A sophisticated buyer is one who understands risk and program structure, is transparent, and can have high-level conversations. This is how biotech industry insurance buyers were described by panelists on Advisen’s quarterly D&O Claims Trends webinar.
While it may sound more like a broker and underwriter dream than reality, it is one of the benefits of working with this challenging class, according to the panelists.
“Because it’s an area where the buyer understands what they are purchasing and what it is for, they are willing to take the time to get it right and understand the cost associated with it” explained Kevin Lacroix, EVP of RT ProExec. Although it can be a challenging D&O class to underwrite and place, it can also be an extremely rewarding class for those willing to make the effort to stay informed and do the hard risk selection and risk segmentation work.
According to Advisen data, as a whole, the biotech industry has a higher frequency of securities class action suits per company than other industries, but on average the severity of settlements tends to be smaller. The smaller settlements are likely a reflection of the smaller companies which make up a large portion of this segment.
The reason biotech companies are sued more frequently has to do with some specific characteristics of the sector. According to the panelists, the most significant is single factor vulnerability.
“Many biotech companies have something about their composition or operations that make them vulnerable to a pinprick which could significantly deflate their marketplace perception and future prospects if it were to occur” explained Lacroix.
Other characteristics that expose biotechs to litigation include unpredictable regulatory and clinical trial processes, issues associated with product efficacy or product safety, and the use of stock promotion firms.
Small biotech firms frequently use stock promotion firms to increase their share price. “Over the past few years we’ve seen a number of lawsuits where the smaller biotech’s have used promotion firms to drive up their share price only to see the share price tumble when the promoter’s exaggerations come to light” said Lacroix. “It’s a particularly volatile combination of circumstances.”
When it comes to placing biotech risk in the market “it is that volatility from pre-clinical to commercialization and all phases in between that causes challenges in underwriting and placing a particular risk” explained Christian Hoffman, Senior Managing Director at Aon. As a result, most players in this segment are larger, industry focused insurers. “There is a lot of deep underwriting that goes into a biotechnology account” Hoffman explained. “It leads to a somewhat smaller marketplace because some are more conservative from both a primary and excess perspective.”
Ray Hannan, Jr. SVP U.S. Underwriting Manager at Aspen agreed. “It’s definitely a class that all underwriters have to dig into. If you’re underwriting in this sector you have to get it right.” For example, the life cycle of a startup biotech from phase one clinical trials through regulatory approval is a process of continual fundraising which requires a level of positivity to get new investors. “That can create a conflict, if you remain overly positive and there is a regulatory setback it can cause the shares to crash.”
Fortunately for brokers and underwriters, biotech boards and management often understand what is at stake and what their exposures are. Many of these individuals have seen it all when it comes to the biotech space, and because of their past experience they are willing to do what it takes to get it right.
Josh is an Editor at Advisen in the Research & Editorial division. He is the lead editor responsible for several of Advisen’s Front Page News editions and he also originates custom research on behalf of Advisen’s largest insurance company clients. Contact Josh at [email protected].
