Pharmaceutical companies are likely to see another round of price increase in 2021. This is on the back of reinsurance price hardening in sectors like pharma and healthcare, especially during COVID times. However, an increase in drug prices may not take place immediately.
Reinsurance is a form of insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. India’s sole domestic reinsurer is the General Insurance Corporation of India (GIC Re).
Insurance sources told Moneycontrol that the premium rates could increase by 15-20 percent during the upcoming renewal cycle in 2021.
“There has been a rise in reinsurance costs due to the rise in claims globally in the pharma sector, and, hence, this translates to Indian insurers in the form of a premium hike for reinsurance policies. This will force insurers to increase premiums,” said the head of underwriting at a large private non-life insurer.
However, sources it is too early to say whether drug prices will increase. They said, typically, pill prices don't take into account insurance premium rises, and it is other factors such as raw material prices that cause a price hike in medicines.
Fire insurance and bulk drug segment
Last year, fire insurance premiums were raised 3-4 times by general insurance companies, due to a rise in claims. The bulk drugs segment was also classified as one of the eight occupancies, along with chemical manufacturing below 32 degrees centigrade flashpoint, rubber goods, plastics, textiles, thermal power plants, steel plants and transporters' godowns.
A senior pharma executive, who is into the manufacturing of Active Pharmaceutical Ingredients (APIs) and intermediates, who didn't want to be named, said that while he isn't aware of any increase, he added that there isn't any change of situation on the ground that warrants an increase in fire premium.
There were incidents of fire accidents reported at pharmaceutical units across the country, following the reopening of lockdowns, when there was disruption of work. The executive said fire accidents used to happen in the pharma segment, especially in bulk drug units, before COVID-19 as well, as the nature of business is to deal with hazardous chemicals, reactors and boilers.
“Industrial fire insurance policies cost went up substantially much before COVID-19 but we haven't seen any significant increase now,” said Satyanarayana Chava, CEO of Laurus Labs.
Vaccine storage, transportation issues
Insurance company executives, however, are of the view that there has been a claim increase in 2020, and, for 2021, there are added concerns about vaccine storage and transportation that would increase the claim costs for the pharma/healthcare industry.
However, it is to be noted that only a small portion of the pharmaceutical industry will be responsible for distribution. But from an insurance perspective, when the reinsurer hikes rates, it reflects on an industry-wide basis. Hence, a price increase will affect the entire sector.
“Pharmaceutical firms feeling that the cost increase is arbitrary, but there are concerns among reinsurers about pricing as well. In 2021, if the COVID-19 vaccine comes in, we have to make provisions for added claims due to the possibility of fire-related accidents in storage facilities, which could lead to big losses,” said the senior vice president of commercial portfolio at a state-owned general insurer.
He also added that the lockdown and temporary plant shutdowns across India also led to a 10 percent rise in fire accident-related claims this year as soon as manufacturing facilities reopened.
Following a directive by GIC Re in February 2019, insurers were mandated to hike fire premium for a set of eight occupancies.
Claims data, reinsurance premiums key criteria
When it comes to pricing products, insurance companies are dictated by past claims data and reinsurance premium.
Claims data collected from the Insurance Information Bureau showed a significant rise in loss ratios in fire insurance. This meant that the premium collected was not proportional to the claims paid.
For a few insurers, loss ratios had crossed 160 percent, which meant that for every Rs 100 collected as premium, they paid Rs 160 in a claim. Add to these natural calamities that led to a rise in fire and allied perils like lightning and explosions due to accidental fire incidents.