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Risks in the chemical and pharmaceutical industries.

TO BETTER SERVE their customers' needs, Zurich International-U.S. has implemented a strategic change in the way they put together coverage and servlce programs. By using a survey developed through a sophisticated research methodology, the company hopes to gain knowledge of risk managers' specific insurance and service requirements in certain industries.

So far Zurich International-U.S. has utilized this approach for chemical and pharmaceutical companies, and has created a special account team consisting of an account executive, tWO underwriters, a claims manager, a senior risk engineering consultant and two account assistants - to work exclusively with their clients in these industries.

Zurich International-U.S. adopted this approach in recognition of the fact that each industry faces unique risks that require special attention from underwriters, claims managers and engineers. In the chemical and pharmaceutical industries, the highly sophisticated nature of the products and the manufacturing processes used to create drugs and other chemical products lead to a number of risk management concerns.

For example, chemical and pharmaceutical companies use potentially hazardous substances in their manufacturing processes, requiring risk managers to mamtam ngorous manufacturing and loss control programs while meeting or exceeding existing regulatory requirements. "These hazardous substances include toxic chemicals, petroleum products, solvents and fertilizers," says Gerald A. Heinz, corporate risk manager for Dow Chemical Co., which is based in Midland, Michigan. "The inappropriate handling of these substances can cause accidents such as explosions, fires, reactive chemical incidences, chemical releases into the atmosphere and spills."

When such incidences do occur, they can leave chemical and pharmaceutical companies vulnerable to major losses, says John D. Ormerod, vice president and director of marketing at Zurich International-U.S. in Schaumburg, Illinois. "The loss potential in these industries tends to be more catastrophic than in other industries," he says. "And since each chemical or pharmaceutical plant uses a unique manufacturing process, insurers must customize their coverage and service for each client."

The potential for catastrophic accidents demonstrates the vital need for safety standards within the industry. In fact, the potential for explosions and fires remains a perennial safety concern at chemical and pharmaceutical companies, says Michael Newman, loss control manager at Johnson & Johnson in New

Brunswick, New Jersey. Mr. Newman says that an example of such a fire hazard involves the use of fluid bed dryers, which are used in the manufacture of pharmaceuticals. "These devices 'code,' or blend, ingredients used in the making of particular drugs," he says. "Since some of these ingredients may be flammable, strict safety precautions have to be followed." Due to these risks, chemical and pharmaceutical firms generally employ the best fire protection systems available, says Harvey R. Molloy, risk manager at Pfizer Inc. in New York, New York.

There are also other unique manufacturing concerns in these industries. For example, many of the manufacturing processes used in the pharmaceutical industry require maintaining sterile facilities, says Thomas Douglas, risk manager at Merck Co. in Rahway, New Jersey. "Pharmaceuticals are manufactured in 'clean rooms,' which are separate from other work areas and are kept completely sterile," he says. "Specific procedures must be kept in force to govern the work that goes on in these rooms."

Environmental Risks

IN REGARD TO environmental problems, waste treatment disposal is a continual concern for the chemical industry, says Lisa Bendixen, director of environmental, health and safety at Arthur D. Little in Cambridge, Massachusetts. "The nature of waste streams in some plants could lead to problems, particularly if there is stormwater runoff at a plant that has a leak," she says. "Other pollution problems can arise if certain chemicals or substances used in manufacturing processes become mixed together inadvertently."

Among some of the methods that chemical companies can use to reduce pollution emissions emanating from their plants and facilities are recycling, redesigning manufacturing processes and installing new pollution control equipment, declares Donald Helin, director of safety and plant operations at the Chemical Manufacturers Association, which is based in Washington, D.C.

However, a similar organization for the pharmaceutical industry known as the Pharmaceutical Manufacturers Association reports that in the case of pharmaceutical firms, meeting the requisite permitting and emission regulations is often problematic. This is because by nature pharmaceutical manufacturing involves frequently switching from product to product at a given facility, as opposed to continually processing a single product. As a result, air emissions and pollution streams emanating from these plants will change whenever the manufacturing cycle is switched, making it difficult for pharmaceutical firms to meet regulatory requirements that were designed for companies that continually process only one product.

For the insurance industry, the current legal environment and the problems associated with the Superfund law have preempted carriers from being able to provide much assistance to their insureds, says Mr. Ormerod. "However, to be able to meet their clients' environmental exposures, carriers must have substantial capacity," he says. "The insurance industry will have to develop a capacity of at least $100 million before it can meet the needs of chemical companies."

Products Liability

PRODUCTS LIABILITY is another risk management concern, particularly in the pharmaceutical industry. "Liability issues represent a significant exposure for the pharmaceutical industry," says Mr. Molloy. "Given the fact that liability losses in the pharmaceutical industry are often financially devastating, and due to the litigious nature of U.S. society, pharmaclcal manufacturers place a great emphasis on product safety."

As a result, many pharmaceutical manufacturers have a reporting structure in place that allows them to keep track of adverse reactions to particular compounds. "Merck has a worldwide adverse reporting system in place for all of its products," says Mr. Douglas. "If we receive reports of seven adverse reactions to a particular drug, we then study the drug to see what steps to take next."

Long-Tail Claims

SINCE PRODUCTS LIABILITY exposures in the chemical and pharmaceutical industries are also often long-tail in nature, claims in this industry tend to be highly specialized, thereby requiring a great degree of expertise from insurance carriers, says Lynn Ann Quigley, team leader and account executive for Zurich International-U.S.'s chemical and pharmaceutical account team. "To meet the needs of their clients' claim requirements, insurers must focus on providing top quality service," she says. The widely held belief that occupational diseases such as cancer and leukemia are prevalent in the industries represents another potential liability for chemical and pharmaceutical firms, says Ms. Quigley. "Although there's no conclusive evidence that such illnesses are associated with working in these industries, many insurers perceive that there is a high nsk for these conditions, so they are unwilling to write certain forms of coverage."

Coverage and Pricing

FOR THE CHEMICAL and pharmaceutical industries, insurance coverages include general liability, products liability, business interruption and workers' compensation. And because of the unique set of problems associated with these industries and their exposures, risk managers need to have insurance coverage and service that allows them to adequately protect the assets of their companies.

In recognition of this fact, Zurich International-U.S. interviewed risk managers about their insurance concerns. The end product of this research was a survey that contained questions describing the needs, or "attributes," that the risk managers indicated were of great importance to them. These attributes were contained in 10 general categories: coverage issues, financial stability, claims issues, premium cost issues, selfinsurance, loss control issues, relationship issues, broker issues, global capabilities and risk management information systems.

The survey's results showed that despite the unique and difficult risks inherent in these industries, between 80 percent to 85 percent of the respondents regard coverage issues, financial security, relationship issues and pricing issues to be the most important.

In regard to coverage, risk managers indicated that attributes concerning property and business interruption exposures, liability exposures and catastrophe coverages were highly important. This included attributes such as "coverage that does not have any gaps" and "coverage interpretations that won't cause a problem down the road." The survey also indicated that although risk managers are greatly concerned with pollution coverages and related issues, they are generally dissatisfied with the industry's efforts in this area.

Respondents also rated two types of pricing issues as very significant for their needs. The first of these was stable pricing, which was represented by attributes such as "premiums that don't go up 10-fold over a short time." The second issue dealt with the carriers' pricing philosophy, and included attributes such as "pricing insurance recognizing the value of improvements" and "the company prices the risk, based on the risk, not on the manual."

Although Zurich International-U.S. has been using the results of this survey to help them create products for their customers in the chemical and pharmaceutical industries, the insurer plans to conduct other studies using the same research methodology for the industrial machinery and computer and electrical components industries, says Ms. Quigley. Overall, risk managers may be encouraged by the study, which represents one insurer's attempt to gain a better understanding of their clients' business and coverage needs.
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Article Details
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Author:Christine, Brian
Publication:Risk Management
Date:Jun 1, 1993
Previous Article:High-rise risk management.
Next Article:Looking ahead to long-term care.

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