Product Liability Trends in the Insurance Market
• competition among insurers is driving premiums down by more than 15 percent
• insurance company profitability reached all-time highs last year
• insurance claim frequency and severity have leveled off
• insurance companies have underwriting profit and profits in capital markets
Product Liability insurance for the life science industry is unlike other industries - 1 claim can wipe out the available capacity and cause a quick mass exodus of insurers.
One common misconception in the life science industry is that it only affects the largest companies in the industry.
For over a decade, insurers have been understanding the nuances of the life science industry.
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Catalyst December 2007
By Michael D. Lezynski, CPCU
Hays Companies of NJ
Available insurance capacity is at an all-time high, while competition among insurers is driving premiums down by more than 15 percent. Savvy brokers are negotiating multi-year policies and broadening terms and conditions.
This represents a significant development when compared to the headline in Business Insurance (Dec. 28, 2006): "Drug, Medical Device Makers Seek Risk Financing Alternatives." So, what has changed in such a short period of time, why has it changed, and most important, how long will it last?
What has changed? The simple answer is industry profitability and a short memory. However, the issue is much more complex. True, insurance company profitability reached all-time highs last year as a result of continuous premium increases post-9/11 through Dec. 31, 2006 combined with a lack of hurricanes and other U.S. natural catastrophes. In addition, claim frequency and severity have leveled off, partially as a result of tort reform and a healthy economic environment. In the past, insurance companies expected an underwriting loss in a given year and expected to turn a profit with their investment income. Today, insurance companies are turning an underwriting profit and making additional profits in the capital markets.
Insurance has become an attractive investment opportunity, and product liability can be considered an attractive underwriting line due to the long-term nature of claims, and given the litigation environment. Your premium today will not result in the payment of claims for years down the road as a result of the lengthy litigation process. That's where the short memory part comes into play. The claims that occur in this industry cost a tremendous amount of money to defend, and you never know which product or class of products the plaintiff's bar will attack.
Why has it changed? The litigation associated with the products mentioned above caused capacity to shrink and insurers to exit the class beginning in the late 1990s. This caused a steady and often drastic increase in premiums by the few insurers who remained active underwriting the class. Premiums rose even when other classes of business experienced premium reductions, and skyrocketed after 9/11 when the insurance industry as a whole experienced consistent premium increases. There comes a point in the cycle of any industry when prices rise high enough with limited competition and when new entrants believe a profit opportunity exists.
How long will it last? The only legitimate answer is, "I don't know." Product Liability insurance for the life science industry is really unlike all other industries due to the fact that one claim can wipe out the available capacity and cause a quick mass exodus of insurers. The claim event touches all companies involved in the food chain from the active ingredient supplier to the manufacturer to the distributor to the pharmacist and physician and any other company involved in the food chain with similar products. The legal community is very creative with whom they name in their lawsuits. One common misconception about the multi-plaintiff litigation in the life science industry is that it only affects the largest companies in the industry.
However, the underwriting fundamentals are much better today compared to the past. Insurers have invested over a decade in understanding the nuances of the life science industry and are underwriting with a significant amount of intellectual capital and a better understanding of the science associated with each product class. The influx of new capital in our market has been most dramatic in Bermuda, which is where the capacity crunch was initially addressed in the early 2000s.
So, bottom line: the insurance market has always been a great roller coaster of ups and downs. But, there is optimism out there heading into 2008. This market has some legs, so buckle up and get ready for a great ride.
Michael D. Lezynski, CPCU, is president of Hays Companies of NJ, a national insurance broker locally based in Morristown. He can be reached at 973-359-3602 or mlezynski@hayscompanies.com. |
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