2015 was not a good year for the supplement industry, from both a regulatory standpoint and also the general public’s media-driven, negative perception of the industry. It seems everyone is now confronting accusations that the dietary supplement industry doesn’t care about quality, safety or product integrity. And few, if any, expect that chorus to subside; indeed, most expect it to accelerate.
But wait—this column is about insurance. How does all of this negative news relate to your insurance premium, in particular the cost of product liability insurance?
Setting the Scene
First, you must understand that insurance underwriters have a fundamental lack of knowledge about the supplement industry. That’s pretty apparent to anyone who has tried to complete an application for product liability insurance. The questions asked of the applicant have little or no bearing on evaluating insurable risks generated by a raw materials supplier, contract manufacturer or retailer of supplements. Further, many of these underwriters are tasked with underwriting several other industries at the same time (e.g., medical devices, hospitals, clinical trials and pharmaceuticals). In other words, they are spread pretty thin.
The second part of the equation begins with the realization that insurance underwriters—the people who set the prices for this insurance—read newspapers, scour the Internet for information (good or bad), and watch TV (e.g., “Frontline”) just like you do. Put yourself in their shoes for a moment. Wouldn’t you be saying to yourself, “Am I crazy? Why am I selling liability insurance to this bunch, at any price?”
Despite this seemingly disastrous precursor for supplement liability insurance, let’s consider an amazing historical fact. Product liability insurance prices have dropped dramatically since the years right before and immediately after the ephedra ban in 2004 (and no, ephedra alone did not cause those high premiums; there were many other factors in play as well). If you were paying $100 for liability insurance in 2004, you are probably paying $15-$20 for it now. Yes, the drop has been dramatic, although it has leveled off in large part in the past 12 months.
So there are lower premiums and an increasing cacophony of bad publicity about the industry. Does this make any sense? Let’s examine what’s really happening.
Analysis & Predictions
The industry as a whole has been good to the insurance companies, not handing them insured losses that have exceeded the premiums they’ve collected. I do not have hard, consolidated data, but I can say with confidence that the insured losses I have seen in my 15 years in the industry have been few and far between. Sure, there have been some whoppers, notably from the sports nutrition and weight loss channels, but industry-wide the carriers have done well.
From a macro standpoint, the commercial insurance industry in the U.S. has historically been a roller coaster ride of steep and rapid increases in premiums followed by a steep and rapid decline in premiums. These cycles vary in length, and are tied to several factors, most notably interest rates. The last downward or “soft” cycle lasted from 1986 to 2002, or 16 years of declining prices. The current market, which began softening in 2005, is still in a downward cycle with no end in sight. So this “macro effect” has also contributed to the dramatic price drop in liability insurance for supplement companies.
Given these dynamics, what does the future hold for the premiums you’ll be asked to pay for product liability insurance? Here are my predictions and commentary.
- As the industry slowly but surely tackles issues of quality, safety and product integrity, insured loss payments will probably decrease, all else being equal. Many of the insured losses happen because of manufacturing mistakes, which arguably should not occur in an industry with proper manufacturing standards. If insured losses decrease, it will put downward pressure on premiums.
- The current “soft” insurance market will continue to have some effect on supplement insurance prices (i.e., downward).
- A lot of the bad PR these days is from events that are not insured by a product liability policy, such as class-action and individual lawsuits for false advertising, regulatory actions like the Attorneys General from New York and Oregon, criminal charges against companies and individuals, FDA or FTC enforcement activity, and other incidents that do not allege the supplement product caused physical injury to a person. Thus, an underwriter may read about these things and brush them off because “I’m not covering those anyway.”
Remain Diligent: Lower Premiums Are Not Guaranteed!
All of this sounds pretty good, right? Premiums are way down and should stay down for the foreseeable future. But remember this: when you and your insurance broker begin work together on your product liability renewal, underwriters are not looking at trends, macros, interest rates and the like. They are looking only at your company, what you do and how you do it. And your story has to be clear and compelling when it hits the underwriter’s desk.
I’ve heard underwriters say countless times how poorly organized or incomplete a company’s renewal package is when it does hit their desk. Fault for this falls squarely on the shoulders of the insurance broker, who is charged with assembling an informative and on-point package on your company. If your underwriting package is poorly presented, you’ll pay more due to the “uncertainty factor” that underwriters will subjectively apply to your premium. You don’t want this to happen, or you might end up bucking the trend of lower premiums that your competition may be enjoying.