26 April 2022
Are pharmaceutical supply chains becoming a headache?
The vulnerability of global pharmaceutical supply chains was critically exposed (and exacerbated) by the COVID-19 pandemic. From geopolitics to climate change and changing patterns in patient care, the supply-chain challenges faced by the sector are only growing.
Pharmaceutical supply chains: risk wrapped in risk inside risk
The pharmaceutical supply chain connects, at one end, the suppliers of drug-making ingredients, through to patients at the other extreme, via a complex web of drug makers and distributors, drug wholesalers, clinicians and pharmacists. It involves multiple methods of transportation, cargoes that require special handling, and time-sensitive deliveries, all of which raise clear risks in terms of global supply chain disruption, theft/security, and spoilage and deterioration as a result of delay in transit.
The risks involved in such a complex system are manifold. The complexities are also evolving with trends in patient care. Even before the pandemic, patient care was becoming more dispersed, moving away from a centralized system based around the hospital to community-based systems.
This change prompts some challenging questions around the stability of medicine supply chains. In a survey by a large healthcare company undertaken in the first quarter of 2021, a majority of healthcare executives said they had experienced a significant increase in the care delivered through non-hospital settings over the past twelve months, a trend that the respondents expected to continue.
The survey also highlighted some of the supply chain challenges that healthcare leaders anticipated as a result of this shift. More than a third expected freight management to pose an issue. Challenges to inventory management, logistics, product standardization and product assortment were also expected.
At the other end of the supply chain, a 2021 report from the Olin Business School in St. Louis, USA, highlighted the fact that American drug production is highly dependent on imports of active pharmaceutical ingredients (APIs). The EU is also grappling with the challenge with its updated Industrial Strategy, which identifies the pharmaceutical supply chain as a potential area of vulnerability.
Drug production is therefore particularly exposed to ongoing global supply chain disruption caused by geopolitical tensions, pharmaceutical protectionism (and again), extreme weather events, container shortages and skills shortages (e.g., of lorry drivers), as well as to Black Swan events such as the March 2022 Walmart warehouse fire or the grounding of the Ever Given in the Suez Canal in March 2021 (or its sister vessel near Baltimore a year later).
Technological developments in the freight sector are also changing the risk landscape. Digital solutions may be a vital aid to managing increasingly-complex supply chains but pose questions around cybersecurity. Meanwhile, the trend towards ever-larger container ships has the potential to exacerbate the scale of disruption caused by adverse events.
Pharmaceutical supply chain: insurance considerations
Duration: In light of increased disruption to supply chains, standard duration provisions in cargo policies may provide insufficient coverage. Specific risk assessment should be undertaken to highlight when extensions to duration provisions may be necessary and/or prudent.
Accumulated Value: Pharmaceuticals are a valuable cargo. It is therefore important to ensure insurance coverage includes sufficient limits of liability to cover the whole value of the cargo in case of loss or damage. This is particularly important when increasing the size of shipments or stockpiles, such as may be considered in order to mitigate risks to supply caused by conveyance disruption.
In the past decade, there has also been a move toward long-distance shipping of pharmaceuticals by sea with benefits including fewer temperature excursions, lower costs and smaller carbon footprint. Marine cargoes are however often larger than other those carried by other modes of transportation, and standard limits on liability are unlikely to provide sufficient coverage.
Attention to accumulated value and liability limits are also in the spotlight due to the trend toward ultra-large container ships – which result in far greater accumulation of risk – and the now regular occurrence of fires onboard container ships, which are bucking an otherwise positive trend for hull losses. Various organizations have or are preparing recommendations to the IMO with regards fire protection, detection and extinction, as well as for more robust inspection programs to identify dangerous goods. Shippers should also expect increased focus on fire risks from insurers.
A final point here relates to container losses from container ships, which number in the thousands per year. In recent years, losses have spiked: more than 3100 containers were lost overboard in the 2020-1 period, a 400% increase on the previous period. There are a number of causes for container losses but issues may be exacerbated by the current container shortage leading to the use of older/poor quality containers and the overloading of containers. Ultra-large container ships may also present a higher risk profile when it comes to container losses.
The spike in container losses – although still only a fraction of the total number of containers transported each year – and higher risks posed by today’s larger container ships highlights the need for robust vetting of shipping companies to ensure adequate safety and risk management. It also reinforces the need to ensure insurance policies are flexible and robust enough to cover cargo losses.
Cold Chain: Pharmaceuticals are subject to tight environmental quality controls during transport: the Pfizer-BionNTech COVID-19 vaccine, for example, must be maintained at -70°C. Marine insurers may therefore seek additional information from shippers with regards environmental management of shipments, including details of how the pharmaceuticals are packed and transported to minimize exposure to temperature change, the use of temperature recording and tracking devices (and who is responsible for this), contingency plans in case of a breakdown in conveyance, and vetting procedures for carrier and warehouse quality control systems.
Cybersecurity: As in most industries, supply chains are increasingly relying on digital technologies to improve performance – from automated pharmaceutical dispatch facilities to the digitalization of marine transport facilities, the use of internet-based services onboard ships, and even the development of autonomous container ships. The risk of cyberattack is ever present and rising, and is a growing concern for insurers. Theft from supply chains is also often connected to cyber security.
However, marine cargo policies will usually have broad exclusions when it comes to cyber-related risks. Insureds would be prudent to consider their cyber risk and consider specific cyber coverage.
Expert cargo insurance advice: an effective painkiller
The experienced Cargo team at Gallagher supports hundreds of clients around the globe with their cargo and stock risks – whether that’s coverage for domestic or international transits, or stock held at retail stores down to small drug kiosks.
The cargo team can also call on the expertise of Gallagher’s Property team and terrorism experts to assist clients in getting the best policy coverage to their specific risks. For example, it will often make sense to cover retail stock in the property market, rather than in the cargo market.
There is no doubt that pharmaceutical supply chains are a complicated business. Our team is here to help take the pain out of the process, with the right insurance policy, to allow you to continue your business with confidence.
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