Munich Re addresses non-damage BI risks for pharma industry

The new cover was released on a worldwide basis last June and provides companies with protection against BI where no property loss has occurred. Cedents can cover the financial fallout of a supply chain failure caused by a range of issues, including regulatory non-compliance. According to Munich Re, financial pressures and the continued drive for cost optimisation have resulted in significant changes to pharmaceutical companies' manufacturing business model, including the outsourcing of key parts of the production process to contract manufacturers, the use of just-in-time intake of manufacturing materials and the strategic reduction of finished inventory.hideWhile improving cost margins and shareholder value, this stripping down of the asset base creates multiple and critical dependencies in the supply chain, many of which are outside of business' control. This inevitably adds to the threat of supply chain disruption and financial loss, said the reinsurer. It believes that as outsourcing of manufacturing gathers pace and companies become more sophisticated in preventing physical damage events-such as fire, explosions and windstorm-non-physical damage risks are now more critical than traditional property insurance. In response, and following calls from risk managers for more extensive non-damage BI cover, Munich Re has launched its new solution for the pharmaceutical and life science industry. According to Jenny Yu, Underwriter at Munich Re's Corporate Insurance Partner, the solution covers the whole manufacturing process. "Triggers include actions following a regulatory inspection, regulatory non-compliance in the manufacturing process, documentation and record issues, contamination and foreign articles in a product," she told Commercial Risk Europe. The cover indemnifies the insured for financial losses arising from supply chain business interruption caused by: Suspension of manufacture due to major manufacturing defects The supply of off-specification materials from suppliers Product recall for accidental contamination, mislabelling, malicious product tampering, product extortion and counterfeiting Cyber risks including cyber hacking, cyber extortion, denial of service attacks and destruction of digital assets Trade disruption along the supply chain Crucially, it protects firms against regulatory action causing business interruption. "[In the pharmaceutical industry] we are experiencing an increasingly stringent regulatory environment with a heightened threat of regulatory enforcement. Any identified failures in manufacturing compliance that are not adequately addressed can lead to the withdrawal of regulatory approval to manufacture and market products. This has significantly increased the likelihood of a major non-damage-related business interruption loss. Such risks are not covered by a standard business interruption policy," stated Munich Re. Ms Yu explained her firm's push into this interesting market: "This solution is in response to what we see as a gap in the market and demand from risk managers. For property damage BI risks it is easier for firms to fix and mitigate the threat, but for non-compliance and non-damage issues the impact is much more significant than property damage and the risks harder to deal with." She explained that the solution has two parts. The first protects against suspension of manufacture as a result of deficiencies in the process. The second provides product recall cover. The recall coverage is triggered by manufacturing deficiencies, malicious damage and counterfeited products. It is designed to also cover the costs of crisis management. Ms Yu believes although there are other non-damage BI coverages in the market for the pharmaceutical industry, Munich Re's offering breaks new ground. "The conditions in our policy, the limits we can provide and the operational side of risk we cover is what makes our policy unique. If we are not the only insurer offering a solution for regulatory non-compliance, we certainly provide very substantial limits," she said. In the past year Munich Re has provided cover limits of up to $100m and $150m under the policy. But Ms Yu said that these could go higher. "These numbers are not definitive or the highest we will provide. We are building up a book of risks and we are looking to see if we can provide higher limits. As we are solution-based we are very flexible. We have the standard policy, but at the same time we can adapt that to different sized companies. So big, small and medium firms are target companies-we have no restrictions," she said. The cover is global with pricing dependant on risk profile. Ms Yu said that pharmaceutical companies need to look 'deeply and thoroughly' at their supply chain, its transparency and exposures. But she warned that often firms consider BI risks from a traditional perspective rather than looking at the non-damage exposures that are much bigger. "The pharmaceutical industry is particularly susceptible to supply chain risks. In other industries there is often a wider choice of suppliers and therefore the ability to transfer the risks. For the pharmaceutical industry there are key limited suppliers and it is not feasible to simply change supplier. This can take weeks or months for the most important suppliers. For example, you need to get FDA (Food and Drug Administration) approval in the US market for certain suppliers. Getting that regulatory approval can take half a year. So because it is a heavily regulated industry it cuts down the options to pharmaceutical firms and allows less chance to physically mitigate the risk. Therefore the financial impact of supply chain failure can be devastating," she said. Alan Fraser, Head of Section within Corporate Insurance Partner at Munich Re, said the stakes are high for the pharmaceutical industry when it comes to BI exposure. "For a pharmaceutical product you might apply early in the process for a twenty-year patent. It may take somewhere between eight and twelve years for you to develop that product at a cost of maybe $800m or even $1bn. Anything that stops you from sales or even losing market share once sales have actually started puts a tremendous hole in the potential economics of an individual product," he said. The Thai floods and Japanese earthquake and tsunami in 2011 revealed that many companies, and in turn insurers, had failed to properly grasp the size of their BI exposures and properly assess supply chains. Although improvements have been made, this knowledge remains patchy and requires more effort at both pharmaceutical firms and those in other industries, said the Munich Re experts.” "Some industries are more advanced in terms of managing their supply chain than others. But still a lot of companies do not know where their supply chains are. Even with key suppliers they can't, or haven't, quantified the impact of the supply chain breaking down. So I would say there is a lot of scope to improve in this area," said Ms Yu. Mr Fraser added: "There is an industry out there to try and improve data gathering but I think experience is a bit patchy still. If a customer is sufficiently concerned to cede that risk we can help them to find ways of finding that information. So I think it is about will rather than anything else."

Munich Re addresses non-damage BI risks for pharma industry

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