Key risks and insurance trends for life sciences in 2023

A recent survey of life sciences executives has highlighted the risks that they are most worried about going into 2023. This is of particular note for life sciences dealmakers, in particular those intending to obtain an insurance policy to cover any loss arising from breach of the representations and warranties.

New Opportunities

As we have previously noted, many in the sector are focusing more on collaborations rather than new product development. Many also cited the opportunities and uncertainty created by digital health solutions such as wearables, the ability to conduct aspects of clinical trials remotely as well as cell and gene therapies.

New Data Risks

However, these new opportunities also bring new risks. As data becomes ever more important to healthcare companies, both from a commercial perspective but also in terms of obtaining regulatory approvals, the risks of a data breach or cyber attack also rise. While there are differences between the US and Europe in terms of the permitted levels of data collection and use, this is an area that regulators, patients and the public are becoming more focused on.

Unsurprisingly, cyber criminals have targeted the industry and the increase in large-scale attacks against healthcare companies is one of the reasons that insurers are now reviewing their approach to coverage. As a recent case in point, Lloyd’s of London will require its underwriters to exclude state-backed attacks from standalone cyber policies as of 1 April 2023. While state-sponsored hackers continue to target Big Pharma, industry dealmakers should also be alive to the importance of using the diligence process to identify smaller attacks.

The costs of not doing so can be severe – financially and reputationally. In one high-profile enforcement action (albeit involving a travel company), the UK Information Commissioner’s Office cited a buyer’s failure to undertake sufficient diligence around data security – both at the time of the acquisition and on an ongoing basis thereafter – and issued a GBP 18 million penalty against the company as a result.

ESG Factors

Beyond security concerns, survey respondents were increasingly focused on ESG factors. We have discussed previously that health equity and environmental factors are becoming more relevant in a life sciences context. While the sector is often seen as an almost automatic positive from an SDG perspective, it is also a huge user of energy and as prices rise this is something operating companies need to contend with. Life sciences is enjoying a high level of public perception following the pandemic, but it may soon become a target for environmental campaigners.

Implications for W&I (R&W) Insurance

From an M&A perspective many of these issues (such as data breaches or product safety concerns) can be difficult to have (fully) insured through a warranty and indemnity insurance policy. However, these policies can be a great tool in a dealmaker’s kit when trying to manage risk or bridge pricing expectations in a transaction.

Lower deal activity and increased insurer capacity, has also resulted in a considerable softening of the warranty and indemnity insurance market. Premiums and policy deductibles have declined, and more insurers will consider providing at least partial coverage for risks they had not previously been willing to cover at all (e.g. cyber, product liability, environmental). In order to maximize the value of insurance, it will likely require additional work at the outset of diligence in the transaction, as well as a law firm that understands both the life sciences sector and how to navigate the insurance market.