The nutraceutical industry has responded to underwriters' concerns about product liability coverage for the manufacturers of nutritional and dietary supplements, which experts say has led to steady capacity and stable pricing.

Nutritional and dietary supplements often are described as nutraceuticals—a catch-all term for foods or drinks that claim health, wellness and medical benefits, such as herbal products, vitamins and other dietary supplements.

Nutraceuticals are a growing U.S. industry, posting a 6% growth rate in 2009 with sales of $26.9 billion, according to the Nutrition Business Journal.

The industry is expected to post a 7% growth rate in 2010 as baby boomers near retirement, experts say.

“Baby boomers are getting older and they want to be young and beautiful,” said Nan Meyer, managing director of casualty and product liability for Markel Corp. in Deerfield, Ill.

“The growth is exponential as long as you put it into a larger category: foods with health claims,” said Curt Fletcher, regional vp of the Seattle branch of Admiral Insurance Co.

Despite the industry's growth, lack of regulation of nutraceutical products by the Food and Drug Administration is a main concern for product liability insurers, which also worry about unknown adverse health effects of product misuse or mixing supplements with prescription medications, experts say.

Most nutraceutical firms are relatively small manufacturers and typically transfer their risks to insurance, experts say.

The Dietary Supplement Health and Education Act of 1994 is the FDA's regulatory framework for nutraceuticals. Prior to that, supplements were subject to the same regulatory requirements as other foods under the FDA.

While the agency maintains a list of banned or flagged substances that are potentially dangerous, dietary supplements do not need FDA approval before they are marketed, nor do manufacturers need to provide evidence that their products are safe.

Along with scant federal regulation, experts say supplements containing herbal ephedra or alkaloid ephedrine helped drastically constrict the product liability insurance market for nutraceuticals in the early 2000s. Deaths linked to the stimulant sparked lengthy court battles against manufacturers and distributors and insurers took on large losses, observers said. The FDA banned supplements containing ephedra in 2004.

The ephedra scare had a “huge chilling effect on our industry,” said Peter Daly, senior vp at Wells Fargo Insurance Services Inc. in San Carlos, Calif.

“Ephedra brought the industry to the limelight for the underwriter,” said Pati Bouman, client manager for Marsh Inc. in Salt Lake City.

Insurers look closely at ingredients and business practices of nutraceutical manufacturers and distributors, constantly updating their exclusion lists, which can even include refusing to provide coverage if a nutraceutical manufacturer engages in spam e-mail marketing practices.

Ms. Meyer at Markel, which has been underwriting nutraceutical risks since 2002, underwrites each product individually, examining ingredients, advertising, distribution channels, warning labels and product test results.

Product liability pricing varies, she said, but typically, weight-loss products are more expensive to cover, as is any product that is ingested.

Admiral Insurance, which has been underwriting nutraceutical policies for 10 years, looks at manufacturers' websites for extreme marketing claims or aggressive statements about the products' effectiveness.

“What we worry about are really aggressive statements that would lead a buyer to believe categorically that it's going to work,” Mr. Fletcher said.

After the ephedra ban, insurance claims have declined as nutraceutical companies responded to insurers' concerns, observers said. Insurers report they have sold more policies and policyholders are comfortable assuming higher retention levels because of low claim activity.

“Our renewals over the last several months have been pretty positive from a client's standpoint,” said Jim Walters, managing director of Aon Risk Solutions' life sciences and chemical group in Philadelphia. He said renewal pricing has been stable to decreasing for several months.

“The insurance market has come back pretty strongly; and actually, there are some new entrants in that world that, frankly, have made our placements in the last year or so actually a little easier than they have been,” Mr. Walters said.

Lexington Insurance Co. re-entered the nutraceutical insurance market in 2009 after taking some ephedra-based losses following the 2004 scare, said John Parente, senior science adviser for Lexington in Boston.

“As the ephedra scare waned and people became a little more comfortable with (nutraceuticals), capacity has grown and the rates have actually come down,” Mr. Parente said.

Nutraceutical companies are adopting good manufacturing processes and focusing on an “improved health perspective,” said Marsh's Ms. Bouman. “Clients try to work their product in great detail,” refining and researching products to achieve accuracy, she said, which helps the underwriter considerably.

“If the industry continues to monitor itself, refine its products and distribution methods,” insurance pricing and capacity should follow, she said.

“The most successful companies with whom we work with in this area in particular are the ones that communicate and help the underwriters identify what the risks are, then what controls they put into place to deal with those,” said Wells Fargo's Mr. Daly.

The challenge for underwriters is “to make sure that they have enough acumen to underwrite a really dynamic industry,” Mr. Fletcher said.