When private equity firms buy companies in various industries, they must consider and carefully manage those companies’ and industries’ major risks. When purchasing manufacturing companies, that means addressing product recall risk. Many potential costs associated with recall events can be managed through dedicated insurance coverage, but building an effective insurance program requires a strategic approach.
Coordinating your approach to recall insurance
Private equity firms that purchase multiple manufacturing companies often inherit multiple product recall insurance policies across their portfolio, leading to inefficiencies and increased costs. A thorough review of these companies’ policies and their operations can reveal opportunities for consolidation, cost savings and improved risk management.
Many portfolio companies, for example, may share common suppliers, components, or ingredients, which increases the likelihood of an industry-wide event triggering multiple policies and self-insured retentions (SIRs). Additionally, tariffs and supply chain disruptions may force companies to rely on newer, less established suppliers, further elevating recall risks.
When the individual companies within a private equity portfolio have separate product recall insurance policies — potentially issued by different carriers — each policy will have its own minimum premium and SIR, resulting in higher overall costs in the event of losses. Terms and conditions and claim-handling protocols can also vary widely, increasing the potential for gaps in coverage and leading to greater administrative costs.
By consolidating policies, a private equity firm can improve the spread of risk across its portfolio, leading to premium savings, reduced SIRs, and a streamlined claims process. A better spread of risk also strengthens a buyer’s ability to negotiate limits and premiums with insurers.
Case study
A private equity firm acquires three food manufacturers, each of which produces varying products. The three companies also have different product recall insurance policies, terms, limits, SIRs, purchased from three different insurers. By the time the policies are up for renewal, combined revenues across the portfolio have grown by 35%, providing an opportunity for policy consolidation.
By structuring a consolidated policy, the private equity firm achieves a program with common terms, a lower SIR, and reduced pricing. The firm also adds an endorsement, clarifying that if a recall incident impacts two or more of the food manufacturers, only one SIR would apply.
These changes improve the program's overall administration, strengthen coverage certainty, and allow the private equity firm to purchase higher limits for the same premium the three individual companies were paying previously.
Old structure
New structure after renewal
By consolidating product recall policies, private equity firms can achieve significant premium savings, lower their SIRs, and improve consistency in managing recall exposures. A well-structured approach also ensures more efficient risk management across a diverse portfolio while reducing redundancies and administrative costs. Private equity firms should proactively assess their acquired companies' recall insurance strategies to maximize these benefits and enhance overall portfolio performance.
Working with the right advisor
In designing a consolidated policy structure, private equity firms and their portfolio companies should consider several important questions. For example:
Will individual companies share a common limit, or should limits be allocated separately per entity?
Can premium costs be distributed internally in a way that aligns with each company’s risk exposure?
How will funds for crisis management and product contamination events be structured to ensure adequate response capabilities?
Do the portfolio companies share common suppliers or ingredients that may create cumulative recall exposures?
What cancellation provisions should be included in a policy?
Can premium be returned in the event of a divestiture?
An experienced insurance broker can help you answer these questions and build a tailored product recall insurance program to meet your organization’s unique needs — with the right program structure and choice of insurer.
Among other things, the right advisor can help you:
Thoroughly assess your operations and unique risk management needs.
Review and under the regulatory landscape for your organization and your obligations in the event of a recall.
Provide insight into best practices for mitigating product recall risk and managing claims.
Deliver industry benchmarking so you can compare your approach to insurance purchasing to that of your industry peers.
Understand the state of the product recall insurance marketplace and the options available to you.
For more information, please reach out to Natasha McLean or Jennifer Peters.
