Examining the life sciences insurance space
In this life sciences and associated risks special edition of Insurance Business TV, Falvey Insurance Group's Mike McKenna, Chief Underwriting Officer, and Eric Newman, Senior Vice President, Claims, Loss Prevention, and Recoveries, explore some of the unanticipated risks in the space and the sort of expertise that is needed from underwriters. They also give examples of recent losses and explain how brokers can succeed in the space.
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Paul: Hello, everyone, and welcome to the latest edition of Insurance Business TV, a life sciences special brought to you in association with Falvey Insurance Group. Now, whenever we're talking about the life sciences market, one word instantly springs to mind COVID. It was very much a watershed moment for the industry as businesses were more or less forced into embracing new technologies and rethinking their operating models. But now, as COVID touch wood subsides and some relative normality returns, what is the state of the market now in this special edition? Our experts will go beyond COVID alone. However, delving into how we can evaluate life sciences risks from an underwriting perspective. Speaking on supply chain issues, providing claims, examples, and outlining the types of losses they are dealing with. But who are these experts? Well, it gives me great pleasure to introduce Mike McKenna, Chief Underwriting Officer of Falvey Insurance Group, and Eric Newman, senior Vice president of Claims Loss Prevention and Recoveries at Falvey Insurance Group. So gents, let's start with a little bit of an overview for anybody not in the know. Tell us what the life sciences space covers and elaborate, if you would, on on some of those unexpected or unanticipated risks for life science companies. Mike, I'm going to direct this question at you.
Mike: Thank you, Paul. And that's a good segue in. And maybe the first thing I should probably do is just provide a generic definition and then jump into some of the dynamics and risk factors embedded in the industry as we see them today. So the life science industry comprises companies in the research, development and manufacturing of pharmaceuticals, biotechnology based food and medicines, medical devices, biomedical technologies, nutraceuticals, cosmoceuticals, food processing and other products with a goal to improve the life of organisms that these products are intended to serve. And that's a mouthful, obviously, to say the least. It's a big part of the overall United States economy. And with this, these organizations face many risks, and these risks are both known, managed and addressed through traditional enterprise risk management techniques. But also they work on the fly and they cope and deal with the global and local dynamics from an economic and human standpoint for the industries that they serve. I'll dive into a few of these key risks that span the known and unknown, and we'll note that these macro issues are not directly only related to the marine exposures, but more attuned to the enterprise exposures, cybersecurity and IP theft. Global hackers and criminals specifically target this industry, according to a Chubb report between 2009 and 2017, cyber attacks increased over 2,300%, and within the last ten years, 38% of all cyber attacks targeted this industry. Why do hackers want access here? They want customer data. They want research, and they want IP. Very valuable assets. Supply chain. As the supply chain is expanded through globalization, the reliance on raw materials and outsourcing through third parties has created an increase. The risk associated with securing this supply chain, losing supply chain customers and third party contracts can cause major impacts and severe disruption and delay, which are already critical and sensitive to the manufacturing processes. Security lawsuits. I'll just mention this because it the statistic just jumped out at me. Fraud costs, class action lawsuits have increased dramatically and account for about 1 in 4 of all fraud class action lawsuits in this space. Just the filing of the claim alleging misrepresentation can bring a major risk to a life science company. Political instability and war. We all know what's going on in Russia right now, but the risk embedded in the global supply chain and unexpected risks like things like trade embargoes and even inter civil wars, can have a devastating impact on these companies and their global dependencies. Spoilage of product. I think most people would know in this space properly navigating the to ensure that spoilage is covered is a key factor evaluating those products evaluate. Reweighting the coverages and seeing how these coverages interact across multiple policies can have a big impact on these businesses. Product liability. According to reports and studies I reviewed for this product, liability suits that were filed in courts targeting medical device companies outnumber the full caseload for patent trademark employment, copyright and securities fraud combined. So you can see the risks associated. I thought that would be a good way to just walk into this discussion and maybe I'll turn it over to Eric for a few of his points.
Eric: No, I think that clearly demonstrates the complexities and the risks that are associated with life science companies. And I think one of the things that is most kind of in the news lately and certainly on underwriters minds, is the cyber risk. And I think when you talk about the life science industry, the the numerous mergers and acquisitions that go on within the industry really, really expose these companies because of the data sharing and the merging of systems which expose their data to potential hackers. And the other thing that also exposes them is given the overall complexities of these supply chains that life science companies manage on a global on a global scale, they're strongly reliant on third party vendors and suppliers. And so there's a lot of data sharing that goes on in order for a supply chain to be carried out effectively. And so with this exposure, really, this is a heightened risk that underwriters need to pay attention to, and it's certainly prevalent in today's industry.
Paul: Yeah, fantastic overview of all the risks there. But as mentioned at the top, of course, the the COVID pandemic really shook things up for the industry. If you don't mind, talk to us about some of the the new risks that have emerged and how they are impacting businesses as the pandemic, of course, begins to fade a little bit. Eric, I'll come to you for this one.
Eric: Yeah, well, certainly that was a shake up for the industry. The pandemic basically exposed the fragility of global supply chains. I mean, prior to the pandemic, really, by and large, companies operated their inventory management on a just in time basis, which meant inventory levels were kept low for cost saving strategies and and the like. And when the pandemic did hit, everything came to a sudden halt. And as quickly as it came to a sudden halt, it started up just as quickly with the with the increase in the e-commerce business. And so companies were faced with low inventories and capacity restrictions on shipping, which really added to the disruption that in the bottlenecks and the and the overall restriction of the flow of goods within the global supply chain. So basically what's coming out of that, what companies have done now has looked at that. They've done they've gone into more predictive analytics, they've changed their their focus on shipping forecast models and really have started to shift now from a just in time management inventory system to a just in case. And that's an opposite philosophy in that they build up inventories and in doing that you're building up inventories, you're working with different vendors, you're increasing stock values and you're increasing your footprint globally, which obviously increases the overall risk to the product. So those have to be looked at effectively and differently than they had prior to the pandemic. Think coming out of the pandemic, what we've seen and what's what's been prevalent in the industry is the is the overall approach to looking at supply chain resiliency. And, you know, that's a concept where companies now are really formally mapping out their whole supply chains, looking at their production facilities, looking at their distribution centers and looking at their carriers and trying to identify potential threats and hazards that could adversely affect their their supply chain and cause future disruptions. That has led to companies being more diligent in assessing risk, in trying to identify where the next bottlenecks or disruptions will come about, whether it be through any of the risks that Mike mentioned earlier. And basically that's introduced data analytics in artificial intelligence in ways to more actively predict and forecast the ship, the company shipping models and supply chains, which is really kind of led to what we in the industry like as a risk managed approach. It's identifying those risks and trying to anticipate in those companies that aren't taking that that view and attitude as far as the need for resilient supply chain resiliency are going to find themselves exposed to the next issue that causes a supply chain disruption.
Paul: Yeah, well, I was anticipating hearing the word supply chain, and no surprise that that was sort of top of your list. Eric. Mike, any emerging trends that you would highlight along with the obviously the supply chain risks as well?
Mike: Yeah. Just to play a little bit off of a few things that Eric mentioned, I think it's pretty hard not to interrelate the emergence of technology with risk. And if we think of things like data sharing, blockchain and AI, for instance, the life science industry in general is trying to create exchanges to exchange data to work quicker through the process to get sort of drugs and approvals to the market. And with that is a lot of risk assumed in the cyber space, for instance, sharing of data, data privacy among customers. So as the market kind of emerges in technology, the risk associated with that technology improvement is increasing as well for the individual customers. So while blockchain data sharing and artificial intelligence will bring. Probably product and bring innovation to the market sooner. On the side while the overall outside folks who don't know the intricacies of this industry will look at it, they will see that as a very large positive, where our customer base is looking at it as a positive for the customer, but an internal risk that they're going to need to manage very closely as this emerges.
Paul: You know, hearing you guys talk and sort of breaking down what is obviously a very, very complex market and making it accessible for our viewers here today, it's really striking for me why expertise in this space is clearly so important, especially when it comes to finding an underwriter for life sciences coverage. But how can brokers and agents sort of explain that value of finding the right insurance partner to their clients? Mike, can you pick this up?
Mike: Sure. I think it's probably fairly pedantic to say that a specialized coverage need should be underwritten by a specialized sort of product and by specialized underwriters. That's exactly what I'd like to say here. Each customer in this space is unique in terms of their need and having the right underwriting organization to review those needs rate and appropriately craft coverage is essential. I think clients and brokers alike should look to underwriting organizations that are transparent on the coverage grant. Look closely at the coverage restrictions that a policy may have and understand why. The other thing I would say is it's super important that clients understand that there are multiple policies that could come into play in the event of a loss. And having brokers and clients and underwriters all understand when competing policies may be in place, that there is a clear line for which policy is to respond to which event and that's something that a very experienced underwriting organization can help with. The innovation that I talked about a little bit earlier, the evolving risk partnering with these underwriting organizations, clients can count on their underwriters to be there as their business grows. There are things in the coverage grant that will emerge as companies get larger. Eric mentioned limits and valuations increasing as customers sort of grow and produce new sort of FDA approved drugs, which may have a very big impact on the overall limits required and then also the ability to cover global exposures. Having an underwriting organization that is focused on understanding each of those needs is super important. And then the last piece I'll say is partnering with underwriting organizations that have other services available for our customers, risk assessment discussions, risk mitigation techniques, understanding business best practices when it comes to supply chain, for instance. All of these dynamics in the supply chain that are changing that we talked about, this should be an open discussion between industry experts, brokers and underwriters alike. So I think I'll close with that.
Paul: Yeah, I think the the value clearly speaks for itself. But Eric, any added benefits that you would highlight?
Eric: Certainly. I think it's important to recognize, I mean, if we talk about as we have been, the risk and the complexity of these risks and managing these global supply chains, I think it's it's necessary and appropriate for underwriters that understand this risk not only from the physical risks and exposures that products and materials are exposed to in transit, but understand the industry itself and understand that these particular products, materials and devices are basically these companies are involved in the preservation of an improvement of the quality of life. And that's not, that shouldn't be understated because it's not just a widget or it's not just a gadget that's being moved that you're trying to understand the risk and protect it from, you know, damage, adulteration, loss or what have you. It goes this goes beyond insurance terms and conditions. And as Mike pointed out, it's critical that these insurance terms and conditions are appropriate for that risk. But it's also for underwriters to understand the nature of the industry and understand the criticality of moving these products safely through a supply chain so it can get to the ultimate user, which is the patient at the end of this supply chain that's dependent upon the product and material. So that added understanding, right, requires underwriters and the loss prevention services that they provide their clients to really understand deeply what the nature of their client's business is and what it takes to move those goods, the partners that they work with and the shipping lanes in which they're moving them. And they need to understand the process at large. They need to understand the sourcing and supplying of raw materials and intermediate. They need to understand the R&D phases in the preclinical and clinical stages that all are built up to bring a product to market and understanding the risks that are inherent in each of those stages. So that from a consultative point of view, not only internally and crafting terms and conditions, but offering services and consultation to the client as far as how to best manage that and some of the regulatory components that they need to consider is absolutely critical to building a solid relationship with your clients. You know, their, you know, their business and they have trust and confidence that that you understand their business and have provided a product and a service that is appropriate for their their operation.
Paul: Yeah. And I'm sure all of the brokers watching really want to understand this topic deeply as well. So I always find that a great way of kind of giving people explanations is to give them some some real life examples. So if you don't mind, do you have any examples of perhaps claims or or life sciences losses that you've seen in recent times and and perhaps how you were able to help with those? Eric, I'll stick with you for now.
Eric: Sure. I mean, well, we have claims. I mean, that's the basis and that's at the core of the relationship between an underwriter and their client is to be there to make them financially whole in the event that they suffer an event or circumstance that causes them to have loss or damage to their goods that affect their business. So we see claims and it's important getting going back a little bit to what I just said about understanding a client's business and understanding what it takes to move their products to the supply chain is absolutely critical in the claims process as well, because understanding what a product can and cannot tolerate or be or be exposed to will help with a prompt claim. Settlement. Understanding that maybe testing in a situation where a temperature damage to a small molecule, pharmaceutical product cannot go outside a certain temperature range. And if it does, and the data is there to show that it did and it's proven there's no sense in doing destructive testing or prolonging the process. If you understand what the what the parameters are of the quality parameters are for that product. So that's key to understanding the business. And so we do see claims, we see temperature excursion claims. And when those happen, when we see theft claims, we see those types of things. I think that's what is important is, yes, we pay the claims when when when the policy calls for it, but it's working with the clients then to develop corrective action and understanding and doing root cause analysis. And what led what causative factors led to a specific loss or damage? And how can you as a consultant to them as their insurer and loss prevention person help them? Fix the problem, identify those problems, implement corrective action that could be through packaging, development, packaging, engineering and making sure whether it's a passive non-mechanical type package is robust enough based on what they're shipping and where they're shipping it. Or maybe it warrants more of an active type shipping container to make sure that there's constant thermostatically controlled temperature. In the case of theft, it's looking at carriers and who are who the the companies are partnering with to move their goods and responsible for customs clearance and distribution and making sure that the service levels that they offer are appropriate and are based with the same quality based mindset. As far as what what the products need to how the products need to be handled and cared for in transit, and making sure that those service levels are dictated and mandated by through contracts and sops and service level agreements so that the company is working with vendors that are knowledge and skilled and capable and qualified to handle those types of time sensitive time critical products. The other thing that is very helpful is we at Falvey that we do is knowing the business that we do, we're a resource to them to help do some of these risk assessments that we mentioned earlier and trying to identify risk and threats along a supply chain. And that includes, you know, helping them with the vendor assessment and performance management programs. It helps to help them understand how to formally assess risk along a supply chain in a geographic region by doing such things as failure mode and effects analysis, where you identify through a mapping of your entire supply chain, you identify those threats and you measure the impact. And then you there identify what the appropriate corrective action measure would be or mitigation step would be so that you're identifying specific risks and attaching specific corrective action or mitigation steps towards that. That's that risk based approach that we talked about. And again, that all ties into an overall knowledge of the industry to be able to provide value added resources to a client that's desperately needing them in the ever changing complex world of global supply chain management in the pharmaceutical and biopharmaceutical world.
Paul: Yeah, some absolutely fantastic examples there. Mike, I don't suppose is there anything that you could add.
Mike: A lot there. I'll give a, I'll give a brief kind of add on to some of the things that Eric talked about. When I think of this industry, I just. Kind of equate it to a property policy. This is a first party exposure. We have the same type of risk events as you would see in a normal sort of property placement. We have wind events. We could have flood events, we could have, you know, events that happen purely out of fortuity. And then we also have the catastrophe side. We also have goods that are moving. And with those goods that are in motion, there is a tremendous amount of risk evaluation and risk assessment as well as sort of risk mitigation that needs to happen. And that's what makes this business so complex but also so enjoyable. So that's all I would add to that.
Paul: Well, there's one way that I always like to wrap up our editions of Insurance Business TV, and that's by asking our experts if they could give one tip to brokers, what would that be? So one tip for brokers to succeed in the life sciences space during the course of 2023. Mike, I'm going to start with you.
Mike: Mostly give a plug here. Place your life science business with life science experts. The coverage grant will match your clients needs and true life science experts and underwriters. Be there in times of need, both market cycles and down market cycles to take care of their customer needs. So that would be the one piece of advice I would give.
Paul: Yeah, we don't mind a shameless plug or two. Eric, I'll switch over to you. Any tips that you would give our broker audience?
Eric: Well, I would just like to emphasize and stress the importance of communication and collaboration. It's critically important that the broker underwriter client relationship is one that's open and receptive to idea sharing and information sharing so that there is the opportunity to build strong and long lasting partnerships. I think that's absolutely critical.
Paul: Huge thanks to Mike and Eric for shedding light on and simplifying such a potentially complex area of the market. Remember, if you want to know more about the life sciences insurance space, you can reach out to Falvey Insurance Group. And for more from experts like Mike and Eric, make sure you stay tuned right here at Insurance Business TV.