Product recall insurance market benefits from price competition

The recall market saw a steady 2021 and the signs of a continued healthy price competition going into 2022 are good, with new insurers keen to enter the space.

Insurers are looking to expand capacity for product recall protection as they consider the area attractive from a profitability perspective. Although there hasn’t been any obvious rate hardening in the past few years, product recall has been continuously showing a benign claims record, especially in the key food and beverage manufacturing segment where loss ratios have been below 50% for many insurers. Covid-19 may have played a role in this with regulatory authorities exercising a lighter touch on facility audits with fewer inspections and greater leeway to maintain production.

The outliers

Unlike the food and beverage manufacturing sector, the fast-growing automotive component sector experienced a rise in recall activity around electric vehicles (EVs) and their lithium-ion batteries. The insurance market is closely watching the LG chemical /General Motors discussions around the Chevy Bolt recall given the $2 billion settlement (opens a new window) in October 2021 and the consequent exposure to multiple years of existing insurance coverage.

The GM recall also highlights the systemic exposure to the market of critical components often made by very few suppliers. Consequently, a loss event can stretch over multiple auto brands and models on large limits for a relatively small niche market.

The market has seen similar key ingredient/component exposures in the past: Peanut Corporation of America supplied contaminated peanut paste (opens a new window) to multiple manufacturers. In another case contaminated flour caused multiple recalls (opens a new window) throughout the US, Canada, and Europe as an illegal food dye (Sudan 1) was found in multiple products. It is likely that the recall market will apply the lessons learned from exposures throughout the supply chain to the auto components sector.

The risks surrounding ingredients are now better understood and covered by insurers albeit it at higher premiums than the end manufacturer. While continuing to track potential aggregate exposure, insurers are likely to still offer coverage for new and emerging risks around EV in the automotive segment.

Another area that has created a significant claims increase is food service and restaurants. The main trigger here is in-store contamination causing brand damage and economic loss to the entire food service brand. Coverage had been extended to shutdowns caused by communicable diseases and produced significant loss activity due to Covid-19, exacerbated by a total loss of sales. This segment is still recovering from these losses and coverage has been restricted back to in-store hygiene type events.

Growing demand

Risks around component parts going into both consumer end products and industrial goods are among the drivers of demand in the product recall insurance segment. These policies can be triggered when a manufacturing error leads to the component not meeting a customer’s specification - as opposed to a clear safety critical issue. This broad cover as well as contractual requirements have spurred demand for these insurance products. Greater confidence in the quality assurance of parts made in Southeast Asia has also bolstered confidence of insurers and co-manufacturing partners that the risk is manageable.

Barring unforeseen catastrophic loss events, the market is heading into 2022 with a high level of confidence in growth, both in new buyers and new capacity.

For further information, please contact:

Ian Harrison , Partner, Global Head of Product Recall Practice Group

T +442079332297

E ian.harrison@lockton.com