By Donald Esker and Robert Gauss

CLIENT: A developer and manufacturer of component parts used in medical devices

CHALLENGE: The client had an opportunity to supply component parts for an implantable device. Senior executives rejected the op-portunity, nervous that the situation was too similar to a previous problem: A part they had manufactured was used in another type of implant that ended up causing infections. The implant manufacturer was sued, and our...

EVALUATION: We began by systematically collecting and analyzing the litigation history for the implant product under consideration. Since it was a new type of device, we also looked at the loss history for analogous products. We then looked at the litigation history of products manufactured from similar materials " including nonmedical applications. Finally, we interviewed colleagues and business partners who had experience with similar products.

We use a relative risk model comparing prospective risks to the risks associated with existing products. The process uses a two-axis map with coordinates for frequency (how often a product incident might occur) and severity (the cost of an event in terms of harm or damages). Existing products and prospective products are mapped together, providing a visual indication of the risk. (see graph, "Life Sciences Inherent Risk Map") We prefer to use the risk map rather than the raw risk score (risk = frequency multiplied by severity) because the map provides an indication of the ways to improve the risk. We also plot varying positions in the value chain to demonstrate the relative degree of risk versus reward of maintaining or moving downstream (toward the consumer). The implications of a change in position are among the most common concerns, because clients seek to understand the potential in-crease in risk versus the revenue opportunity " which is typically quite large.

Clients seek to understand
the potential increase in risk
versus the revenue opportunity.

OUTCOME: We learned that the risk profile for the new application had a lower potential severity (in injuries and dollars) and was less likely to occur. Product liability risks for our client (the material supplier) were much lower because of the client's position on the value chain. The risk profile for the new application was on a par with the client's existing book of business.

The client agreed to supply the material subject to contract terms and conditions that assigned liability fairly and required each party to defend, indemnify, and hold them harmless in the event of a claim or lawsuit. The decision to supply this material has opened the doors to other, similar opportunities. Most importantly, it has allowed them to meet and/or exceed growth goals while considering (and pricing) the relative degree of product liability risk within the product's pricing structure.

Donald Esker is vice president and Robert Gaus is senior vice president at Marsh Risk Consulting.

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