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Market Update
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International - Product Recall
Printable Version
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At the start of the new decade the specialist market for insurance risk management of product recall and contamination is in good shape from an insurance buyer’s perspective. We have seen a steady growth in both supply of insurance capacity and expertise in this area married to high levels of interest in insurance protection by client groups with the financial exposure to such risks. The increase in both supply and demand for recall is a very good sign of a healthy market.
New Choice of Insurers
We now have potentially eight lead markets, primarily based in London, all with alternative wordings, response consultants, and different industry specialisations, providing a level of choice and competition not seen before for primary risks. On an excess basis, capacity remains available allowing programmes of $200,000,000-plus to be placed for catastrophic exposures if required.
Buyer Interest
Enquiry levels have risen steadily, but the “hit ratio” of inquiry to binding has also increased. This suggests expectations of pricing are moving into line. More competitive pricing has certainly been a factor, but so has increased awareness of the growing sophistication of the insurance/risk management solutions available across industry segments.
Market Issues
The market faces two specific—but interlinked—challenges over the next year. The supply chain is coming under closer regulatory scrutiny than ever before, as evidenced by the response to the Peanut Corporation of America (PCA) and Plainview dried milk supply chain contamination incidents.
In both cases, the U.S. Food and Drug Administration (FDA) took the unusual step of strongly advising customers of these significant ingredient suppliers to conduct precautionary recalls without specific evidence that their end products were actually contaminated out of an “abundance of caution.” This, in turn, caused claim problems, as most insurance cover requires evidence that there would be a bodily injury.
Insureds then incurred significant costs without having recourse to insurance coverage. This problem is likely to worsen as a new U.S. law (the Food Safety Improvement Act) is likely to provide mandatory recall powers to regulatory bodies such as the FDA.
Another interlinked supply chain issue arises between the manufacturer and their own customers. Here the pressure is reflected in the growth in contractual remedies being forced on suppliers, especially by private-label product owners such as the food retailers.
The market has responded by providing enhanced Customer Loss of Profit cover as a first-party financial solution. It has also responded to the third-party liability that can be created by these supply chain risks.
Pricing
Pricing trends for claims-free, well-presented risks without major revenue changes are certainly down, and we have seen evidence of very aggressive pricing by new markets. It is, therefore, important to market renewals where possible to evaluate all options.
However, the total market revenue across all these lines is unlikely to exceed $500,000,000 of income, meaning that a repeat of the catastrophic losses during CIGNA’s entry into the marketplace in the late 90s could easily destabilise the entire class.
Many clients see building relationships with underwriters and their response consultants as vital for long-term availability of this key coverage.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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