Take an insurance pill
How to protect your business against regulatory shutdown
The innovative non-damage business interruption (NDBI) cover Pharma IQ was jointly launched by Munich Re and the brokerage Marsh USA Inc. in September 2015. The solution offers Pharmaceutical companies protection against losses arising through suspension of their manufacturing and distribution operations due to a failure to comply with Good Manufacturing Practices (GMP) and subsequent regulatory shutdown of a named insured’s or named supplier’s site.
NDBI Pharma IQ cover offers Pharmaceutical companies up to $10 million in the aggregate non-damage business interruption, remediation costs and extra expense coverage for up to ten named locations, including those owned by third party suppliers. NDBI Pharma IQ is available only through Marsh USA Inc. and Munich Re. Pharma IQ also includes up to 60 hours of complimentary risk assessment and quantification services supported by Marsh Risk Consulting’s forensic accounting, business continuity and property experts. Additional insurance capacity and consulting services are available as needed.
There has been a great deal of interest in the cover, the first of its kind specifically for the Pharmaceutical industry. Topics Online spoke with André Knoerchen from Munich Re and Nathaniel (Ty) Howe, at Marsh USA Inc. about how this new concept meet clients’ needs and what makes it so appealing.
What were the main challenges in developing Pharma IQ?
André Knoerchen: This is an entirely new solution, developed with internal and external expertise specifically for the Pharmaceutical industry. That meant gaining a very profound and detailed understanding of the clients’ needs, which takes time and patience. We conducted many in-depth discussions with potential clients, analysed input from our external expert consultants, built databases and modelled risks as the foundations for solid technical underwriting.
Could you explain what was special about the risk in question?
André Knoerchen: Regulatory risk was previously considered uninsurable in the Pharmaceutical sector, especially where international supply chains are concerned. Shutdowns ordered by authorities at owned sites or at key suppliers’ sites can threaten the existence of a pharmaceuticals manufacturer. Calculating this risk and offering a cover for relevant scenarios – even including pre-emptive shutdowns before a regulatory order to halt production has been issued – was a major undertaking.
The product includes risk assessment and consulting with the support of Marsh Risk Consulting. To what extent is Pharma IQ designed to meet the concerns of a company’s internal risk managers or investors?
André Knoerchen:This is a very important factor. With regulatory scrutiny increasing, investors have a strong interest in sophisticated risk management, and our risk assessment can be seen as a valuable tool in risk decision-making. Especially where larger risks are involved and additional loss control engineering measures are carried out, clients benefit from an external view of their risk situations and can act accordingly. A clear indication of the value Pharma IQ represents is the role it can play in ensuring the viability of M&A activities. Companies are looking at reallocating funds originally budgeted for traditional insurance covers to include our solution in their risk management programme.
Pharma IQ represents a pioneering effort. Will more products follow in its tracks?
André Knoerchen: The experience of investing a great deal of time and resources in listening intensively to the needs and wishes of a specific industry without knowing precisely what the final product would look like took considerable courage and perseverance. Underwriter Jenny Yu and her team deserve a lot of credit for the effort. The fact that, in the end, such an outstanding solution was achieved definitely makes it a success model. Especially in light of the topics presented and discussed at the recent RIMS Congress in San Diego, it’s clear that our industry must innovate to meet future challenges. I think demand for this type of tailored concept will continue to increase, and Pharma IQ will serve as a best practice case for future product development projects.
Pharma IQ is an innovation success story, and a major deal was completed when a client purchased the cover in 2015. At what point had the company first identified its exposure to NDBI in terms of regulatory oversight and compliance?
Ty Howe: Our client had long been aware of its sole site dependency for producing its products. This had been further highlighted by a large loss suffered by Genzyme Corporation several years ago, which demonstrated the potential magnitude of the risk. There was immediate interest in Pharma IQ and, after initial discussions about the coverage, the Board of Directors was contacted. The Board immediately supported the purchase as an effective way to mitigate the supply chain risk.
Had the company tried to buy insurance cover for this risk in the past?
Ty Howe: No – because there was no insurance policy available to cover this specific regulatory risk before Pharma IQ was developed. The solution that emerged out of the cooperation between Munich Re and Marsh answered that need.
Are clients generally concerned about own sites only or also the risk from suppliers?
Ty Howe: Smaller Biotechs have no choice but to outsource much of their supply chain, which puts a large element of regulatory risk beyond their control. Each vulnerable site that is an essential part of the supply chain has its own unique risk. In the case of the major 2015 deal, the client purchased protection both for its own main site and for key suppliers’ sites where, by nature, it had less insight into the nature of the controls in place.
Had your client assessed the likely maximum costs of a prolonged shutdown at either its own site or at a key supplier’s site?
Ty Howe: Yes, and we worked with our client to ensure that they selected the most critical sites to optimise the insurance coverage purchase.
How important is this risk compared to, for example, normal property business interruption, or PDBI, risk?
Ty Howe:The company’s public filings specifically mentioned NDBI as a key risk in the supply chain. PDBI risk is not mentioned.
What were some important factors in the client’s decision to purchase NDBI?
Ty Howe: Coverage, price and available limit were of equal importance in the decision process. The solution offered excellent performance on each of these points.