Expensive product recall events, where whole food processing plants were closed for a considerable time, have highlighted the catastrophic loss potential in the product recall/contamination space.
It is therefore highly likely that, at renewal, underwriters will request more granular information on both key plant dependency and the supply chain aggregations, from insurance buyers. Doing this will help them to better establish this severe risk exposure for their own balance sheets, and those of their reinsurers.
Recent large recall cases
Barry Callebaut has warned (opens a new window) investors about a "notable" impact on its financial results, after stopping production because of a salmonella contamination at a factory in Belgium. On 27th June, the cocoa processor and chocolate manufacturer detected salmonella on a production lot manufactured in Wieze. Lecithin was identified as the source of the contamination on 29th June. All production lines within the factory were stopped (opens a new window). Lecithin is used in all chocolate production lines, so the company blocked all chocolate products manufactured from 25th to 29th June.
Another recall event was triggered in December 2021, after Salmonella Typhimurium was detected (opens a new window) in a buttermilk tank at a Belgian Ferrero factory, during the manufacturer’s own checks. By 19th May, more than 300 people from 16 countries had fallen sick, their illness directly linked to Kinder chocolate made by Ferrero, in the Belgian factory. Nicolas Neykov, the head of Ferrero France, suggested (opens a new window) in May that the incident will cost the company “tens of millions of euros.”
Impact on insurance
In both recall events, food processing plants have remained closed for a considerable time, generating significant revenue losses for the companies. The cases show that the bulk of the losses from product recalls are less likely to be related to the physical recall costs. Instead, they are mainly driven by business interruption costs of highly integrated, single plant dependent business operations.
These food/beverage losses have been matched by auto recall and consumer product loss events, suggesting a potential hardening of the market for larger, loss prone accounts into the final quarter of 2022 and into 2023. This is particularly likely if reinsurance costs and general market conditions harden at the key 1st January renewal date.
Other speciality lines of cover have suffered dramatic and unforeseen accumulation losses (contingency during Covid-19, political violence in Ukraine and aviation in Russia). This is likely to increase reinsurers’ selective approach and pricing at renewal. It may consequently affect insurance buyers, both in terms of costs and required information on supply chain exposures.
Supply chain recalls can and do affect large numbers of end consumers, and a single contamination can affect multiple insureds. This creates an increased aggregation/accumulation challenge in the relatively small recall/contamination market and its reinsurance backers.
Underwriters are likely to request more specific information from product recall insurance buyers at renewal, so as 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. These may include highly audited supply sources, back-up, or alternative plant capacity. Ideally, they should also provide a wide list of key suppliers, should a supply chain event affect them.
The product recall market has enjoyed very stable pricing in the past five years, due to a benign loss environment and new flow of capacity, attracted by appealing returns and a growing premium base.
Capacity continues to expand with the arrival of IQUW and BluNiche with experienced London market teams, creating new opportunities for insurance buyers.
For further information, please contact:
Freddie Schlesinger ACII - Vice President
Product Recall & Reputational Risk
Crisis Management
M: +44 (0) 7769248552 |E: freddie.schlesinger@lockton.com (opens a new window)