NEW YORK-Two proposed catastrophe product liability insurance programs for pharmaceutical companies are dead, killed by their high costs and cheaper competitors, and the same factors are threatening to kill a third.

The structure of the two facilities proposed last year, one by Capital Risk Strategies and the other by Johnson & Higgins, also prevented them from getting off the ground.

In particular, risk managers were turned off by the mutualization of risks inherent in both programs. Risk managers noted that under mutualization, one policyholder's loss could reduce the limits available to another policyholder.

The third program, which was announced last fall by Marsh & McLennan Cos. Inc., claims to have avoided the mutualization of risks and is offering a substantially lower premium. Those advantages, however, have not helped attract the critical mass of policyholders it needs to fly. If at least five policyholders don't sign up by July 1, the project likely will be abandoned.

Risk managers acknowledge that the catastrophe limits offered by these programs could be needed, but not in the forms developed or at the prices offered, which in some cases exceeded $20 million a year.

The expansion of capacity in the traditional insurance market also hindered the projects, said Colin Witheat, director of risk management at SmithKline Beecham P.L.C. in Brentford, England.

About $750 million to $800 million in product liability capacity already is available to pharmaceutical companies, he said.

"We believe that that is enough," Mr. Witheat said.

Self-insurance is preferable to the large premiums demanded by the two defunct programs, he said, adding that he is still in contact with J&H Marsh & McLennan Inc. about the possibility of signing up for its program.

"We are still interested, but I doubt that they will get it off the ground because they haven't got the critical mass of policyholders," Mr. Witheat said.

Another turn-off for risk managers was that the limits offered by the defunct programs were to be shared among the policyholders, said Richard Reddaway, group insurance manager at Glaxo Wellcome P.L.C. in Greenford, England.

"We felt that there was a need for the coverage, but as soon as it was put to us that there was a mutualization of risk, we had reservations," he said.

The surviving J&H/M&M program, PharMed, still has a high price tag, Mr. Reddaway said.

PharMed likely will cost less than half of the highest premiums quoted by the other facilities, said Robert Redmond, a managing director at J&H Marsh & McLennan in New York.

But it also is offering less than half the limits. The proposed program would be led by Swiss Reinsurance Co. Other insurers that have been approached to back the program are ACE Ltd., X.L. Insurance Co. Ltd., Munich Reinsurance Co. and Zurich Insurance Group, Mr. Redmond said.

The program was marketed initially last fall and has been significantly modified since, Mr. Redmond said.

The current proposal would supply $500 million in limits excess of $500 million in conventional insurance capacity over a five-year term, Mr. Redmond said.

Now, the possibility of a movable attachment point is under consideration, Mr. Redmond said.

"We are trying to close the gaps, and we think the positions will come into focus by July 1," he said.

MedExcess, the program proposed by Capital Risk Strategies, finally was abandoned late last month, said Andrew W. Potash, president of the insurance broker/corporate finance company in New York.

The facility was first launched in December 1995 (BI, Dec. 11, 1995) and then modified in October 1996 (BI, Oct. 21, 1996).

The facility proposed to offer $4 billion in shared limits and $2 billion for each policyholder aggregated over 10 years. It included conventional insurance capacity as well as capacity from the capital markets.

Mr. Potash said the main problems policyholders had with the program were: price; mutuality of risk; a lack of variable attachment points; and the exclusion of exposures such as chemical and agricultural risks.

"I think these were solvable issues, but the problem was that with three companies offering different solutions there wasn't enough urgency among the clients to do anything," he said.

The price of the product could be brought down, Mr. Potash said. Specifically, pharmaceutical companies might be prepared to pay the following premiums if insurers would accept them, he said: $5 million to $7.5 million for $500 million in limits; $8 million to $12 million for $750 million in limits; and $12 million to $16 million for $1 billion.

The other program, PharmaCat, was launched by Johnson & Higgins last summer and offered $1.1 billion in limits over five years renewable for five years, provided by American International Group Inc. and Berkshire Hathaway Inc. (BI, Aug. 19).

The program was withdrawn shortly after the merger of J&H and M&M, said Mr. Redmond.