Two trends are emerging in the product recall/contamination market that are giving insurance buyers new options and an opportunity to adjust their current insurance protection to better suit their needs.
Overall, the product recall/contamination market continues to show rate stability and resilience, despite rising reinsurance costs and increased claims activity. Insurers have faced difficult negotiations with reinsurers at the latest 1.1 reinsurance renewal, particularly in the property space, due to recent natural catastrophe (natcat) events and a tighter retrocession market. However, this has not had a significant effect in the product recall space so far, despite the fact that there have been a number of significant losses in the past 9 months.
Spotlight on limits
Two food and drinks producers in the confectionery sector have experienced major plant shutdowns due to contamination, both resulting in multimillion financial loss events. It turned out that the businesses were significantly underinsured because coverage limits in the policies had been set too low.
Learnings from these events:
There seems to be a lack of awareness around the potential cost of such contamination events. Insurance buyers need to examine the total cost of a worst-case scenario, involving the shutdown of a key manufacturing plant for a lengthy period.
An industry benchmarking exercise on limit adequacy may be useful. Unlike property insurance, the calculation of loss exposure is still an inexact science due to both the relative youth of the marketplace and difficulties in calculating the contingent financial business interruption exposure to third parties (key customers such as food retailers who will pass all costs back to the source of the contamination event, along with the implied threat of delisting a supplier).
Insurance buyers may want to gain a better understanding of the extent of financial balance sheet protection that the recall/contamination market offers. The potential recall and logistics costs still seem to be the main driver for insurance buyers, while the potential revenue drop after a contamination event and the costs of plant closures are usually far greater.
Reliance on inappropriate “free” sub limits granted by liability or property policies leaves businesses, particularly in the EU, exposed to substantial risks. Furthermore, budget constraints are often driving decisions regarding the level of limit purchased, instead of the true worst-case scenario.
Cover innovation
Another trend in the product recall space is the emergence of cover for industrial products. Traditionally, the market has been focusing on consumer and branded products, but this has changed after the successful expansion into automotive components. Underwriters have been using a broader “trigger of failure to meet specifications clause” in the auto sector which has generated appetite to offer cover in non-traditional areas. Recent requests for quotes have involved a wide set of areas including installation of kitchen cabinets, telecom projects and even car cleaning products.
Whilst the market is still wary of offering any form of long-term warranty beyond the annual “claims made” horizon, solutions are being put forward as a result of increased contractual liability obligations being forced down the supply chain.
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)