Whether it’s a tumble dryer that catches fire or baby milk that’s contaminated with salmonella, an increase in safety concerns is putting product recall insurance in the spotlight. With the frequency and severity of claims on the up, there are concerns about the sustainability of the market
Recent high-profile recalls have included the withdrawal by Lactalis of more than 12 million boxes of baby milk powder from supermarkets across 83 countries; the Takata airbag recall, which affected at least 19 car manufacturers and as many as 70 million vehicles; and Samsung’s recall of 2.5 million Galaxy Note 7 phones after a series of battery fires.
Closer to home, a quick look at the UK’s Chartered Trading Standards Institute website shows just how common recalls are. For example, in December 2017, there were 25 product recalls listed, including B&Q’s owl and penguin tree decorations, Dr Oetker’s Regal-Ice ready rolled white icing and some tealight holders from Neptune.
And the cost of a recall can be huge. According to Allianz Global Corporate & Specialty’s report, Product Recall – Managing the impact of the new risk landscape, the eight largest product recalls since 2004 cost almost $50bn, with the Takata airbag recall in 2015 accounting for at least half of this amount.
Even the average costs are eye-watering, with the report stating that these come in at €1.4m (£1.2m). For the two most affected sectors – automotive, and food and beverage – these averages rise to €12m (£11m) and €8m (£7m) respectively.
Although these figures include the cost of physically removing the items, Ian Harrison, head of product recall at Lockton, says the largest part of most claims is the economic damage to the business. “Around 60% of a typical claim is down to financial damage,” he explains. “Companies can see a drop in sales following a recall as people either can’t or won’t buy the product. The physical recall costs only make up around 5% to 10% of the claim.”
A variety of factors are driving the increase in the size and number of product recalls but the main one is tougher regulation. “There’s much stricter product safety laws today,” says Stewart Eaton, head of product recall at AGCS. “Regulators are far more proactive too, increasing the risk of a recall.”
As an example, in the US, the Food Safety Modernization Act is regarded as the most sweeping reform for more than 70 years, giving the Food and Drug Administration more powers to force a recall. The approach is no different in the UK, where the Food Standards Agency oversees the safety of food and beverages. “There’s much more focus on safety,” says Bryan Kelly, senior casualty underwriter at Zurich. “It’s been very proactive and is quick to hold businesses to account.”
Other sectors are also under increasing scrutiny, as is demonstrated by the recent launch of the Office for Product Safety and Standards. Designed to provide consumers with greater protection, this will support local authority trading standards teams.
Billion dollar recalls
Japanese manufacturer Takata filed for bankruptcy in 2017 as up to 70 million of its faulty airbags are being recalled from cars worldwide
Samsung recalled 2.5m Galaxy Note 7 phones after explosions caused by overheating batteries
Merck recalled arthritis drug Vioxx after a study found an increased risk of heart attack and stroke
Auto ignition flaws saw General Motors recall more than 30 million vehicles
De Puy Orthopaedics recalled hip replacements due to a high level of repeat surgeries
Economic factors are also increasing the recall risk. With retailers and consumers expecting cheaper prices and a more exotic range of products, manufacturers can come under significant pressure. “Many are being forced to look for cheaper supplies and there’s also the risk of corner cutting to keep costs down,” says Eaton.
Supply chains are changing: increasingly global, they’re becoming longer, with more companies feeding into the chain. Kiran Nayee, partner at JLT Specialty, notes: “If you look at a risk, the more companies there are in the supply chain, the more the risk multiplies. It becomes really difficult to have visibility.”
Consolidation among suppliers creates a different dynamic that can potentially push up the size of a recall. This is particularly the case in the automotive sector. A prime example of that is the Takata airbag recall, which affected at least 19 manufacturers.
In this tough regulatory environment, the likelihood of a retailer insisting on a recall is also increasing. “Everyone is so concerned and sensitive about the reputation of their brand that we’re seeing much more pressure from retailers to recall if there’s any doubt over the safety of a product,” says Kelly. “They might not have recalled before but they don’t want to be closed down by the regulator.”
Advances in technology are also making it much easier to determine culpability in the event of a food safety issue. “The advent of whole genome sequencing effectively enables the regulators to fingerprint pathogens,” explains John Turner, director of crisis management at McLarens. “What once took weeks, now takes 30 minutes and costs $50.”
As an example, he points to a case in the US where a food manufacturer had cleaned up its production line in 2010 after a bug was found there. But, when there was an outbreak of food poisoning five years later, the regulator was able to look at the bug’s genome sequence and trace it back to the same firm. “With this level of proof, it’s tricky to say it wasn’t it,” he adds.
Today’s manufacturers also find themselves under a much brighter spotlight as a result of social media. “This is driving up consumer activism,” says Stephen Turner, legal director in product liability team at DAC Beachcroft. “If it’s not handled correctly, the potential for reputational damage is huge.”
Given all these pressures, demand for product recall insurance is growing steadily. Alongside increased awareness of the risk, it’s also becoming a contractual requirement, especially in the food and beverage sector. Harrison notes: “In the past, suppliers used to be able to negotiate this out of the contract but this is less likely now. To be in the market, you need the cover.”
While some markets have pulled out of product recall, most recently Liberty, this line remains an attractive option for a growing number of insurers. “There’s no lack of capacity in the market at all,” says Kary Yates, director of product recall and contamination at Aon Risk Solutions. “Some will write product recall alongside their casualty business. If they can show they have expertise in product recall, they can win the client.”
Insurer appetite means the market is very competitive. While this can encourage take-up, many believe that the current pricing isn’t sustainable. “We’ve had 10 years of falling rates but the frequency and severity of claims have increased and companies have bought bigger limits,” says David Burke, product recall line underwriter at Hiscox. “It’s not sustainable. The market has to harden.”
As an example, he points to some of the pricing in the excess market. “You see rates priced for a one-in-200-year loss when the reality is more like one in 10 years,” he explains.
Although it’s difficult to buck the low-price trend in a competitive market, there are signs that insurers are taking steps to cover their backs. Harrison says there’s much more focus on the level of self-insured retentions. “Deductibles reached catastrophic loss levels but we’re seeing them return to more acceptable levels now,” he explains.
Alongside pushing some of the liability back to the company, Harrison says he’s also seen insurers adopting more sophisticated underwriting approaches. “There’s more segmentation, with insurers tracking aggregation to ensure they have a good spread of risk,” he explains. “This is particularly important when one manufacturer’s products can be supplied to so many companies.”
He’s also seen an increased interest in syndication, which is helping insurers control exposure. “Five years ago, a market would have been prepared to take on $50m (£35m) of risk, now it’ll only take on $10m (£7m) and syndicate the remainder,” he explains.
As well as having this more controlled approach, there are also signs that insurers are taking a more prudent approach to individual risk selection. For instance, an important part of Zurich’s strategy is to work with clients that it already has a relationship with on other liability lines. This ensures it has a good oversight of their working practices and can help them enhance risk management.
For some, risk management is the key to making this market sustainable. “Insurers need to understand more about how an insured’s supply chain and risk management is organised,” says DAC Beachcroft’s Turner. “Making this part of the conversation feeds into a virtuous circle, with improvements in risk benefiting all parties.”
Crisis management services are becoming an important part of many product recall policies, giving access to consultants who can advise a client both pre- and post-loss on how to respond to an incident. Nayee says that, although larger companies have this resource internally, many smaller organisations will purchase this alongside their insurance cover. “By responding to a recall in the right way, it can prevent it becoming a balance sheet damaging incident,” he explains.
When social media gets involved, rather than waiting for a full-blown negative campaign, a business should control the message and demonstrate it is taking customer safety seriously, in an effort to keep reputational damage to a minimum. “It’s part of a much more sophisticated approach to product recall,” says DAC Beachcroft’s Turner. “If a company understands the risks and takes steps to manage them, it should improve business.”
With more balance between the risks taken on by the insurer and retained by the business, some would like to see product recall cover evolve to secure broader appeal. Nayee explains: “Most sectors are going through exponential change and, as this introduces more complexity, the market needs to reflect this. New risks are emerging such as cyber and we need to be able to offer more joined-up solutions.”
As a starting point, he would like to see products that are more sector-specific, reflecting the risk exposure those companies face. This could then be packaged with relevant risk management advice to create a product that can support their business.
Another area where many believe there’s room for improvement is on the policy triggers. Although some insurers have added government recall as a trigger, most policies will only respond where there’s a risk of bodily injury.
Unfortunately, products can be recalled for other reasons. “Companies can find themselves incurring recall costs if there’s been a mistake in the manufacture, for instance the wrong finish, or there’s a quality issue, but a product recall policy wouldn’t respond,” explains DAC Beachcroft’s Turner. “Insurers can’t take on all the commercial risk but there is an opportunity to develop a more tailored response that meets requirements.”
While product development will help to drive take-up, there’s also a need for more education around product recall. Yates says there can be confusion between liability products. “Some people believe they’re covered under their casualty programme but this would only be the case if they damaged another company’s product,” she explains. “Once they understand the differences it does increase take-up.”
But while there’s clearly room for greater understanding of what the market needs on both sides, many expect product recall will mature into a standard part of most manufacturers’ insurance programmes. “It’s a bit like the directors and officers market,” notes Burke: “20 years ago, hardly anyone bought it. But after a few wake-up calls such as Enron, it’s a must-have. I can see the product recall market following a similar path.”
- Aviva promises to 'reinvent' insurance and end dual pricing
- Brightside winds up lawsuits under Brendan McCafferty
- Government call for evidence over discount rate revision
- Analysis: How most favoured nation clauses fell out of favour
- Roundtable: The new wave: time to disrupt the disruptors
- Gallagher acquires South West commercial broker
- ABI confirms summer heatwave caused record-breaking subsidence surge