New Complexities and Risk Management Requirements of the Pharma Supply Chain Post-COVID

The pandemic has forced stakeholders including asset owners, financiers, insurers/reinsurers, and brokers to re-assess risks to key facilities across the pharmaceutical and life sciences sector.

Entirely new complexities have entered into the pharma supply chain that may require new risk management considerations are put in place.

As such, it is more important than ever to ensure accurate values at risk are declared to insurers to avoid under-insurance (in the case where a claim is not fully paid out) and over-insurance (where premiums paid are higher than require for current replacement costs).

With the sector facing unprecedented demand on resources, in part due to Covid vaccine roll outs, there is a greater need than ever for asset management best practice.

Declaring accurate defendable costs to insurers is vital in the post-pandemic environment, not only because the equipment suppliers, consultants and contractors may not have the same availability, but also because insurers have faced unprecedented claims or loss of revenues due to Covid and are seeking to push up premiums or challenge claims as a consequence.

Here are just some of the ways in which the situation has changed and could cause concern to those focused on property damage insurance across the pharma industry.

Availability of Materials

At the start of the pandemic many governments asked non-essential industries to close or reduce output in an effort to control people movement.

Many industries had little prior notification of these shutdowns and were therefore not in a position to boost inventories.

As the disruption has continued, companies and suppliers have struggled to maintain output, meaning that some materials and goods have seen rapid price increases.

Just by way of example, in early 2020, many of the world’s steel blast furnaces were idled.

Although demand has picked up, particularly in markets such as China, these blast furnaces has been slow to come back online, and steel prices have increased rapidly as a result.

For example, China steel costs are up some 40-60 per cent from March 2020.

For the pharma industry this increase in steel costs could have an impact not only on reconstruction costs for buildings but also for the replacement of specialist reactor vessels and associated pipework after a loss.

Availability of Specialist Personnel

While the roll out of the vaccination programme across many countries is offering hope for a return to some form of normality, building contractors and equipment suppliers in the pharmaceutical industry have reported that they continue to have issues getting specialist personnel to desired locations.

Many countries have made the pharma industry a priority for fast-track movement of materials and supplies, but it is not totally clear if this would this apply to expert personnel required to install specialist equipment or facilities.

Certainly, it would appear that not everyone able to travel is keen to do so, even if borders are open, so this may mean higher costs to attract the right talent.

Disruption to Global Supply Chains

The news has been filled in recent months with discussions on global supply chains and their vulnerability.

From the Suez Canal blockage pushing up the cost of oil and commodities to the semi-conductor chip shortage causing some vehicle manufacturers to scale back outputs, we live in a connected world that is open to disruption.

Trade Disputes

The reported spat between the European Union and the United Kingdom over the distribution of vaccines manufactured in each other’s areas has highlighted another area of concern – trade disputes.

This may be exasperated in the aftermath of Covid as governments seek to maintain employment, protect domestic industry, and raise taxation.

While Trump has left office, many of his tariffs remain and there is little sign of these being removed in the short term.

Certainly, we have seen increased attention to cross-border regulation and compliance which may push up further the cost of materials and equipment.

In Conclusion

Owners and financiers of facilities and infrastructure in the pharma and life sciences sector have to carefully balance the need to reduce risk and minimise losses while improving governance.

For insurers and reinsurers of the pharma sector, improving pricing and risk selection, while increasing premiums and minimising disputes is key.

Insurance brokers are of course also a key stakeholder in the pharma sector and would do well to pay attention to the new risks and complexities.

We are experiencing a situation in which the signs are pointing to the cost of reinstating premises or facilities, after an insured loss, being significantly different to those we would have seen pre-Covid.

Not everyone has understood the implications of these changes.