Risk Capital Solutions in Life Sciences: How to Find Cost Efficiencies and Manage Volatility

Risk Capital Solutions in Life Sciences: How to Find Cost Efficiencies and Manage Volatility
May 21, 2025 9 mins

Risk Capital Solutions in Life Sciences: How to Find Cost Efficiencies and Manage Volatility

Risk Capital Solutions in Life Sciences: How to Find Cost Efficiencies and Manage Volatility

Industry shifts and innovations are creating both new opportunities and challenges for life sciences organizations. Optimizing risk capital can enable business leaders to uncover cost efficiencies, strengthen resilience and enhance control.

Key Takeaways
  1. An evolving legislative environment, increased digitalization and ongoing geopolitical pressure are among the challenges creating increased volatility in the life sciences sector.
  2. Amid evolving risks and cost concerns, businesses should optimize their use of both internal capital and external risk transfer solutions to strengthen balance sheets.
  3. Alternative risk transfer solutions, including captives, parametric insurance and structured solutions, may provide a more cost-effective way to manage increasing and evolving risks.

2025 is shaping up to be a transformative year for the life sciences sector, with 90 percent of industry leaders focusing on new business models, emerging market growth and digitalization.1

Investor cash inflow into the industry, along with anticipated innovation due to potential IPOs, is showing some promising signs of momentum. Although M&A activity has been relatively low, there are still positive developments, and the overall environment remains cautiously optimistic. At the same time, the success and widescale adoption of GLP-1 medications is reshaping innovation and research focus.2 Technological advancement, including artificial intelligence (AI), is transforming the sector and helping to lower costs and save time during research and development.3 Increased digitalization is also optimizing supply chains by increasing end-to-end visibility, helping life sciences organizations to enhance forecasting, inventory management and resource allocation, while also supporting carbon footprint minimization.4

However, just as opportunities increase, so do risks. 

Geopolitical turbulence, climate change challenges and economic uncertainty continue to create a volatile business environment. At an operational level, life sciences organizations are also contending with evolving threats, from cyber risks associated with adopting new technologies to supply chain challenges and global regulatory and legislative changes. While reciprocal tariff policies have unsettled various markets, life sciences organizations will likely feel the impacts directly. While once exempt from tariffs, U.S. pharmaceutical importers could soon face duty on the $213 billion of finished medicines brought into the country,5 threatening supply chain stability and profit margins. Against the backdrop of several impending patent cliffs, increased industry competition, growing scrutiny on drug pricing and tariff uncertainty, cost optimization is becoming a growing concern for leaders.

The complex nature of life sciences operations combined with the life-impacting consequences of industry risks, such as supply chain disruption, require a sophisticated approach to risk management and risk financing. 

69%

of pharmaceutical companies have implemented AI-driven automated alerts to monitor cold chain logistics in real time.

Source: AI: A strategic imperative for pharmaceutical supply chains, European Pharmaceutical Manufacturer.

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Opportunities in Risk Capital Optimization

In recent years, insurers have become much more selective about the types of risks they want to insure. This has resulted in rates and deductibles rising across certain lines, changes to conditions, tightening restrictions on existing coverage, and in some cases, complete withdrawal from the line of coverage. The trend for life sciences capacity reductions in key lines such as product liability has accelerated, with volatility in other key lines such as property/business interruption and cyber. The cost of global insured losses from natural disasters in 2024 are estimated at $145 billion – the sixth-costliest year on record.6

These market conditions and the trend toward increased risk retention have seen life sciences organizations turn to innovative solutions outside the traditional insurance market — such as captives and parametric insurance. By leveraging risk capital optimization as a business enabler, organizations are better positioned to seize opportunities and protect their balance sheets.

Risk capital optimization offers several strategic benefits for life sciences organizations. Quantifying key financial metrics enables risk transfer to be measured in value terms, allowing organizations to determine the right level of external capital to leverage. Additionally, the cost-efficient approach to risk management provides multi-year pricing stability and access to alternative capital sources. This offers a more proactive and aligned risk financing approach, reducing risk costs over time and more accurately matching business cycles. 

13.5%

The increase in the number of new European life sciences companies in the past five years.

Source: Life sciences real estate is booming amid looming ‘patent cliff’, but what lies ahead? Pharma Phorum.

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The opportunities are there within the life sciences industry — it’s cost optimization and innovation that will be the foundation for sustained growth.

Meaghan Piscitelli
Global Life Sciences Leader, Enterprise Client Group

The Strategic Benefits of Captives

A captive is a licensed insurance or reinsurance company owned by a parent organization that insures or reinsures the risks of its parent and associated companies. Life sciences organizations have always been sophisticated captive users. They leverage advantages where there has historically been a lack of capacity — for example, product liability coverage or where bespoke coverage is needed for emerging risks, such as supply chain risks. 

In addition to maximizing their protections, life sciences organizations utilize captives as business enablers to optimize risk financing. They have proved particularly useful when leveraged for clinical trials insurance, innovative contracting and drug warranties. Other benefits include:

  • Clinical Trial Liability Insurance Efficiencies

    As well as helping to retain the risks of clinical trials, captives can provide the added advantage of tailored coverage across multiple jurisdictions. This centralized approach can enable streamlining and automating the often labor-intensive process of issuing clinical trial insurance certificates while ensuring compliance with local legal and regulatory requirements.

  • Drug Warranties

    A drug warranty is an insurance solution that enables reimbursement for patients who do not respond as desired to a selected pharmaceutical product. Manufacturers provide this solution to demonstrate confidence in their products performance and deliver value to patients and payors. Warranties are most commonly utilized in therapeutic areas where there are low patient numbers, but the cost of the product is high.

  • Enhanced Risk Management of Own Risks

    When new products come to market, it can be challenging for the insurance market to assess and price them accurately. That’s why captives are seen as suitable for managing product liability risk, buoyed by an in-house understanding of the associated risks and the opportunity to build up historical exposure data. Captives can function as incubators for any new and emerging risks, helping organizations price products in line with how they view the risk. 

  • Access to Reinsurance

    Life sciences companies with captives are leveraging structured reinsurance solutions to manage capital more flexibly and effectively. These solutions help mitigate market pricing volatility over multiple years and lines of business, providing a degree of long-term certainty and reducing exposure to frequency losses. This approach allows organizations to retain frequency losses within the captive layer while establishing structured solutions for excess coverage over a pre-agreed time frame (typically 3-5 years).

  • Supply Chain Risk

    The lean and complex structure of life sciences supply chains, the sensitive nature of the products within their distribution channels and the strict regulatory requirements facing the industry, mean that any disruption can have severe consequences. Captives can provide extended contingent business interruption coverage, including non-damage scenarios, bespoke to an organization’s requirements, which are often excluded from traditional policies. This approach ensures better protection against disruptions, allowing organizations to navigate regulatory recovery processes more effectively and maintain the production and distribution of vital products.

The Flexible Advantage of Parametrics

Parametric insurance is a clearly defined and fast-paying risk transfer solution triggered by a specific, pre-defined event, providing clients with straightforward if-then coverage. If a specific pre-defined event occurs (such as a natural catastrophe or weather event), as determined by independent, third-party data sources, the insured then unlocks a highly flexible source of risk capital. The broad coverage and quick settlement mechanics (where payment is available within weeks of an event) can help clients mitigate uncertainty and provide access to liquidity to accelerate recovery after an event. Other advantages include:

  • Faster Claims Payouts

    For life sciences organizations, speed of recovery after a period of downtime is critical to business success. With protection designed to cover increased costs of operation or loss in revenue linked to business interruption, life sciences organizations can get their operations back on track as quickly as possible, helping to minimize disruptions to their customers.

  • Tailored Coverage

    Parametric insurance is triggered by real-time data, enabling coverage to be tailored to an organization's specific exposures — risks that are often excluded by traditional insurance. For example, a client looking to address supply chain challenges caused by changes in river water levels near a critical production facility could have a policy triggered when water goes above a certain level. Some life sciences organizations have also found the benefits of turning to parametric coverage within their own insurance programs, using a captive to self-insure their retentions under parametric structures.

Protecting Reputation and Spurring Innovation

To future-proof operations in an era of rising volatility and evolving risks, life sciences organizations must embrace innovative solutions that help them uncover cost efficiencies while building organizational resilience. By leveraging the protection offered by captives and parametric insurance and using data-driven insights to take a more strategic approach to risk, life sciences organizations can better incubate risks — an approach that could help to spur more innovation within the industry.

Reputation is everything in the life sciences industry, from securing the trust of patients and medical professionals to building credibility with regulators, investors and wider stakeholders. With greater safeguards against increasing risks, such as supply chain disruptions and evolving risks, including cyber risk exposures from AI integration, organizations are better positioned to protect both their operations and their legacies. Life sciences organizations that prioritize evolving risk mitigation strategies and strengthening balance sheets will also enhance their opportunity to attract the investment needed to realize their growth ambitions.

1 Top Risk Facing Life Sciences Organizations, Aon.
2 As GLP-1 drugs boom, other healthcare companies are cashing in, BioPharma Dive.
3 From Test Tubes to Terabytes: AI's Takeover of Life Sciences, Aon.
4 Improving efficiency and sustainability via supply chain optimization through CNNs and BiLSTM, ScienceDirect.
5 Trump threatens to end pharmaceuticals tariff exemption, BBC.
6 2025 Climate and Catastrophe Insight, Aon.

Aon’s Thought Leaders
  • Meaghan Piscitelli
    Global Life Sciences Leader, Enterprise Client Group
  • Anne-Christine Fischer
    Global Life Sciences Consulting Leader, Global Risk Consulting
  • Sarah Langwell
    Director of Client Services, Captive and Insurance Management, Europe, the Middle East and Africa
  • Jimmy Hussey
    Principal Consultant, Life Sciences Practice Group, Global Risk Consulting
  • Ciaran Healy
    Global Head of Captives, Commercial Risk Solutions

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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