While insurance may seem like the answer to every risk you face, increasingly non-insurance techniques are being implemented by organizations within the life sciences and technology space. From medical device to biotechnology, pharmaceutical firms and more, risk management strategies are being employed to blend insurance and non-insurance techniques in order to reduce uncertainty and the financial consequences of loss.
What is risk management?
As a general overview, risk management can be viewed as a process that involves:
- Identifying possible causes of loss
- Finding ways to address the causes of loss
- Selecting an appropriate technique to address the cause
- Implementing the technique
- Monitoring the firm's risk management program for results
For life sciences companies, risk management can also be viewed as a toolbox of four classic risk management techniques including:
With a heavy emphasis on safety and prevention techniques, control aims to reduce the frequency or severity of accidents. In the realm of life sciences and technology risk management, control techniques might involve:
- Legal counsel review of all product labels and warnings
- Quality assessment of vendor supplies and materials
- Strong ongoing compliance program for GMP’s
- Fire alarms and sprinkler systems within the plant and facilities
In particular, loss control techniques benefit medical device, biotechnology and pharmaceutical companies in three ways:
- Safety measures can help prevent losses while saving money and loss of life or limb.
- Some insurance companies may offer lower premiums for organizations with a thoroughly developed safety plan.
- Firms may receive further discounts from their insurance provider for implementing loss control measures.
Ultimately whatever the cost of loss control and safety measures may be, they are typically less than the costs of a single accident.
This risk management technique is often implemented when an organization can self-fund partial or all losses without transferring the risk to an insurer or another entity. While some large life sciences and technology firms establish large and sophisticated “self-insurance” programs, many smaller enterprises lack the funds or risk appetite to seriously consider this. However, there are still other ways that smaller-sized firms can consider retention as an option.
For example, using “self-insured retentions” (SIR’s) or deductibles on liability insurance is one form of retention. The higher the SIR or deductible a company is willing to shoulder, the lower the rate. Thus, stepping up to higher SIR’s or deductibles is one quick way for firms to trim insurance costs.
Second, firms can identify certain small types of losses and opt not to purchase insurance for them. One example might be breakage of glass or rental car reimbursement for company-owned vehicles. These types of losses involve low dollar figures, and some firms may feel comfortable funding for these types of contingencies out of regular operating funds.
An insurance policy is a prime example of the transfer technique as it involves shifting the financial consequence of loss to another entity. Insurance is a common risk management technique, but it works best and is most cost-effective when integrated with avoidance, control and retention. Prior to purchasing insurance, executives should ask themselves:
- Is this kind of loss best addressed by insurance?
- Which insurance proposal offers the most relevant coverage?
- Which offers the best value?
- What kind of service can the company expect if it has a claim?
- How financially stable and solvent are these insurers?
Avoidance means shying away from an activity because of its potential for losses. For example, due to a liability of lawsuits, there are now few companies which manufacture intra-uterine devices. Some device companies have found these lawsuits so prevalent and costly that they mad a conscious decision to stay out of these product lines. Life sciences and technology firms can consider avoidance as a risk management tool by deciding to avoid functions or activities which may entail a risk of severe loss. Examples might include:
- Deferring a new product entry due to concerns over liability lawsuits for defective design.
- Deciding to not acquire a new company or line of business due to potential for accidents and possible claims.
- Opting out of existing activities or deciding not to take part in other activities due to the risk of loss.
Avoidance is an extreme risk management technique, reserved largely for risks which a firm deems uncontrollable or extremely threatening to its financial existence. Any healthy enterprise must also strike a comfortable balance between serving the needs of its customers all the while balancing risks in an intelligent manner.
Life science firms can view risk management as a four-legged table supporting their financial health. Focus on loss control, retention, transfer and avoidance to boost your corporate immune system against the potential of liability claims and lawsuits. To see how insurance can complement your risk management strategies, contact the Axis Insurance Group to speak with one of our specialized brokers today.
As a member of the TechAssure network, the above was provided by Quinley, KM Risk Management 101 for Life Sciences Technology Companies (Medmarc, 2006).