Tough insurance market weighs on life science/medical sector post pandemic

Life Sciences
Despite the enormous success in developing vaccines against Covid-19, the life science/medical sector continues to face a challenging market for insurance protection.

The sector has developed and delivered a wide range of solutions for the pandemic in record time including clinical trials for tests, vaccinations, treatments and personal protection equipment (PPE), saving lives and paving the way for the society’s safe return to normality.

Nevertheless, the sector is facing difficult negotiations at renewals with insurers demanding higher premium and more risk related information. This is partially driven by a generally hardening market but also by some sector-specific issues.

A generally hardening market

In the past year the insurance market hardening intensified due to natural catastrophe claims and the pandemic as insurers faced a rise in claims prompting a further tightening of underwriting and a rise in premium across the board to improve profitability. The life science/medical sector hasn’t been shunned.

Among insurance lines particularly affected by rate increases and capacity withdrawals are directors and officers (D&O) liability, property and cargo. 

This comes as the life science/medical sector is already under increased pressure due to stress in the healthcare systems nationally and globally, supply chain and service disruptions, and additional workforce needs which are widening the risk exposures. 

Key risk areas for insurers:

  • Life science relates mainly to drugs including vaccines, paracetamol, morphine etc. This area contains the Tier 1 major players such as GlaxoSmithKline, AstraZeneca, Novartis, or Sanofi. Most of these companies don’t buy insurance as claims have been so large in the past that insurance is prohibitive due to cost and market appetite. Also, insurers feel uncomfortable when a new drug is created behind closed doors they don’t understand the full risk of and suspect that companies may not disclose all relevant aspects.
  • Medical products include both invasive and non-invasive material. Some players in this segment are using biotech (animal parts) for their products. Biologic mesh is understood to erode the body less than for example synthetic mesh.
  • Medical devices include machines, catheters, needles, surgical gloves, or personal protective equipment (PPE).
  • The healthcare industry includes hospitals, nursing homes, ambulator surgery, and in/outpatient clinics. These facilities and providers utilize the services and products mentioned above and suppliers and can be held vicariously liable. 

While loss severity is not new to life science, the Covid-19 outbreak has made insurers even more cautious and many players are holding back to see what impact the pandemic will have on the sector. Consequently, although capacity is theoretically available, in practice many underwriters are not prepared to offer much protection for new business risks. 

Regional differences

The life science market and carrier appetite differs substantially by jurisdiction, particularly with regards to the US as compared to the rest of the world. Many European insurers will not write US risks due to the highly litigious environment  but they may feel comfortable in underwriting Tier 1 pharmaceutical companies elsewhere. Similarly, European insurers are likely to have a much higher limit which can reach €150m while in the US market limits are often set at $10m, and perhaps more on excess basis when strong underwriting diligence has been completed. 

Litigation adds to insurance costs in the US

Litigation in the US continues to generate concern in the life sciences space. Mesh remains a ‘four-letter’ word. Hernia mesh, specifically, is a cost-generator for defense and damages in the US.  

While the opioid litigation continues to be monitored, it should be noted that this took an interesting turn in the US whereas the general liability (versus the products liability) is the coverage line that was dramatically impacted. With municipalities driving a significant portion of this litigation, citing the need to recuperate costs associated with increased law enforcement, additional measures to combat overdose, further healthcare providers to care for those with addiction, etc., the average cost per claim is roughly $1,000,000. 

The recalls and expected potential product liability surrounding sartan drugs (high blood pressure/heart failure medication) is on the radar of life science insurers as well. The insurers are concerned about the current uncertainty of ‘how’ the nitrosamines are becoming part of the medication. 

The above are just a few of the current types of litigation driving the US life science market. With the onset of third-party litigation funding – a whole new day in defence and damage expectations has arisen. 

Finally, product liability insurers in the US are being brought into more and more traditional healthcare liability claims (medical malpractice). Limits of the provider or the facility may be too low to accommodate the damages desired by the alleged injured party. To address possible higher damage awards, the manufacturers are becoming part of the medical malpractice litigation. 

There are, however, some trends affecting the life science-market more generally and across both the US and the rest of the world. D&O is a specific line of coverage that has been dramatically affected . 

Trends by insurance line

D&O

Whilst the D&O insurance market as a whole has seen an ongoing general reduction in capacity and an increase in premium rates since late 2016, these changes have been magnified in relation to pharmaceutical companies, driven primarily by the adverse claims experience of insurers participating in this business sector. The life science industry faces unique risks, including those relating to royalties, licensing agreements, capital increases, etc. Insurers are well aware of these vulnerabilities and will often respond by increasing the cost of D&O insurance.

There is a limited number of insurers available offering D&O protection for the pharma and life science sectors with only five to seven insurers willing to consider offering terms.

Product Recall

Product recall capacity is often not available on its own for this sector due to the considerable cost of replacing invasive products. However, the litigation may hold a product manufacturer liable for the product to be replaced and be forced to pay these costs. One concern in this field is longevity: A hip that is due to last 20 years and is implanted in a 65 year old would previously serve until the host deceases but this may no longer be the case as life expectancy continues to rise. 

Professional indemnity

In the past year, professional indemnity insurance providers have aggressively pushed for higher rates. Increased claims activity and several large settlements had driven the net underwriting combined ratios of many insurers over 100%, indicating that underwriting results were unprofitable. As part of efforts to improve business results, insurers pushed for rate increases that were often in the double-digit percentage level. 

Marine cargo

There are capacity constrictions particularly for life science clients. Complex risk modelling systems are impacting availability of marine cargo insurance capacity, rate loads, deductibles, aggregate limits, and flood, windstorm, and earth movement peril and occurrence definitions. 

Rate increases vary with loss experience and/or risk profile characteristics, including but not limited to the natural catastrophe (NAT CAT) profile. This is causing retention levels to be reviewed on a case-by-case basis. For the first time the marine market is introducing wildfire definitions, exclusions, and aggregate limits.

Life science liability

The life science liability market remains consistent. Overall, capacity is stable for life science risks with a handful of new insurers having entered the space over the past years. Except for certain high hazard risks (i.e., orthopaedic implants, opioids, other litigated classes), most should have several insurers willing to offer cover.

Clinical trials insurance

There has been slight pressure on moderate increases in the UK but in other regions such as Australia, premiums within the clinical trial space remain relatively stable. Key drivers that will be reflective in premium will be US exposure, number of trials and number of participants and type of trial i.e. invasive or non-invasive.

Covid-19 and vaccines

Given the magnitude of the pandemic, vaccines are being rolled out on a huge scale before long-term side effects can truly be understood. Some drug companies are requesting governments directly to indemnify them against product liability claims.

While the market for clinical trial insurance remains relatively stable for most studies being undertaken, those related to Covid-19 are being indexed or rated per participant involved. Further, while some insurers are happy to underwrite the exposure during the trial of the vaccine, they are not willing to take on the risk once the vaccine rolls out into production, making the market appetite limited within this scope.

Impact on insurance buyers

When placing new and existing risks, underwriters are particularly concerned about increasing reinsurance cost and capacity constraints. Insurers are trying to reduce their risk exposure by capping limits, increasing deductibles and applying restrictions around communicable diseases and natural disasters.

There is very little professional indemnity and advice available in this sector. Companies should therefore consider offering training to staff and advising boards of what hospitals should be treating and how. A major focus should be medical malpractice and the consequences of bodily injury claims.  

Life science clients are generally facing greater scrutiny from underwriters. Lockton is focused on engaging clients to get them thinking about their risk tolerance and consider how risk mitigation could alter the impact on their insurance purchasing.

Climate change, the hardening insurance market and now the shake-up of global supply chains due to the pandemic have and are continuing to alter risk appetite amongst insurers. This is resulting in lengthy negotiation processes and requires creative broking in order to get insurance risks placed. 

For further information, please contact: 

Genevieve Mathews Senior Associate Health & Community Services Lockton Companies Australia
Mobile: +61 474 174 317 | 
Email: Genevieve.Mathews@au.lockton.com

Liz Spink, 
Senior Vice President
Healthcare Practice Leader (Midwest) – US 
T: +1 314 812 3229
E: ESpink@lockton.com

James Pryke, Partner Retail Property & Casualty UK
T: +44 (0)20 7933 2895  
E: James.pryke@uk.lockton.com
 

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