Product Recall Capacity Needed for Life Sciences Segment
The life sciences industry has seen a dramatic increase in product recalls, and while insurance capacity for the life sciences industry generally has been increasing, insurers have been wary about offering more product recall coverage to the segment.
As of Sept. 12, 2013, there have been 50 medical device recalls compared to 49 for all of 2012. In 2012, there were 45 pharmaceutical drug recalls in total, but as of Sept. 13, 2013, that number had already increased to 48, according to recall information on FDA.gov.
Most recalls are voluntary, meaning the drug and device manufacturers have chosen to take the drug off the shelves, notified consumers and doctors to stop using the product and/or return it, or required that a medical device be inspected to make sure it is safe to continue using. The FDA reports that the majority of recalls are those that are considered to have “a reasonable probability that the use or exposure to a violative product will cause serious adverse health consequences or death” — also known as Class I recalls.
Fran Stockwell, vice president and chief underwriting officer for Medmarc, a life sciences and medical technology insurer in Chantilly, Va., says the increase in recalls can be partly attributed to companies being more proactive in voluntarily recalling medical devices or drugs. Companies have an advantage if they can get ahead of any problems — both with consumers and legally. The FDA also has stepped up its safety efforts, with more investigators looking closer at the products produced by the life sciences industry.
“The frequency of recalls doesn’t reflect poorly on this industry because in this business, you have to be vigilant because you are working with patient safety. These companies are held to a high standard and supervised by the FDA,” Stockwell says. “Everyone is putting in more effort than in the past. Companies realize the damage that can be done to their reputation.”
Stockwell says the life sciences industry is mostly populated by small- and mid-size companies with revenues up to $100 million, so their business could be devastated if a recall is not handled quickly and efficiently.
“I have seen this multiple times — a company has to conduct a recall and it shakes people’s confidence about purchasing their product. When that happens, companies have been crippled to the extent of having to sell their business. I think that’s why we are seeing more effort spent,” Stockwell says.
Coverage Needs
The insurance industry, on the other hand, has not been as quick or efficient at responding to the need for more coverage. Aside from the costs associated with pulling and replacing an expensive medical device or drug, publicizing the recall, and managing the reputational harm, recalls — especially those within the medical industry — also attract litigation, which could trigger bodily injury claims. That means there is the potential for insurers to end up with a very expensive claims scenario.
Stockwell says the industry is struggling with the best way to cover the exposure while maintaining profitability.
“We realize that [product recalls] are something our customers are very concerned about — but it’s a devilish issue because of the frequency and severity of recalls,” he says. “How much capital does an insurer want to commit to any line of business? All underwriters are asking this.”
Medmarc currently offers first-party product recall expense coverage with a standard $50,000 limit for a company that recalls its own devices or drugs. The coverage includes mitigation expenses and crisis management.
Stockwell says Medmarc is not intimidated by the rising number of recalls and is, in fact, considering some enhancements to its coverage that would include third-party liability coverage. The company also is considering expanding its limits. Stockwell says the company hopes to introduce these product enhancements later this year.
The industry can expect to see more capacity in the marketplace eventually, Stockwell says, as insurers look closer at the root causes of recalls and create analytical/predictive tools to assist the buyer, broker and underwriter to avoid or mitigate these events.
“As the recall issue is better understood, then the seeming randomness of recall activity will be demystified and more limit should become available,” he says.
Carriers also are paying close attention to product recalls that may be symptomatic of endemic problems or conditions within a company, or whether it’s just an isolated/episodic event. Insurers do know that certain devices and drugs tend to be more risky, Stockwell says. Looking at the predictability of failure allows underwriters to place more accurate terms and pricing around the exposure.
Also, underwriters are focused on the culture within a life sciences company, such as how much emphasis is placed on quality-control and whether the proper procedures, staff, and resources are available to handle a recall so it doesn’t get to the point where the FDA has to get involved.