Bermuda-based Allied World Insurance Company?s pharmaceutical underwriting strategy reflects a trend in the insurance industry as companies cut the amount of cover they will offer to drug manufacturers against litigation.

The Times of London Online reported this week that fears of a surge in new lawsuits from patients has seen underwriting capacity ? the maximum amount that an insurer is willing to lose to a single client ? drop by $150 million in the past two weeks to $600 million according to analysts.

?If insurers continue to reign back their cover at this rate, most big drug companies will effectively be left uninsurable by the end of the decade,? the Times report said.

The article said that already most of the larger pharmaceutical companies ?have been forced to share the risks of legal action as a pre-condition to getting outside cover. However, the reluctance of insurers to foot legal bills could leave drug makers facing losses of tens of billions of dollars?.

The Times reports that the situation was compounded when AIG, one of the biggest players in drug liability cover, cut its underwriting capacity in half to $25 million.

Staff and management at Bermuda-based Allied World Assurance Company, in which AIG is a shareholder, made a similar decision, reducing capacity six months ago.

?We have a restricted pharmaceutical underwriting strategy that we?ve had for quite awhile,? president and chief executive officer Scott Carmilani told this newspaper: ?The industry has more of a perception that the pharmaceutical companies are becoming harder to insure because of their efforts with the FDA and the plaintiffs that are bringing larger lawsuits.?

AIG and AWAC are not the only ones to cut their capacity in this area. David Thomas, an expert in liability cover at Willis, the London insurance broker, told the Times the situation was unlikely to improve.

?The perception among pharmaceutical companies is that insurers are eliminating cover at the first sign of a problem ? real or imagined,? he told the Times.

Mr. Carmilani said that in AWAC?s case, ?cutting? is the wrong word. ?We are tailoring our capacity to individual risks and only putting up larger capacity on risks that we feel warrant it,? he said.

The Times also reports that some insurers have also imposed tough conditions with Swiss Re now only writing liability cover if companies agree to ?onerous reporting requirements?.

Mr. Thomas told the Times that the consequence might be ?the exclusion of cover of significant product lines where there is no evidence of a major problem.?

The Times reports that polices up for renewal are already being amended to exclude Cox-2 inhibitors, which includes Merck?s anti-inflammatory medicine Vioxx. Merck pulled its best-selling pain drug in September over safety concerns. The action is now the focus of a federal probe, and the controversy has raised suspicions about other pain drugs from rivals.

The Times reports the cost of insurance has risen fivefold in the past three years as the number of class-action lawsuits in the US has soared.

?The crisis is expected to deepen this year in the US where Merck is fighting several class actions. Analysts estimate that the company faces a potential litigation bill of $17 billion or more. Last month Merck said its insurance cover ran to $630 million,? the report said.