Product recall market steady and stable for now
Product recalls take place all the time, on everything from cars to foodstuffs, but in terms of major insurance losses, the last few years have been fairly quiet. And unlike many other insurance sectors, the product recall insurance market has been relatively stable, with plenty of capacity and competition. But the cost of recalls is increasing and rates could harden for loss-prone accounts going forward. Tony Dowding reports…
The product recall insurance market has been remarkably steady during the last few years, both in terms of capacity and rates. Some insurers have pulled out of the market, only to be replaced by others coming in, and it remains a crucial insurance product for manufacturers.
Ian Harrison, partner, global head of product recall practice group, Lockton, notes that the product recall market has enjoyed very stable pricing in the past five years due to a benign loss environment and new flows of capacity attracted by appealing returns and a growing premium base.
He explains that capacity continues to expand with the arrival of IQUW and BluNiche with experienced London market teams, creating new opportunities for insurance buyers. And he highlights the continued trend toward risk syndication/sharing, which may increase if the reinsurance cost of excess layer protection increases at 1 January, emphasising the importance of a London platform.
Julie Ross, international business development director, Sedgwick, believes there is more capacity than there has ever been, both from a US standpoint and internationally, since the market began in the 1980s.
She says that despite a number of hefty claims in the food, consumer products and auto spaces, rates are holding, although she adds that single-market capacity has reduced somewhat because of the large losses occurring, which is causing markets to reduce lines they want to put out on accounts.
“Other markets are looking at branching out into niche lines like product recall. However, to do that, those companies are going to require experience to set up because it is very technical to underwrite and it is a catastrophe line, and a new entrant will need to be able to build up premium well in advance of having to pay losses,” she explains.
According to Ross, new emerging wordings in food industry forms are available for mould, rancidity or pest contamination, while even a border rejection coverage is being made available in certain jurisdictions. She explains that some of those forms may widen the coverage, but some are also trying make it clearer what is covered and what is not.
She believes that the product continues to be undersold, with it being seen as expensive, or a luxury product, or with companies saying they don’t need it because they have “the best quality systems in the world”. She adds: “The cost of recalls is increasing as the costs of producing products is increasing. Companies are trying to find ways to save money by restructuring and using external resource for recalls as these incidents don’t happen every day.”
Alex Marti, focus group leader for US product recall, Beazley, says it is a growing market: “There is pressure on rate in the upper middle-market and large-account space, but with small business and lower middle-market accounts, rates are pretty even. Overall, on rates we’re on a pretty even keel, despite new markets joining in recent years.”
According to Marti, product recall is one of the few areas relatively unscathed by Covid-19, other than an increase in recalls on sanitiser for a short period of time at the height of the pandemic. Ross agrees: “Seemingly, Covid didn’t hit this sector heavily. The thought is that it’s because there were less inspections and investigations.”
Harrison says: “Counterintuitively, Covid caused fewer recalls as food production was prioritised and regulators did not audit plants due to access issues. This is now being reversed as audits are being brought back up to speed.”
In the last year, recalls of peanut butter products in the US, and salmonella at two separate Belgian chocolate manufacturers, all saw food processing plants remaining closed for a considerable time, generating significant revenue losses for the companies. This has highlighted the catastrophic loss potential in the product recall/contamination space, according to Harrison.
The broker says the cases “show that the bulk of the losses from product recalls are less likely to be related to the physical recall costs, but are mainly driven by business interruption costs of highly integrated, single plant-dependent business operations”.
He adds: “These food/beverage losses have been matched by auto recall and consumer product loss events, all suggesting a potential hardening of the market for larger loss-prone accounts into the final quarter of 2022 and into 2023, particularly if reinsurance costs and general market conditions harden at the key 1 January renewal date.”
Harrison says that away from the food sector, the other big sector of concern relates to increasing automotive recalls, which continue to involve millions of vehicles with the costs being passed by the brand owners (original equipment manufacturers) down to their suppliers in the complex supply chain.
“The big systemic risk to the market is probably a battery recall in the electric vehicle market, where lithium ion represents a significant engineering risk and there are only a handful of key suppliers,” says Harrison.
The growing problem of inflation could impact the sector. Marti says if inflation worsens, it could impact things in terms of insureds buying product recall insurance. “Some are choosing not to renew for the time being, and some first-time buyers are not buying because their rates in other lines have gone up. But, given that the situation is likely to be temporary, I don’t anticipate any extra impact on top of what we have seen already.”
Inflation will mean it will cost more to replace recalled products. In addition, says Ross, “with regards to the manufacturing industries, raw materials and ingredient costs are increasing, and the semiconductor shortage continues, along with the rising costs of utilities and staff shortages”. She continues: “Counterfeit ingredients and parts are on the rise, and could be inadvertently introduced to the supply chains. These issues could lead to errors in production or maintenance issues on the lines, malicious acts being carried out on sites by staff, or third parties maliciously attacking or trying to extort companies for economic gain.”
Marti notes that following some new entrants to the market, “we have seen a little bit of softening in terms of people asking for underwriting information”, adding: “We are certainly seeing a bigger focus on supply chain and where the products are coming from nowadays – and the impact of downtime if there is a loss in this area to consider as well.”
Ross says insurers are always looking for a lot of information because underwriting recall cover is not a simple calculation. “Many application forms are lengthy and can be tricky to complete, even more so if the particular client’s business profile is complex. It is also affected by the type of products being supplied and being based in several locations and jurisdictions. It is also going to be tougher for insurers to underwrite these risks if wider coverage is requested as the market continues to innovate coverage offerings.”
She goes on: “One view is that vertically integrated companies are a better risk because they have more control and traceability isn’t so hard. The alternate view is that if a company is vertically integrated, it can be more of a risk than a company that relies on external suppliers, often due to the subrogation elements of the policy wording. The cover might pay for a particular loss but then insurers will look to recover from the third party. Vertically integrated companies mean the insurer has nowhere to go. This stance is often down to an underwriter’s preference and based on their experience gained through underwriting their portfolios and claims they have seen.”
Harrison says underwriters are likely to request more specific information from product recall insurance buyers at renewal to understand and quantify supply chain exposures. “This does, however, also offer businesses an opportunity to better explain the risk mitigation measures they have in place to avoid or reduce their exposure to supply chain risks,” he says.
He adds: “The growing awareness of systemic risk aggregation arising from concentrated supply chains is likely to be the largest medium-term challenge for insurers and amplified by the increased risk syndication. If reinsurers require supplier aggregation information, this would create a significant market challenge to identify common supply/customer concentrations.”
There have been a number of legislative changes and developments that potentially impact the product recall insurance sector.
The European Commission’s General Product Safety Regulation became effective in August 2022, increasing protection of EU consumers and covering non-food dangerous products sold offline and online. The proposed regulation addresses product safety challenges, including new technology products, and enhances market surveillance of dangerous products in the EU and makes their recalls more effective, according to Sedgwick.
“So, it could mean more costs for manufacturers and distributors when producing and getting products to market, and companies will have to be even more vigilant when putting a product into the market and making recalls more effective when an issue is discovered,” says Ross.
Ross also points to the Medical Device Regulations (MDR) (2017/745), which came into force following a one-year delay because of the Covid-19 pandemic. The MDR brought EU legislation into line with new technological advances in medical devices and changes in medical science. “Against the backdrop of perceived historical issues with medical device safety in Europe generally, the new laws aim to create a more robust, transparent and sustainable regulatory framework, to improve clinical safety and to create fair market access for manufacturers and healthcare professionals,” says Ross.
In the US, she notes that the US Consumer Product Safety Commission (CPSC) has been examining the ramifications of AI. “The CPSC is seeking to understand when and how AI and machine learning could affect consumer product safety further, and how that should be reflected in relevant voluntary standards and regulatory guidance. Even when the hazards are understood, some consumers still don’t respond to recalls,” says Ross.
Also in the US, broker Amwins notes in a recent briefing: “The US Food and Drug Administration (FDA) is increasing funding to protect consumers, with 2022 shaping up to be one of the most active years for product recalls in the last decade.” The FDA “is not going easy on recalls”, it adds.
Amwins notes that Robert Califf, the new US FDA commissioner, has gone before Congress to request additional funding of $76m for the FDA’s 2023 budget, with the funds allowing for new technologies that could improve the FDA’s ability to rapidly trace food contamination back to the source.