(Re)insurers must be ready to respond to the profound challenges posed by the US opioid crisis, argues Erik Soria who heads up casualty reinsurance, Sirius Bermuda
More than two million Americans are addicted to opioids, and more than 100 of them are dying from overdoses each day.
To put that figure into perspective, opioids are killing more people each year than car crashes. And the fatality rate is expected to rise at a rate not seen before in the country’s history.
Blame for the growing crisis has been leveled squarely at the drug manufacturers and distributors, which have been the target of hundreds of lawsuits. Lawyers for cities, counties and states across the US have sued the firms they claim are responsible for coordinating a criminal and fraudulent scheme with doctors to deceive the public at large.
The suits allege that the companies misled patients into thinking that opioids are safe, effective and required for both acute and long-term treatment of chronic pain.
Just last month, pharmaceutical firm Insys Therapeutics negotiated a settlement of at least $150mn with the US Department of Justice which had accused the firm of paying kickbacks to doctors who prescribed the addictive prescription painkillers. In 2017, the firm’s founder was arrested on the charges, which he denies.
The Insys case is far from an isolated incident and undoubtedly a sign of things to come. The past two years alone have seen at least three other settlements. US distribution giant McKesson agreed to a $150mn settlement in 2017 after it was accused of failing to detect “suspicious orders” of opioids.
Meanwhile, rival Cardinal Health was fined $44mn on similar charges and CVS paid out at least $6.5mn for failing to report thefts of opioids from its pharmacies.
To date, the punchiest suits have been brought by government agencies, states, cities, counties, and municipalities, all trying to recoup damages incurred in their jurisdictions. But pension funds, hospitals and unions have all begun to follow their lead. The damages sought range from the costs of health care, social services and law enforcement to charges taken by employers, who have found themselves on the hook for lost productivity, health insurance and rehab bills.
Typically, there are two categories of defendants in which insurance and reinsurance companies should be watching closely. The first is the prescription opioid manufacturers themselves, as well as the doctors and clinics that partnered with them.
The second category is the prescription opioid distributors, pharmacies and pension benefit manufacturers, which all form part of the distribution chain.
Data from the Centers for Disease Control and Prevention show a sharp upward trend in opioid use starting in the late 1990s. By 2014, prescriptions for the addictive drugs were at five times their 1999 levels. And preliminary data suggest that trend continued well into 2018.
That macro data twinned with discoveries resulting from the numerous – and in some cases ongoing – government investigations have unearthed evidence that is being used by claimant lawyers, who are taking their clients’ cases to the courts.
And that should be a concern to carriers. Not least because older liability policies out there – without an opioid exclusion – will certainly have limits exposed that both plaintiffs and insureds will want access to. Even more recent policies that do include exclusions could be at risk. Until the wordings have been tested, the exclusions are anything but foolproof.
Data from earlier lawsuits is likely to beget further litigation as each case bolsters the volume of information in the public sphere. And that will be a concern to (re)insurers.
Plaintiff lawyers are likely to look for evidence of commercial general liability (CGL) policies, product liability (PL) cover as well as protection for directors and officers (D&O).
The CGL cover will be the first focus of insureds and will invoke a duty to defend. However, it may be a challenge for those policyholders to prove that the allegations against them represent an “occurrence” under the cover because claimants have argued that the damage was intentional.
Meanwhile, PL carriers typically cover damages due to bodily injury from products and those policies are almost certainly in play. Meanwhile, D&O insurers are already on risk after suits from shareholders against opioid manufacturers who stand accused of making false public statements.
And if the causes for action were not enough, there are a number of factors that threaten to make things much worse for insurers. Not least because, entire towers are exposed. For example, it seems highly likely that even the top layers of liability towers for the likes of CVS, Walmart and Costco are vulnerable. Insurance carriers on those towers will all be pulled in for their respective shares, meanwhile, reinsurers face a potential clash if they participate on multiple reinsurance treaties. There are, of course, max limits and loss ratio caps to limit the downside for reinsurers, but underwriting results will inevitably be impacted if and when all these claims come barreling down.
Those concerns will undoubtedly be compounded by the fact that reinsurance casualty treaties have been consolidated over the past decade, raising the probability that carriers will find themselves on the hook for any settlements that are negotiated between claimants and an insured that has cover under various insurance coverages buried within one of those treaties.
Further, the ability to comfortably pay those claims has been hampered by the soft market environment, which has reduced the margin available to absorb the cost of damages from the opioid epidemic.
Meanwhile, opioid exclusions, which have been introduced to liability policies in recent years, remain untested and can include coverage givebacks if the damage is not a result of violating federal drugs laws and other regulations.
At the same time, the issue is front and foremost in the public consciousness with more than 50 bills currently before congress designed to address the growing crisis. And that is all the more reason for the industry to stand up and take note. We cannot forget the public backlash over tobacco and asbestos.
The exposure from opioids is far reaching, similar to that of cyber security and other emerging risks. That, in turn, has created a systemic risk that is driven by solid data and evidence of wrongdoing, which has been the subject of government enforcements for large and meaningful dollar sums.
But there could be more to come. And it has the potential to affect the casualty liability space for decades because the crisis will take years to rein in.
Even when it abates, the fallout is likely to leave insurers to pick up the cost of damages ranging from birth defects, overdose deaths and broken families to lost jobs and the bill to get communities back on their feet. There is more to come with this societal tragedy and it will likely get worse before it improves. The federal and local government is finally acting after feedback and pressure from its citizens and constituents. We, the insurance and reinsurance community that serves them, should get ready to react as well.