Pharmaceuticals as cargo

The global pharmaceutical industry which was around US $ 935 billion in 2017 is expected to grow to US $ 1.53 trillion by 2023. Giant multinational pharma companies dominate the markets across continents, while many countries have their own home-grown very large pharma companies too, apart from many more small and mid-sized companies. One would think that cargo underwriters the world over would be enthused and rub their hands in glee at this huge opportunity. The reality is that underwriters look at ‘pharma cargo’ with great trepidation. This is partially due to the identified exposures and partially due to the bad experiences of the past.

In order to ascertain if pharmaceuticals are really bad as ‘cargo’, there is the need to understand what the term ‘pharmaceutical’ includes. Two broad classifications can be  1) Bulk drugs or API (Active Pharmaceutical Ingredient), which is the basic drug used in manufacturing medicines after compounding and under different brand names. 2) Formulations, which represent the medicine in the form used by the consumer. In terms of types, pharmaceuticals can be tablets, capsules, syrups,ointments, drops, injectibles & vaccines. Another classification can be on the basis of whether the particular pharma product requires to be transported/stored in controlled temperature or not. The transit risks associated with each of the listed pharma type will be different, apart from the general risks applicable to all of them as cargo.

Insurers, even before looking at the details about the pharma products in question, should first understand who the proposer is. If the proposer is the manufacturer of the pharmaceutical products, this can be perceived as a ‘ better risk’ as compared to the proposer being a buyer of the cargo, contract manufacturer, toll manufacturer or distributor. Why? The losses typical to pharmaceuticals come with the rider ( from the insurers’ side) that even if the packing shows signs of damage, testing would be needed to figure out if the contents are damaged too. ‘Fear of Loss’ cover is something any underwriter would dread to give & rightly so. If the proposer is a buyer or distributor, he will not have the wherewithal for testing  and if the insurer insists on the same, there will be a stalemate. Similarly, if a contract manufacturer/toll manufacturer is the proposer, in case of the slightest indication of external damages, the principal may straightaway reject the cargo and the insurer  will not settle the rejection claim unless tested and the damages established. I can recount the case of a large Indian pharma manufacturer who exported some formulations to the US of A, where water damages were sustained and the entire consignment was reported as a Total Loss amounting to INR 160 million. Panic buttons were pressed and there was a flurry of activity behind the scenes. The assured airlifted the entire damaged cargo, checked it at their Indian facility and certified that the contents were intact and it was only the packaging which had to be replaced. The claim amount came down to around INR 1.2 million.

It will be evident from the above, that whatever be the type of loss, whether to the cargo itself or the packing, Testing presents the first challenge. The other issues can be that repacking or salvaging is extremely difficult, given the nature of the cargo ( impacting human lives) and the consequent strict regulations in different countries, especially in the western world. Again, it is important to identify who the proposer is. If the assured is the manufacturer himself, repacking/re-labeling of secondary packing can still be an option but not in case of a buyer or a contract manufacturer or distributor. We had a case of an Indian pharma manufacturer who also did contract manufacturing. A consignment of paracetamol meant for Russia was damaged due to rainwater at Goa. The loss assessor insisted that, since it was not any life-saving or specialized drug and since only the packaging was damaged, it could be repacked. Assured pleaded that since it was a contract manufactured consignment, repacking/acceptance by the Russian buyer were issues. Loss assessor then insisted that the consignment be sold in the local market. Assured provided an estimate of expenses which was higher than the sum insured. It was only then we realized that the entire packaging including the aluminium foil strips containing the tablets carried the Russian company’s details and logo and if the contents were to be sold locally, complete unpacking down to the primary level followed by testing of the tablets, etc. would be needed. This option was therefore ruled out and the claim settled.

Two of the biggest risks relating to pharmaceutical products are 1) Temperature fluctuation 2) Hijack of entire consignment. As stated earlier, some pharma products require controlled temperature during transportation and storage. Any deviation in temperature below or above the prescribed range would result in the cargo being unfit for human use, whether tested or not. Here it becomes extremely important to understand the countries to which these products requiring controlled temperature are exported. Reasons are two-fold — One, if it is to the US of A or most European nations, the regulations are extremely stringent. The slightest variation in temperature readings and the cargo is sought to be destroyed with no opportunity for testing or taking back to the country of origin. Two, if the export is to certain African countries, the availability of cooling facilities will be a big question. Most airlines give conditional AWBs stating that temperature will be maintained as demanded SUBJECT to availability of cooling facilities in these geographies. This becomes very relevant in cases where there are no direct flights and transhipments are done. Also, controlled temperature is maintained , either by using refrigerated containers or in some cases, gel-packs are used. The gel-packs have a limited life and at times due to delays, they give way and claims run into disputes as to whether the cause of loss was failure of refrigeration or delay.

The risk of hijack is more pronounced during inland transit legs especially in case of very high-value medicines or bulk drugs (which can be easily sold to small-time formulation manufacturers). A secondary risk associated with hijacks is that, even if the consignment is subsequently traced, it is usually declared unfit for human use, because there will be no evidence available as to the conditions and temperature the cargo was stored and if it cannot be certified to  have the potency needed for its intended medicinal use. No manufacturer would venture out with an opinion in this regard.

The values as also the profit margins in case of certain classes of pharmaceuticals tend to be very high. In case of an entire container of high value medicines becoming a total loss due to temperature fluctuations or an entire container getting hijacked, usually, if the assured is a manufacturer, he is quickly called upon by the buyer to send a replacement consignment. Hence, looking at the enormity of losses, the high profit margins ( as high as 60-80% in some cases), many insurers as a measure of abundant caution revise the basis of valuation under the policy for temperature fluctuation and hijack losses to ‘COST OF RE MANUFACTURE’ + transportation expenses at actuals and disallowing the profit element built-in. This is, notwithstanding the fact that premium is paid on invoice value, which includes the profit element. If you think this is theory and will not be possible in practice, you are wrong. There are policies running in India for leading pharma manufacturers with the stated condition, mutually agreed at policy inception.

Pharmaceutical products as cargo are not too different from the rest. So too the underwriting involved. A thorough understanding of the interests insured, the mode of conveyances used and the geographies where they go are a MUST. Equally important is to study the Standard operating Procedures of the assured, warrant that these will be strictly adhered to, price the policy right, have suitable deductibles and basis of valuation. Not bad cargo, after all.