Recall insurance set to play role in supply chain risk

As supply chains have become more integrated and international, a faulty component or contaminated ingredient can have massive implications. For example, faulty airbags manufactured by Japanese firm Takata Corp triggered one of the largest US recalls in history this summer, resulting in 34 million units being recalled in the second quarter of 2015 alone. In the latest twist in the evolution of product recall risk, Italian carmaker Fiat Chrysler was forced to announce the recall of 1.4 million cars in July after hackers gained control of the manufacturer's Jeep Cherokee model. "Product recall risk continues to evolve with the increasing complexity of supply chains and technology-we now see the risk of recalls linked to cyber-attacks," said Ed Mitchell, XL Catlin's Global Recall Manager.hideAccording to Christof Bentele, Head of Global Crisis Management at Allianz Global Corporate and Specialty in London, an increasing number of companies are looking to product recall insurance as a way to address increasingly complex global supply chain risks. Product recall insurance could well have a valuable role to play in managing supply chain risk and covering certain contingent business interruption risks, he continued. "This should be our goal but it will depend on whether clients are willing to invest in terms of retentions and premiums," he said. "We are at the beginning of a process to tackle supply chain risk through product recall insurance. There is a lot of ground to cover before we are able to say that we can cover the entire supply chain," said Mr Bentele. "The insurance product is not at that level yet, but the insurance industry is working on understanding the risk, the related liabilities and how the insurance product needs to respond as clients' concern over supply chain risk grows," he said. "If product recall cover is broadened to cover more supply chain risks it will require investment-as with any product the client needs to accept higher retentions, and this can be one of the challenges," according to Mr Bentele. The niche product recall insurance industry has so far focused mainly on the food and drink and automotive sectors, but that is now changing, according to Mr Bentele. Non-food products, such as consumer goods like toys and electrical merchandise, are subject to many, and sometimes quite large, recalls, as well as significant reputational risk. "There is a lot of recall activity in the non-food market that the insurance industry needs to translate into product," said Mr Bentele. There is recall cover available for non-food sectors that can insure against failure to perform, loss of profits and reputational risks, he said. Insurers have also developed third party recall liability cover for component or ingredient manufacturers that can pay the costs of a recall and loss of profits incurred by their customers. "This is very broad cover, however it can be difficult to underwrite at times, as the insurer needs to know how the client's customer operates in terms of risk management and quality control-information that is not always available to insurers to assess the risks of third party recall liabilities," said Mr Bentele. The growing complexity of supply chains, as well as concern over reputational damage, is already helping drive increasing demand for product recall insurance. There are now more insurers than ever offering the specialist standalone cover as prices have fallen and cover has broadened. "The product recall insurance market is mainly focused on contamination for food and drink and the automotive sector, but the challenges of product recall are not limited to these sectors," said XL Catlin's Mr Mitchell. The cover is increasingly popular with car manufacturers and their suppliers, and is also being purchased by other consumer goods companies, he explained. The product is also being purchased up and down the supply chain, as suppliers look to cover recall-related third party liabilities or fulfill contractual requirements. "To a certain extent product contamination policies already cover losses stemming from the supply chain and it will be interesting to see how these evolve to address the continued risk in the supply chain for the food industry," said Mr Mitchell. "Perhaps more importantly is how recall insurers can help companies manage this risk," he said.

Recall insurance set to play role in supply chain risk

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