Pharma Insurance: A Mechanism for Risk Mitigation


Mr. Adithya D. Shetty1, Dr. Ankitha Shetty1, Mrs. Jyothi Shetty1, Dr. Sandeep Shenoy1, Dr. D. Sreedhar2,

Mr. Santosh Nayak1*

1Department of Commerce, Manipal Academy of Higher Education, Manipal - 576104

Dist. - Udupi (Karnataka) India.

2Department of Pharmacy Management, Manipal College of Pharmaceutical Sciences,

Manipal Academy of Higher Education, Manipal - 576104, Dist. - Udupi (Karnataka) India.

*Corresponding Author E-mail:



Insurance plays a vital role in risk mitigation of pharma supply chain. It’s a mechanism where losses sustained by few are stretched among many those are exposed to kind of similar risk. Unfortunately, insurance is not availed by the intermediaries in pharma supply chain which eventually leads to heavy losses in the regular supplies of the drugs. The pharmaceutical industry in India has secured the third position globally in terms of its volume and adds approximately 10% to the global pharmaceutical production. According to the reports published by the Department of Pharmaceuticals, the Indian Pharma Industry is pegged at INR 810 Bn which is inclusive of domestic sales and exports. India is an international hub for high-quality medicines at an affordable price with a rich vendor base. As logistics and supply chain plays an important role and contributes immensely to the overall growth of pharma sector, risk mitigation becomes inevitable. Poor supply chain in pharma leads to various fatalities due to mishandling of the product, pilferage, poor packing, damage during transit, accidents and other nature hazards leading towards expiry of drugs. Low level of supply chain integrity, absence of contingency planning, inadequacy in resources and infrastructure, lack of support in terms of regulation, adoption of sub-optimal standards in technology are included in it. Currently, there are myriad inefficiencies spotted in both assets i.e., physical requirement like storage and transport as well as enablers i.e., efficiency improving system, technology and process all along the pharmaceutical supply chain. Inspite of all this, the pharma companies opine that there is no adequate insurance taken by the wholesalers and the distributors in the front end distribution of critical drugs. Thus, the study is intended to analyze the product liability exposure arising during pharma supply chain and the quantum of insurance required to mitigate the same.


KEYWORDS: Pharma Logistics, Supply Chain, Pharma Distributors, Insurance, Risk Mitigation.




The pharma logistics is the channel through which essential pharmaceuticals products are delivered at the right quality, right place and at the right time to the ultimate end-users (Enyinda and Tolliver, 2009). Pharma logistics provides a structure that makes it possible for the right medicines to reach the right person at the right time and place. This systematic framework helps perform various functions that range from procurement of materials, transforming these materials into semi-finished and finishes products and the final distribution of these finished products to the final consumers.



All these functions are facilitated through a network of distribution options and facilities. In the context of Pharma logistics, there are four main stakeholders viz., the producers who manufacture the pharmaceutical products, the purchasers who are either dealers, depositaries or wholesalers, the providers who provide the products through their service organizations like healthcare units, hospitals and pharmacies and finally the end consumers or the patients. The delivery of healthcare services requires the supply of medical devices, implants, pharmaceutical products and surgical/medical supplies which are offered to the service providers by the producers. Purchasers are mainly consisted of GPOs (Group Purchasing Organizations) and distributors who act as a bridge to facilitate the payment and delivery/shipment of supplies from manufacturers to providers. Among these purchasers, the key players are wholesalers and depositaries. The key players are differentiated by recognizing the fundamental link associated with acquisition of ownership rights over the goods. While wholesalers acquire the ownership of pharmaceutical and the related business risk from the industry in question or the depositaries, the depositaries work in deposit account and are offered remuneration based on a fee-for-service. The wholesalers are responsible to satisfy the demand of providers within the shortest time possible with a vast network of distributors. On the other hand, the depositaries carry out temporary storage of products and ship them to the providers. Providers play an important role in pharma logistics as they make the distribution process take the last step thus triggering the process. Providers enjoy the flexibility to purchase goods either directly from the producers or from the purchasers. Healthcare services are administered to the patients through the providers by using the pharmaceutical products. In specific context, pharmacies can supply or distribute pharmaceuticals to out-patients or even to those patients, owing to certain reasons are unable to make it to the hospital to receive treatment. Both categories of patients are considered final consumers where the entire process of pharma logistics ends. The companies expect a high level of transport flexibility, customized transportation solutions, information systems integration, and short transit times at low costs that may lead to outsourcing of the transportation systems resulting in multiple risks in the supply network. Also, the temperature sensitive drugs require a controlled environment in storage and transit which retains their validity and makes it safe for the end consumers to use. Therefore, the pharma logistics is highly vulnerable to many types of risks due to an increasing dynamic and structural complexity of today's pharma supply chain networks. Pharma logistics in today’s world demand a safe and secured environment for supply of critical drugs which can enhance the shelf life of the products and maintains the quality as expected by the end users. Thus, supply chain risk management process is gaining persistence competitive advantage due to some of the merits associated (Enyinda, et al., 2008).


“Insurance is subject matter of solicitation”. Insurance is considered a financial risk management tool in which the insured transfers potential risk in terms of finances to the insurance company that basically helps mitigate the loss in legit terms through a monetary compensation which is also known as insurance premium. It’s a mechanism where losses sustained by few are stretched among many those are exposed to kind of similar risk. The insured/policyholder under a contract receives an insurance policy known as policy bond which details the circumstances and conditions of availing compensation under specified events. Hence an active selection of pharma insurance for transit of goods, storage and inventory maintenance is very essential to overcome the adverse effects of the factors acting upon the pharma supply chain. In Financial Year 2017, the non-life insurance market grew from 2.6 US$ to 19.8 billion US$ since FY 2002. Also Non-life premiums have increased 17.7% CAGR from FY 08-17, thus showing a increase in number of policies from 65.55 million to 161.17 million since FY 08, at 10.5 % CAGR (IRDAI).


Cargo loss in the pharmaceutical supply chain has raised a significant concern in the minds of the industry players since an unprecedented and unnecessary loss of a product or products can result in limited availability or in certain cases, complete unavailability of pharmaceutical products to the patients. The same loss can also bother the supply chain intermediators in the context of their investment as it causes the intermediaries to incur significant monetary losses. In order to safeguard the quality of the products as well as the security, safety and efficacy of pharmaceutical products as it reaches the patients, there is a dire need for Supply Chain Risk Assessments towards in-transit activities. Effective assessment of risks and developing a comprehensive mitigation approach can ensure pharmaceutical supply chain continuity and resiliency (Srividhya and Jayaranman, 2007). Thus, risk management has become a vital discipline for organization just like revenue growth and cost containment (Kuhn, 2008). Insurance plays a major role in covering up the losses that are incurred in the process of moving pharma products from one place to another. Insurance in pharma logistics helps in safeguarding and protecting the investment of pharmaceutical companies while procuring and storing the products. It offers financial assistance to overcome the loss in pharma products. For instance, while transporting pharmaceutical products, there are often chances of blockages due to traffic thus causing delay in transit or sudden breakdown of modes used to transport, or delay in clearance at check posts or in the hands of the authorities. Delay in transit can affect the delivery time, shelf life and enforce losses on the intermediary. Loss can be incurred at the storage facility in case of mishandling of products, maintaining the wrong temperature can ruin products, pilferage while in storage and theft due to thin security while accidents might occur at any phase of the transit process. In all the previously mentioned scenarios, pharma insurance develops a secured environment for the intermediaries in the supply chain as they deal in the pharmaceutical sector by offering them monetary benefits in the form of claims in the happening of any unforeseen event that can cause a lapse in the pharma supply chain. From the minute the cargo leaves the point of origin to the point where it reaches the destination, any unforeseen event might occur.


Risk Mitigation using Pharma Insurance:

In insurance, ‘Risk’ describes the possibility of an unfavorable event occurring. Assumption of risk is a fact of management and business life (March and Shapira (1987) and Buehler and Pritsch,2003). One of the strategic actions organizations should take is prevent the uncertainties by adopting risk mitigation techniques identified from various sources (Miller, 2000). Hence, the ability to assume and manage risks is what organizations need to produce profits and shareholder value (Buehler and Pritsch, 2003). Risk mitigation is one of those strategic actions organizations must pursue to thwart the uncertainties identified from a variety of sources. Pharma logistics involves a lot of risk in day today scenario. Accidents, thefts, pilferage, mishandling, damage while handling etc. are few to name. Unfortunately, wholesalers and distributors are not availing insurance reason being easy claims or free replacements by the company in case of expiry of drugs or damage. In this process, there is a lot of impact on the Pharma Company, wholesalers and distributors. Companies loose huge money on replacement of goods. Also, there will be shortage of drugs entering the market. Only Insurance can help the companies to mitigate loss if circumstances occur. Therefore, pharmaceutical organizations must make it a point to avail the required insurance service as this can safeguard the company from incurring huge losses.


Factors acting as a risk Barrier in Pharma supply chain:

Pharma logistics involves a lot of risk in day today scenario. Accidents, thefts, pilferage, mishandling are few to name. A number of things may go wrong at pharma supply, and some of these have potential to be financially disturbing to business that do not have adequate insurance policy. Review of literatures show that natural disaster, supplier failure, counterfeits, legislation, intellectual property infringement, currency fluctuation, exchange rate, regulating agencies, under developed product pipeline etc. have a huge impact on supply-chain performance in parmha domain. (Chan, et al., 2002; Enyinda, 2008; Enyinda, et al., 2009; Enyinda and Szmerekovsky, 2007; Enyinda and Tolliver, 2007; Hillman and Keltz, 2007; KPMG, 2005). Companies loose huge money on replacement of goods. Also, there will be shortage of drugs entering the market. It has also been analyzed that mishandling of the critical drugs that are sensitive to the regular room temperature are prone to extra risks of expiry because of poor temperature controlling mechanism during transportation and storage. Another factor acting as risk is loss arising out of fire or moisture for the goods stored in warehouse before the transit takes place. If adequate measures are not taken at the inception, it might result in huge loss to pharma distributors.



·       To Identify the factors affecting as a risk barrier in pharma supply chain.

·       To Evaluate pharma insurance as a mechanism to mitigate the risk.



Pharma supply chain is facing several major problems in its operations such as pedigree and securing the supply chain. It requires a high degree of surveillance to protect against counterfeits at all nodes of the network (Robert B. Hand field, Ph.D. and Vel Dhinagaravel, 2005). Due to the existence of various unrestrained entities in the distribution system, humidity and temperature monitoring program is vital to protect and safeguard the quality of pharma products that are environmentally sensitive and ensure a patient’s safety (Rafik H. Bishara, 2006). Risks recognized are similar to those predominant in industrial supply chains. Irrespective of the peculiarities of pharmaceuticals such as lack of visibility of stock, short-term SC planning, unanticipated rise in demand, nonstandard practice (customized policies per hospital), Lack of common codes, lack of information, Counterfeiting, Inadequate buffer stock– JIT/lean, Storage/cold chain, etc. (Liz Breen, 2008). India as a geographically diverse country with extreme climates makes distribution a critical function. Hence a modernized cold chain management is required to retain the life of drug during transit. Also, the long channel of distribution and high incidence of brand substitution is making it mandatory for the companies to maintain all its stock keeping units (SKUs) available at all levels at all times, thereby directly affecting the cost of maintaining the inventory (Eric Langer and Abhijeet Kelkar, 2008). All wastages such as pilferage, overstocking and expiry of products should be managed efficiently in the supply chain to achieve cost effectiveness in the system. This wastage decreases the actual quantity of drugs offered to the patients and therefore the quality of health care they receive. Both understocking or overstocking and expiry of drugs highlight problems within the supply chain activities which include selection, quantification, procurement, storage, distribution and use (Go deliver A.B. et al., 2012). Supply chain optimization to channel management in the pharmaceutical industry which can transform the organization to utilize assets and resources better. But generating a better profits is challenged by some of the constraints, like highly fragmented nature of distribution network, strong resistance from trade associations in developing a cost effective supply chain and poor infrastructure for cold chain management for carrying whether sensitive goods (Dr. Ganesh L and Prof. Ghadially Zoher H, 2013). There is a need for accurate tracking and visibility of inventory which takes care of expiry control and also provides better on counterfeiting of the goods both from inventory as well during in its transit. He also emphasized that a good cold chain should be adopted in the supply chain and in storage which resolves the problems of product damage due to any climatic change. (Malik Iqbal Kabir, 2013). Many of the hospitals are facing problems like drug stock out or drug expiry because of no proper inventory control in their drugstores. He has also pointed out that in many of the hospitals, the inventory is compared manually hence the procurement cycle becomes lengthier which makes it difficult to supply medicines on time (Alejandro Romero, 2014). Turbulence risks is the most sensitivity issue in an uncontrolled environment. These risks are often unpredictable which are beyond the control of external factor (Osaro, A., et al., 2014). The pharma logistics is positively developing its cold supply chain with refrigerated facilities in its storage and transportation accounting upto $13.4 billion which shows a rapid growth of 9% in sensitive drug management, thereby suggesting that the industry is learning how to manage cold chain costs more efficiently.


Conceptual framework:


Fig. 1: Conceptual framework



The study incorporated the philosophy of post-positivism in South India to empirically assess the proposed research model. Using established scales validated and published in literature, research constructs were measured. The questionnaire was designed into two segments; first section focuses on capturing the socio-demographic factors and the next section capturing the constructs finalized for the study (Loss of Profit Insurance, Transit Insurance, Umbrella Policy, and Warehouse Policy). Before collecting the final data from Pharma distributors a re-test procedure was followed. First, a draft of the questionnaire was validated by experts in academia and industry. Accordingly, the modifications for the scales were considered. A pilot study was conducted with a sample of 123. The data used for pilot study were discarded for final data sample. 895 questionnaires were sent to the Pharma distributors and finally 742 were returned which were considered for study. The data is collected between September 2019 to December 2019. Multistage sampling with random selection procedure was adopted for the study. The geographical area chosen for the study is South Indian States.


Socio demographic factors (age, gender, income, occupation, qualification, sector of sample)


Table 1: Results of Hypothesis Testing



Path Coefficient



Loss of Profit Insurance





Transit Insurance




Not Significant

Umbrella Policy





Warehouse Policy





Model Fit 0.058, Upper Quartile 97.5% 0.036, NFI 0.968, RMS theta 0.103

Notes: t-values for two tailed test p<0.00, **p<0.05


Table 2: Results of F2

Loss of Profit Insurance


Transit Insurance


Umbrella Policy


Warehouse Policy


Notes: Assessingf2 0.02 small 0.15 medium 0.35 large


Table 3: Outer loadings, Reliability and Validity Statistics


Outer loading













































































Notes: LPI: Loss of Profit Insurance; TI: Transit Insurance; UP: Umbrella Policy; WP: Warehouse Policy; RM:


Table 4: HTMT Heterotrait – Monotrait Test


























Notes: LPI: Loss of Profit Insurance; TI: Transit Insurance; UP: Umbrella Policy; WP: Warehouse Policy


Evaluation of Measurement Model:

Various steps were taken to assess the reliability and validity of the constructs to assess the reflective measurements. The items of all constructs exhibited acceptable inter consistency reliability, indicator reliability (square of overloading’s) composite reliability and Cronbach alpha being above 07 (Table 2). Also, the outer loadings between manifest and latent variables were relatively above 0.70 (Table 3). The Average Variance Extracted (AVE) is high than minimum 0.5 for all 4 constructs which demonstrates sufficient convergent validity (Table 3). Discentinal validity assessed through HTMT analysis where in off diagonal values in between the latent constructs show that there is discriminant validity between all the variables.


Evaluation of structural model:

After measurement model were assessed and found valid and reliable. A step by step evaluation of structural model using PLS SEM algorithm was performed to assess the relationship among latent and manifest variables. First collinearity statistics was assessed. Second, the path co-efficient of variables were evaluated by running PLS algorithm. The significance of path co-efficient that imply the hypothesized relationships between the research constructs the assessment level of R2 was 0.596. The standardized path co-efficient suggest that there is significant relationship of Loss of Profit (0.270), Umbrella Policy (0.460) and Warehouse Policy (0.150) on risk mitigation. Results reveal that there is no significant relationship of Transit insurance towards risk mitigation (Hu and Bentlu, 1999). MFI is closer to 1 and RMS theta below 0.123. Therefore, effect size for risk mitigation model is considerably large. Ehen we assessed model fit, we find good fit since SRMR is 0.058 which is less than 0.10 or 0.08



Loss of Profit insurance (Significant):

One of the concerns for pharma wholesalers and distributors is loss of profit due to mishandling or improper temperature controlled mechanisms for the critical drugs. When it comes to transit of drugs, the mode of transit is also not reliable. This leads to high chance of loss of business income because of product expiry or damage. Also, poor storage of critical drugs is another major factor leading to loss of profit for the pharma wholesalers and distributors. All these factors lead to loss of profit to the distributors and wholesalers as huge losses are involved. Thus, Loss of Profits Policy is formulated to cover the likely monetary loss occurring from break in business activity that may arise due to physical loss of property by an event covered for insurance.


Transit insurance (Not significant):

Majority of the pharma distributors do not opt for transit insurance. One reason being the mode of transit itself is non-reliable. Also, Pharma consignments are received in bulk. The distributor’s further redistribute the larger consignments into smaller orders based on the requirements of the individual retailers. Hence, availing transit insurance is not economically feasible for smaller consignments with varying transportation distance. Therefore, pharma distributors do not generally go for this type of insurance thus bearing the risk on themselves.


Umbrella Policy (Significant):

An Umberella policy is also a best option for risk mitigation in pharma logistics. This policy covers additional layers coverage of liability as per base limits. Umberella policy matches the coverage comprising exclusions and limitations, while excess liability policy outlines what is covered that can diverge from underlying policy.


Wharehouse Policy (Significant):

The wholesalers and distributors maintain a high level of inventory in their warehouse to derive benefits or trade discounts by making bulk purchase. This leads to long storage of inventory and also the product exposure to the associated risk such as pilferage or any natural disaster. Further, it is also being analysed that the mishandling of the critical drugs that are sensitive to the regular room temperature are prone to extra risks of expiry because of poor room temperature controlling mechanisms during storage. Thus, Warehouse policy acts a risk mitigator to pharma distributors in course storage process.



Pharma Supply chain plays a vital role in the economy. But, cargo loss in the pharmaceutical supply chain raises a significant concern in the minds of the industry players since an unprecedented and unnecessary loss of product or products results in limited availability or in certain cases, complete unavailability of pharmaceutical products to the patient and also leading to heavy damages to the wholesalers or distributors. Thus, insurance plays a vital role in risk mitigations by covering the cargo and reducing the damages to wholesale/distributors in the case of untoward incident.



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Received 06.05.2020                Modified on 22.06.2020

Accepted on 20.07.2020         © RJPT All right reserved

Research J. Pharm. and Tech. 2021; 14(5):2659-2664.

DOI: 10.52711/0974-360X.2021.00469