Hiscox warns product recall rates must reflect changing risk

Product recall insurers have a careful path to tread to ensure that a race for market share doesn’t lead to pricing that no longer reflects the true nature of the risk, according to Hiscox. It noted the changing risk landscape for product recall and said that product wordings have broadened to offer businesses extra cover for more risks, while the market itself has expanded with strong competition.

David Burke, product recall line underwriter for Hiscox London Market, said: “Businesses who buy product recall need to be confident that the insurance market will continue to offer a long-term and sustainable solution, particularly given how the recall exposure is changing. The insurance industry’s ability to deliver that sustainability depends on ensuring that the competition for premium does not come at the cost of accurate, risk-based pricing.”

Burke pointed out that there used to be a basic trigger for the policy with no extensions for risks like governmental recall, adverse publicity and third-party contractual liability. But now, “the depth and breadth of the coverage with regards to how a product recall policy is triggered and how the policy responds, gives the insured a huge amount of balance sheet and brand protection.”

He gave the example of Hiscox adding a carbon credit endorsement to its product recall policy which covers a business inadvertently exceeding their greenhouse gas emissions allowances following a product recall incident, allowing them to go back to the carbon market and buy the necessary credits they need to meet their regulatory requirements.

Burker said product recall has transitioned from a niche insurance offering to a mainstream product. “Twenty years ago, the demographics of a typical product recall insurance buyer would be a business that’s had a big recall and suffered a huge financial loss, and realised they needed insurance. Today, however, many risk managers realise that product recall is one of their top three exposures, even if they haven’t yet recorded a loss, which has pushed up demand for the product,” he said.

Burke noted the growing frequency and severity of losses across all sectors from food and drink, to automotive, pharmaceutical and consumer goods. “More insurers have entered the market to meet the demand for capacity, but we are now at a stage of the insurance cycle where chasing market share in the short-term could be storing up losses for the future. Can every underwriter be sure that they are pricing in that changing and more sophisticated risk landscape?” said Burke.

He added: “We’ve seen the product recall risk grow in complexity and the product has responded to protect clients. That’s hugely positive but the way the risk is underwritten must also catch up, become more sophisticated, and offer a premium that’s both competitive for the buyer but more accurately reflects the changing risk. By doing so, the insurance industry will help to guarantee that there will be a healthy product recall market for buyers for the long-term.”