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Product recall insurance scarce for pharmaceutical companies

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Large pharmaceutical companies in need of insurance to cover the cost of product recalls have no options in the traditional market.

Needing a line of coverage made extinct by heavy losses and underwriting mistakes, large drug companies are forced to fund the product recall risk in captives or other alternative market vehicles, or simply assume the expense of a recall as a cost of doing business.

Smaller risks--pharmaceutical companies with sales of less than around $10 billion--have a somewhat easier time finding recall coverage. But those policyholders can turn to just a handful of insurers that are writing the coverage with some significant restrictions.

"For the large research-based pharmaceutical company, there really is no market; that market has been gone since the turn of the century, around 2000 or so," said Tom Coughlin, chief executive officer of Willis Risk Solutions in New York. "For the smaller companies, there still is something of a market available, but not a huge amount of capacity."

The recall risk for many large pharmaceutical companies is considered a cost of doing business, experts point out. Recalls happen fairly frequently, they explain, and often are related to relatively innocuous blunders such as packaging mistakes, rather than design errors that can cause harmful side effects.

Some pharmaceutical companies fund the recall risk in captive insurers or other self-insurance vehicles while others simply plan to absorb the expense if a recall occurs, sources say.

Bruce Belzak, Philadelphia-based managing director and head of Marsh Inc.'s life sciences practice, said he discussed with one risk manager the idea of establishing a captive to cover recalls. "His view was that by putting a captive in place, it adds a layer of cost," Mr. Belzak said of the risk manager.

The risk manager decided that "we're not even going to bother doing that; we'll just write a check" for recall expenses, said Mr. Belzak.

For many companies, product recall is the least of their worries, sources say.

Strategy

"From my experience, European pharmaceutical companies deal with such costs through their risk management programs," rather than insuring the exposure, said Rudiger Seitz, Zurich-based global head of Allianz Global Corporate & Specialty, PharmChem Solutions. "They are more concerned that they have sufficient coverage for product liability exposures. The cost of a recall appears to be manageable for pharmaceutical companies," he noted, but not the expense related to product liability litigation. Allianz does not offer recall coverage, Mr. Seitz said.

"It's not the cost of a recall that should be a concern of pharmaceutical companies," he said, but the expense related to litigation, which is covered by product liability insurance.

Even when recall insurance was available several years ago for large pharmaceutical companies, many passed on the coverage because the cost was so high, said Mr. Coughlin. "Some of them bought it, but it was not a staple for every manufacturer."

"Seven or eight years ago there were a handful of markets that would write it," said Bill Harrison, managing director with Aon Crisis Management, a Somerset, N.J., unit of Aon Corp. "Even some of the large companies did buy it. But there were quite a few large losses," he said. And because underwriters "didn't understand the size of the risk or where the deductibles should be placed, they got hit pretty hard," Mr. Harrison said.

When the losses piled up, "every insurer got out," he said.

The cost of a pharmaceutical recall has been "ingrained as a cost of doing business" as premiums rose to a point at which large companies "were not able to transfer it any cheaper than they can retain it," said Mr. Coughlin.

Today's market is around a dozen insurers for smaller companies. There are a handful in the United States and several more in Europe that are willing to take on the exposure, but they are not covering every facet of the recall risk, market experts noted.

The coverage is not cheap, Mr. Coughlin said. "This is not a commodity buy. "It's a very strategic buy and is going to have relatively large retentions."

"The market as a whole in recall is very small," said Julie Ross, London-based vp and product contamination and recall specialist with Marsh Inc. Available limits amount to around e45 million to e60 million ($59.5 million to $79.3 million) of primary coverage for recalls as a result of accidental contamination, she said, and for recalls due to malicious tampering, availability rises to more than e150 million ($198.2 million).

Recall insurance does not cover drug design errors, which could cause health problems, said Jim Walters, managing director and head of the pharmaceutical and life sciences practice at Aon Corp. in Philadelphia.

"It is important to remember that the reasons for recalls are somewhat limited" in insurance policies that cover them, Mr. Walters noted. Malicious tampering, accidental contamination and product extortion are coverage triggers in recall policies, he said. Other types of recalls, such as those begun because a counterfeit product enters the market, are not typically covered.

Other, less extensive coverages also are available.

Among the insurers offering coverage to small and midsize pharmaceutical companies, Chubb Corp. offers a product withdrawal and expense policy that covers, among other things, expenses related to taking a product off the market, disposal and communication efforts to publicize the move.

Policyholders that purchase the coverage typically are middle-market and smaller drug companies for whom a "$1 million expense would be kind of hard on them," said Jill Wadlund, vp and worldwide life sciences casualty manager with Chubb in Whitehouse Station, N.J. "Larger companies are willing to absorb that," she said.

Large pharmaceutical companies are hesitant to talk about how they handle product recalls. Companies such as Merck & Co. Inc., which faces lawsuits over the market withdrawal of its Vioxx product, and Bristol-Myers Squibb, the maker of Plavix, which prevents blood clots, refused to discuss how they finance or manage the recall risk. Several others did not respond to requests for information.

A spokeswoman for Amgen Inc., which produces drugs for kidney patients that develop anemia and for rheumatoid arthritis, would confirm only that the company has a "risk management strategy in place and certainly a recall mitigation strategy," but would not publicly discuss those controls.

Managing the risk, particularly for large pharmaceutical companies with no insurance, calls for superior quality control to prevent recalls and a loss control program that considers how to soften the blow to the company's reputation and profits if a recall does occur, industry sources agree.

Quality control includes careful packaging and labeling to ensure that mistakes don't trigger a recall, Ms. Wadlund said. Chubb takes a look at its policyholders' recall risk management plan to "see how comprehensive it is," she noted.

The insurer wants to know that the drug maker has up-to-date contact information for hospitals and physicians that use their products, a plan for sending out notices if recalls occur and procedures for communicating recalls to the public, among other recall-related steps that might have to be taken, Ms. Wadlund said.

Recall roster

Most insurers require such pre-recall steps be taken, said Ms. Ross of Marsh. They want to see a "recall response" that outlines who needs to be involved, whether it is the chief financial officer, risk manager or other executives, she said. There also needs to be clear direction as to who will deal with the press and public during a recall, she stressed.

"Once they have a recall, insurers expect to see them invoke that crisis system," said Ms. Ross. That could include a "war room" from which the recall effort would be directed, she said.

Proper communication with the public is critical in a recall, according to Mr. Walters of Aon. "If you have a recall, any insurance product is going to help, but it will not replace the entirety of the loss of reputation and everything else," he said.

While much of the financial loss will be mopped up by the policy, only a careful response will help save a drug maker's reputation, Mr. Walters said.

Ms. Wadlund said policyholders should routinely test their recall response procedure to make sure it can be carried out. "Hopefully, they will never have to use it."