European pharmaceutical and medical products companies have been finding liability insurance increasingly difficult to obtain, following large losses in 2001. Adrian Leonard explores the state of the market.

Ask a European liability reinsurance underwriter why 2001 was a bad year and the names Bayer and Sulzer will almost certainly be mentioned. Understandable hue and cry over September 11, tropical storm Allison, Enron, Petrobras (P-36), Air Lanka, asbestos and mould completely overshadowed large 2001 losses in the European pharmaceutical and medical products sectors, but that doesn't make them any less significant; the combined cost of the two largest claims is already set to top €1bn.

The US plaintiffs' bar has sunk its teeth in deep following Bayer AG's withdrawal of its drug cerivastatin (marketed as Baycol in the US and Lipobay in Europe), removed from the market in August last year. Bayer itself admits the cholesterol-lowering tablets played a role in about 100 deaths worldwide due to rhabdomyolysis, a severe muscular reaction to the drug - although, critically, Bayer is defending the claims. It has not conceded that it bears any liability, and maintains that the drugs are safe when used correctly. At the time of writing, a US class action suit against Bayer involving about 800 plaintiffs was attempting to stretch the class to include German nationals afflicted by the drug's side effects.

Claimants have likewise seized on Sulzer Medica AG, following the Swiss medical giant's recall of hip and knee implants manufactured by subsidiary Sulzer Orthopedics Inc. Sulzer's insurance cover is said to be capped at CHF400m ($247m), but the company has now been shown to be massively underinsured, since the loss will be much higher. By mid-May, Sulzer had secured the approval of the US courts for a global $1bn settlement of about 2,000 lawsuits, equating to around $500,000 per claimant.

"The market has seen a highly unusual frequency of large losses in the pharmaceutical and chemical industry in Europe," said René Schnieper, chief underwriting officer for Europe at Converium. "The losses have prompted a strong reaction from reinsurers and insurers, including a tightening of terms and conditions in reinsurance contracts, a corresponding tightening in insurance, and steep increases in the prices for cover."

Back-breaking loss
The Bayer loss, which market sources say has been reserved at approximately €640m, was the back-breaking straw in a class that has for years attracted too little premium in exchange for too much risk. Already, Bayer's defence costs are running into millions, even before liability is established and claims agreed, if indeed that is the outcome of the case. Bayer is insured under a twin towers policy, written on a claims-made basis for US exposure and on a manifestation basis for those emanating from Europe and most of the rest of the world. The risk is spread across the European usual suspects, with major German and Swiss re/insurers in particular taking the brunt of the cost. Unsurprisingly, the structure of the original policy has caused a fair amount of confusion among both insurance and reinsurance underwriters, not least of which is the challenge of determining which policy years are triggered, since even defining the event is difficult.

At the same time as claims are pressuring the sector from one direction, new laws in Europe are bringing pharmaceutical company insurance under closer scrutiny. The first group action product liability litigation against a pharma since Britain implemented the European Union's new strict product liability regime has now reached the UK's High Court. Since pharmas are one of the biggest buyers of European casualty capacity at high levels, this case, brought by 100 plaintiffs, is being watched closely. The suit contends that a new generation of birth control pills, manufactured by defendant companies Schering, Organon and Wyeth1, brings an increased threat of blood clotting and embolism which was not communicated by the manufacturers. In this sense, the case has echoes of the Lipobay/Baycol claims. In the latter, Bayer had warned physicians and patients about the potential for rhabdomyolysis to arise when using the drug (a threat in common with other drugs from the class known as statins), which was approved for use by the US Federal Drug Administration in 1997. However, the problem could be much more severe than anticipated, so Bayer voluntarily withdrew Lipobay/Baycol in August 2001, although it continued to maintain that the drug was safe if used properly. The birth control tablet manufacturers also warned of risks, but the claimants - including relatives of individuals who the claimants allege died as a result of the products - say the warnings were insufficient.

The similarities end there, however. While some parties allege that Bayer held back information about the drug's side effects, others deny this is the case. Regardless of the truth, product use is an undoubted concern of both the courts and insurers. One underwriter argued passionately that while the Sulzer recall was a clear-cut case of product defect, and therefore is a controlled, measured and predictable loss, the Lipobay event involved a drug that appeared to work perfectly properly and, the underwriter argued, caused problems only because individuals used it improperly. However, he also argued that people would have been much worse off without the drug, though the estimated 100 fatalities linked to Lipobay/Baycol do not wholly support this argument.

The UK test case will be the first try of the EU's directive on liability for defective products through a group action aimed at a pharma. The directive, implemented in the UK through the Consumer Protection Act 1985, states that liability is on a no fault basis. In other words, manufacturers are liable for damage arising from the use of their products regardless of any measures they have taken - such as warnings - to minimise or prevent such damage. In addition, the strict liability regime states:

  • the burden of proof of damage falls to the victim, as well as proof of the defect and the causal relationship between the two;

  • liability is joint and several for all the operators in the production chain, to provide a financial guarantee for compensation of the damage;
  • l the producer can be exonerated if certain facts explicitly set out in the Directive are proved;

  • liability is limited in time, by virtue of uniform deadlines; and

  • clauses limiting or excluding liability towards the victim are illegal.

    In the reinsurance market, the losses were causing a reaction even before the effect of potential strict liability to classes was considered. Concern had been mounting for several years, and during the 2002 renewals, European reinsurers' diminished appetite for pharma risks was unmistakable. Increasingly, liability underwriting experts have become more involved than ever in cedants' pharmaceutical risks. Exclusions have become commonplace. At least one major European reinsurer has refused all treaty cover for any pharmaceutical and medical products risks, and will consider only special or facultative acceptances. Some have capped the level of pharma risk which insurers can accept without referral to the reinsurer for further consideration. Others have simply excluded pharmas from proportional treaties. The larger an insured's US exposure, the bigger the problem.

    In general, only the major continental reinsurers and the largest retrocessionnaires retain a serious appetite for pharmaceutical catastrophe business, and prefer a technical approach which gives them increased control over the premium per risk. In many cases the move was a reaction to changes from above. "Our own [outwards] retrocession treaties now exclude pharmaceutical risk," one reinsurer said. In short, it is fair to say that the reality of the technical account has finally overpowered the lure of the market-share pie chart.

    Primary focus
    On the primary insurance side, a number of carriers have reduced their lines to token amounts in the face of shrinking reinsurance availability. Obtaining sufficient cover - particularly for pharmas with a large US sales base - has become particularly difficult. Insurers have developed extensive lists of products or drug ingredients which they exclude from cover, lists which tend to be adjusted from client to client, based on insureds' specific exposures and loss experiences. According to some reports, the market was so tight and price rises so steep that Swiss pharma giant Hoffman LaRoche decided not to buy any cover.

    A Sulzer spokesman described the company's observations of the market. "Not only are prices increasing, but also the overall capacity is shrinking. This trend has become more and more obvious during the course of 2001, and has been accelerated not only by 9/11, but also by other larger incidents in all industries," the spokesman said. "Due to the fact that the insurance market is not yet able to assess the full extent of certain incidents, reserves might increase even further than the level we see today. It becomes very difficult to meet the levels of cover, as well as limit the increase in rates on line, as it has been in previous years."

    The changes are overdue. "Most people have started to realise that the premium volume was insufficient to cover the losses," said Thomas Freudenstein, director of the facultative casualty division at Gerling Global Re in Cologne. "There was too much competition for pharmaceutical business, but everybody has started to rethink the minimum premium required for these risks. We are rethinking our approach, and raising our premiums for pharmaceutical liability more than for other lines. We have to be able to finance the big hits."

    The magnitude and growth of US awards is the greatest part of the problem, which is exacerbated by the continual habit of the US courts to find in favour of plaintiffs, apparently regardless of the liability. "In an extreme situation, if there were three or four more large losses, companies might not be able to get cover at all. They might have to withdraw from the US," one underwriter said. A possible solution could be dividing cover into US and non-US exposures, which could be a positive move for companies with limited US sales. However, for others it could be very costly indeed.

    Reports in the London market during the 2002 renewals cited price rises of up to 800% for some pharma excess covers, with programmes that typically had offered limits of $500m reduced to $375m. Such reductions are forcing pharmas to look to new markets. Robert Patten, senior vice president and casualty manager at ACE European Markets in Dublin, said European pharmas had not been big buyers of ACE's large capacity offering in recent times, primarily because the price was too high, at least while incumbents were engaged in a soft-market pricing competition. "We had been looking to write European business from Bermuda, but the market was so soft, and ACE tried to stick to a philosophy," he said. "European markets were a lot more aggressive, and they didn't meet our pricing criteria. We are not a premium income writer. We differentiate risks, and write them based on an actuarially driven model."

    However, times have changed for the Europeans, so ACE, which set up shop in Dublin in January last year, is attracting interest - and a lot more European premium. The ACE rate is now more like the market rate, and capacity is in short supply. "With losses in just about all the major sectors, clients are coming to us now," he said. "There are not many alternatives. We don't look to compete with anyone at the moment." ACE is offering lines of $100m which attach "anywhere north of $250m on average."

    The pharmas market continues to harden, said Mr Patten. "Long before the World Trade Center loss took a lot of capacity out of the market, the pharmaceuticals sector was coming under scrutiny, and suffering some large losses. The sector was already seeing increases in premium rates and lower limits, and a tightening of terms. We are still in the throes of the year of renewals since 9/11 when the full effect will be felt."

    No one is willing to look too intently into a crystal ball, but likewise no one expects the pharmaceutical loss situation to ease up significantly. On the other hand, few observers are anticipating that the US litigation culture will take hold in Europe, despite the fact that US plaintiffs' attorneys have it in their sights and regardless of the outcome of the UK birth control tablets case. It seems particularly unlikely that even the US courts would argue, for example, that a German citizen injured by a German company should fall under the jurisdiction of a court in, say, Texas, despite lawyers' efforts in the Bayer case. And Europe's Roman-law roots make US compensation patterns a remote possibly, particularly as punitive damages are not permitted and juries are kept out of civil cases. In the meantime, the European insurance sector is counting the costs of yet more undisciplined soft-market underwriting, and awaiting the next doses of bitter medicine from its pharmaceutical accounts.

    1 Wyeth is the new name of American Home Products, which changed its brand following the catastrophic US Fen-Phen slimming drug disaster. That problem continues to bring grief to all involved. American Home has pledged $3.75bn to settle all claims of fenfluramine users, but Gloria Lopez, a 48-year-old school cafeteria supervisor who opted out of the global settlement, was last year awarded $11.55m in actual damages and $45m in punitive damages by a jury in Alice, Texas in compensation for a heart valve defect her lawyers contend was caused by the drug.

    By Adrian Leonard
    Adrian Leonard is a freelance insurance journalist and a regular contributor to Global Reinsurance.

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