains.
Insua adds that many life sciences companies saw a strong or sharp increase in sales during the pandemic, which had a knock-on effect on coverages. And the pandemic has impacted employers liability claims from life sciences firms, says Taylor.
“Covid-19 has definitely had an impact on management liability, clinical trial enrolments, workers comp litigation for employees, and new employers liability claims within workers comp policies, particularly related to healthcare or pharma employers, where employers liability claims were extremely rare before Covid,” he says.
Another big risk facing pharmaceuticals is US litigation and the recent focus on widespread misuse of prescription and non-prescription opioid drugs. Several US states, counties and cities have brought lawsuits against pharmaceutical manufacturers, distributors and retail pharmacies for their alleged contribution to the opioids epidemic.
Taylor says this litigation has definitely impacted the insurance market but things are beginning to look a bit better for buyers. “Exclusions are common for opioids but there is new capacity to underwrite new risks. With the increase in capacity and more certainty based on litigation settlements from past acts, underwriters are willing to have a conversation and provide capacity for well-controlled opioid risks,” he says.
Insua says Australia seems to be heading in a similar direction with opioid litigation, which could lead to claims. But with opioids more tightly regulated in Europe, the phenomenon hasn’t crossed over to this side of the Atlantic. “It has however become more difficult for clients to find coverage for these types of products,” says the insurer.
Beazley’s Amis says there has also been a fair amount of recent litigation in the US around Continuous Positive Airway Pressure machines, and allegations that their tubing can cause cancer. “This of course has an effect on the component parts manufacturers and electronics manufacturers as well. And following the high-profile opioid litigation and settlements, many carriers will be monitoring these particular exposures carefully,” he says.
Taylor adds that it is now difficult, if not impossible, for life sciences companies, like most others, to obtain coverage in Russia and Ukraine, not least with marine cargo sanctions in that region.
“Businesses with activity in those countries should pay close attention to the performance-delay coverage carve-backs and war exclusions, which may apply if a company’s failure to act, or take action, is the reason for the delay in service or performance,” he advises.
SRS’s Campbell, who is an expert in corporate risk financing and alternative risk transfer strategies for large, global companies, says many life sciences firms are now looking to make better use of their captives, with a wider range of risks being considered. But he believes many aren’t utilising their captive as well as they could. In particular, he makes the case for using structured reinsurance to ensure captives add more value.
“The life sciences industry is fairly mature in terms of captives. They have well-capitalised captives that have often been operational for years, but I think many aren’t using captives to the full extent they could be used,” says Campbell. “During the long soft market, captives were used tactically, sometime not even tactically, simply to manage a retention on a monoline placement. Now, companies are trying to remember why they set up the captive, what can they do, and how can they add value to the corporation.”
Campbell explains that life sciences companies are now looking to bring more lines of business into their captives and are even focusing on difficult risks such as cyber, D&O Side-B and Side-C, and trade credit.
“A lot of my clients are also now looking at employment practices liability, fiduciary and crime terrorism, which are lines that generally haven’t come into the captive because they are seen as low frequency and potentially high severity. But there is no reason why low-frequency, high-severity risks should not be part of the captive’s portfolio, given that they actually enhance the diversification value,” Campbell continues.
And he says many clients are either using structured reinsurance or are looking at this option to enhance their captive’s ability to take risk on a gross basis and then manage the unwanted volatility.
“So, with structured reinsurance you can start to think about how you can buy reinsurance from the market a little differently. You can control and can redeploy capacity from lower down where the market is still inefficiently priced, and you can extract the diversification value of that portfolio, which otherwise you are giving to the insurance market if you buy on a monoline basis,” says the captive expert.