Like many niche sectors, the product recall/brand damage market is nervously evaluating how it will be affected by the significant premium increases in parts of the property & casualty (P&C) insurance sector. Whilst we are seeing some rate increases in the short term, there are strong positive trends in the medium/longer term as insurers realise the comparatively strong growth potential and profitability of the recall/brand damage insurance market.
Insurers are still struggling to reach targeted levels of profitability in many areas within P&C, but the recall/brand damage segment is attracting additional insurance capacity and new entrants as it promises relatively strong growth potential and profitability. A trend that is set to benefit insurance buyers.
Business insurer Allianz Global Corporate & Specialty (AGCS) has, for example, launched a new product recall solution (opens a new window) for UK automotive component parts manufacturers in March 2019 with markets in North America and Asia to follow.
HDI London is also moving into the standalone recall market with a senior market hire and an intention to become a significant player in the London market over the next few years.
At the same time, Swiss Re is strengthening its existing team with hires from CV Starr to enable expansion and a broader focus on international opportunities.
Growth expectations in the segment are being fuelled by rising demand from new buyers and a desire for higher limits, pushed by regulatory changes. The UK government is, for example, forcing the recall (opens a new window) of up to 500,000 tumble dryers due to an alleged fire safety risk in what is being described as an “unprecedented” move.
In the US, the Food and Drug Administration (FDA) is pressuring leafy green producers (opens a new window) and retailers to adopt traceability best practices and state-of-the-art technologies to aid market recalls and traceability after a large E. coli O157:H7 outbreak that left hundreds sick and claimed the lives of five people who consumed contaminated romaine lettuce.
In addition, customers are forcing product suppliers to buy recall/brand damage cover as part of their contractual agreements.
For insurers the recall market is also attractive because it is relatively short tail which means that a potential claims inflation becomes apparent earlier than in casualty risks for example, making the recall market more transparent and easier to forecast in comparison. Furthermore, there is no clear risk aggregation across other policies, perhaps with the exception of general liability. However, as financial loss extensions are removed from general liability policies, the need for standalone recall/brand damage solutions such as offered in the London market will rise significantly.
Another advantage of the recall/brand damage market is that wordings of policies have remained closely linked to defined trigger events and were specifically designed for the financial obligations of different industry segments, creating a clear and transparent risk environment for insurers. In addition, policy wordings have been tested in courts which allowed for the clarification of any ambiguity and further increased transparency for all involved.
While the recall/brand damage market is growing, it remains comparatively small, offering insurers an opportunity to expand. The fact that the segment displays significant barriers to entry such as lack of underwriting expertise or the need for insurers to offer free access to crisis consultants as part of the product offering creates stability and the potential for higher profit margins in the longer term.
Furthermore, the fact that the recall/brand damage market took significant action over retention levels a few years ago is now being rewarded. It resulted in lower frequency of loss and a close focus on pricing in the harder to place segments such as agri business, pet food, and advanced electronics/software for auto components, resulting in greater profitability for insurers.
Perhaps the most significant market change attracting insurers is that the sector has been increasing risk sharing among market participants. It is now common for even lead players to only offer $5m capacity whilst outlining terms for a $20m placement. For insurers this increases the spread of risk and consensus building on pricing and structure.
All the above highlights the relative attractiveness of this niche growth market to insurers which should in turn create competitive tension and allow Lockton to seek even better deals for our clients as new entrants and incumbents compete for market share.
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