Life sciences, typically described as medical devices, pharmaceuticals and biotechnology, is a rapidly moving industry—both in terms of scientific breakthroughs and the evolution of the companies that discover the breakthroughs.
- Life sciences—medical devices, pharmaceuticals, biotech—is a rapidly moving industry in terms of scientific breakthroughs and the companies that discover them.
- The capacity to insure the life sciences industry is no longer limited to the biggest carriers.
- America’s biotechnology research sector consists of about 2,400 establishments, with combined annual revenue of about $17 billion.
The life sciences sector has long been dominated by a few large brokerages, but as the stakes have increased in the life sciences industry, so too has the number of brokerages covering the sector, with many midsize brokerages entering the market.
Mark Ware, IMA Life Sciences client services director, says he’s seeing more brokerages formalize practices in life sciences.
“Traditionally, the large nationals always claimed they have an expertise in this area, but even going back 10-15 years ago there were a number of regional players who were focusing in on this sector and building very, very well,” Ware says. “I think more people are becoming more formalized in their focus in this industry because it’s a growing marketplace. There’s more focus for companies, startups, research development, you’re seeing more pop up in the institutions of higher education. And the VC [venture capital] community continues to fund this sector pretty well.”
It is not uncommon for biotech companies to experience startup, IPO and being acquired all in the same year. It is also an attractive market to service for brokers who understand it. According to statistics from Hoovers, there are about 2,400 establishments in the United States in the biotechnology research sector, with combined annual revenue of about $17 billion.
“I have seen tremendous expansion in the number of competitor insurance companies who are making attempts to be in the space by developing products and underwriting capabilities,” says Joe Coray, head of The Hartford’s technology and life sciences practice. “Some have endured for long, long periods of time. Others are more come-lately because they see the opportunities. There certainly hasn’t been any shrinkage of the number of carriers, and with that, the capacity to insure has grown.”
Capacity to insure is not something limited to the bigs anymore. Smaller players are starting to look around, too.
“I probably get a call a quarter from different brokers who are interested in getting into this space,” says Mike Milligan, life sciences practice group leader for Barney & Barney. “There are very few brokers who really understand these issues but there is definitely an interest level there.
With a rapid pace of breakthrough and discoveries, the sector can be challenging.
“Every client that comes across your desk is completely different from the client that came across before,” says Coray. “They’re pushing the envelope to try to help better the lives of individuals and it’s a noble cause and it’s an important cause and we’re seeing drastic changes. And with those changes come increased liabilities.
“It’s not for the faint of heart. I’ve seen ugly claims. I’ve seen multimillion-dollar spoilage claims because the refrigerator that is protecting the product on which they are doing their research goes down. I’ve seen somebody drop a vial that was testing human tissue for transplantation and therefore the donation is no longer viable and there is a couple hundred thousand dollar claim over that.”
Milligan says a successful life sciences broker must stay in constant contact with his clients.
“I joke that my clients are like my kids: You miss one day, you miss something,” Milligan says. “We’re in an industry that changes so fast you have to be in the game. If I closed my eyes for three years and came back, all the companies would be different. The people who are creating medical devices and these drugs are beyond brilliant, they’re life changing, they’re world changing. It’s amazing to be a small part of it.
“It’s wildly attractive to us. It’s one of our most attractive and largest practice groups. What we like about it is these companies are doing something that matters.”
But entering this field isn’t as simple as deciding to add life sciences to your book. In a sector full of companies daily achieving medical and technological breakthroughs, buyers may not be savvy enough to comprehend all their insurance needs, and brokers may not be well enough informed to understand the buyers’ work.
They’re pushing the envelope to try to help better the lives of individuals and it’s a noble cause and it’s an important cause and we’re seeing drastic changes. And with those changes come increased liabilities.Tweet
“Often the life sciences companies are focused on the science of what they are doing or the business management of what they are doing, but they are not as aware of the risk and potential pitfalls,” Coray says.
Years of Practice
Comprehension is critical.
“The barrier to entry is intellectual capital,” says Ware. “You need to be able to sit at the table with the CEO or folks who are founding a company of this nature and truly understand what they are doing. Everyone you are going to bump into is uniquely different from the one before because they are focusing on new technologies. You better have sharp skates to be able to handle these types of accounts.
“You’ve got to work with it. You’ve got to read, you’ve got to constantly sit and learn. Be part of the local associations, pair up with attorneys. How do you learn to shoot like Michael Jordan? It takes years of practice.”
Buyers in the life sciences sector often have more complex risk issues than do many commercial or manufacturing entities. Coray gives the following example:
A medical device company is researching a new diagnostic test or treatment that uses a basic blood test—the blood is taken from the patient then put into a machine for some type of analysis. The diagnostic equipment has to be approved by the FDA before it can be commercially used. To get that approval, the equipment maker has to develop the technology, then apply for the ability to use the technology in a human clinical trial situation, which has special insurance needs because you have to protect the patient and the people who are doing the trial.
The trials can be an 8-10 year process, and before the test or treatment can be commercialized and sold to doctors and hospitals, the medical device company would need standard products liability that covers that particular exposure. And if it has salespeople or engineers or technicians that train or service or repair this equipment, it might also need professional liability in addition to products liability.
And then there are the basics: The building where it’s manufactured needs property insurance; if the salespeople drive vehicles, you need car insurance; if you have employees in any state in the United States, you need some form of workers compensation. If you have assets that are shipped abroad or services that are sold outside the U.S., you need international insurance. If the company has a board of directors, management liability can be very important.
“Innovative insurance products bring all of these coverages together in a cohesive ensemble of packages that allow the buyer to cover all of these different types of associated risks with the right insurance product,” says Coray. “So instead of buying six different independent coverages from six different carriers, you can go to a carrier that you have confidence in who can handle the products liability and bodily injury, property damage, data exposure and professional liability.
“What we’re seeing in the marketplace is the insurance companies that can innovate and create abilities to insure all of these kinds of dimensions are actually growing stronger and more competitive. Very often you have that connectedness in the healthcare system. The life sciences industry, which supports the healthcare system, is looking for connectedness among their insurers.
“The strongest companies are the ones that are able to be innovative in the ways they offer insurance products and services. Insurance companies that are working to insure companies in the life sciences base really have an advantage if they have capabilities that are robust [enough] to be multinational or global as well because they can flex and grow with the insurers as the risk really becomes global.”
Help Getting Educated
The barrier to entry is intellectual capital. You need to be able to sit at the table with the CEO or folks who are founding a company of this nature and truly understand what they are doing.Tweet
“In insurance, buyers tend to just pick somebody they like and use that broker,” says Milligan. “You see a lot of buyers not buy from experts per se because ‘hey, I got a buddy, he’s my friend and I like him, so we’re going to use him.’ When buyers hire investment bankers, accountants, lawyers, they want the best they can find with as much industry expertise as possible. Insurance buyers are getting more sophisticated, but they still seem to favor the local friend over the industry expert.”
The market is still growing, and as with any segment, those with good expertise, organization and people skills will likely find an ability to be successful.
“A lot of brokers aren’t familiar with the space and there are a lot of barriers to entry,” Milligan says. “People don’t understand the space like we do. I would argue that there are probably six, maybe seven brokers in the country that are really good at this. There is not a lot of real expertise out there for this industry.”
IMA is one of 22 firms that belong to Tech Assure, a nonprofit organization founded in 2001 to provide sales and technical training, education and R&D for new insurance products and distribution channels for its members, who target the technology and life sciences industries. Members are independent brokers and agents, and its sponsors are specialty underwriters and insurance carriers.
Ware says the organization provides important training and assistance to ensure its members can compete with anyone.
TechAssure executive director Julie Davis says buyers are looking for brokers with strong technical skills and expertise; general risk management experience; experience working with the life sciences industry; strong insurance market relationships; and the ability to help buyers with short- and long-term objectives in their risk management program.
In many situations, brokers have relied on underwriters to help them through the learning curve.
“A lot of the brokers who don’t have a strong skill set or a strong team that’s been doing it for a while are going to rely on the underwriters,” Ware says. “There are certain underwriters that do a very, very good job of this and have done an outstanding job of training their underwriters to focus on this industry. I put Chubb up there at the pinnacle of that. They invested a tremendous amount of time in training back when they really made this a focus as a company. A lot of folks that you see on the brokerage front may have come from the training of a Chubb or a Traveler’s or CNA or a Medmarc.
“There are a lot of very sophisticated, savvy brokers who have been doing this for a long time, and although there are a lot of very knowledgeable underwriters in this industry, there also are a lot of newer underwriters because some of these underwriters move on to the brokerage community. There’s a lot of them on the underwriting side who are phenomenal people who I would put in front of any client in the industry, but there are some who are still green and have a long way to go to fully understand how to deal with these types of issues.”
I probably get a call a quarter from different brokers who are interested in getting into this space.Tweet