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What’s shaping the recall insurance sector today?

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What’s shaping the recall insurance sector today? | Insurance Business UK















Broking partner on what’s behind the growth in product recall


Insurance News

By
Mia Wallace



Reading the latest news and alerts from the UK Food Standards Agency reveals that the recall of well-known food products by retailers and brand owners is not a rare occurrence. And while often significant, the financial toll of these recalls is just one aspect of how they can impact a business’s reputation – or even put a company out of business – according to Ian Harrison, partner in product recall at McGill and Partners.

In the course of his career to date, Harrison has supported the design and placement of some of the largest policies for those industry sectors needing product recall protection for the last 20 years, including the auto component, food and beverage processors, food service, packaging, medical devices, pharma and consumer products industries.

“As McGill and Partners expanded the need grew for specialist skills in some of the London market’s niche areas, such as product recall, to best serve our clients and partners,” he said. “I was brought aboard and was delighted to bring my long experience in meeting these exciting opportunities.”

What’s shaping the recall insurance sector today?

Sharing his insight into what’s happening in the product recall insurance market, Harrison noted the recall market has seen a steady and substantial expansion of its income, client base and geographical footprint. Also, and perhaps most significantly, he said, it has undergone expansion in industries needing cover beyond the traditional food and beverage processor risk. So much so that food and beverage processors now form less than 50% of the income base, with auto component suppliers being the next largest sector.

“Current market conditions are stable with abundant new capacity, mainly from MGA providers both in the US and London markets,” he said. “Meanwhile loss ratios suggest profitable results for insurers, although significant potential claims on both auto components and food processors have the potential to disrupt a relatively small market significantly.”

Understanding the impact of product recalls on retailers and brand owners

Examining some of the major impacts of a product being recalled on retailers and brand owners, he said the recall market has not done a good job of fully explaining the depth of cover for financial loss needed by both the manufacturers and their key customers i.e. retailers and automotive brand owners.

He added: “The major impact is always the loss of profit due to a drop in revenues following a recall, not the obvious logistics costs which, while significant, rarely make up greater than 10% of most claims.”

A key development – and driver – of the growth in product recall has been contractual requirements by the vendors and end retailers to pass all the costs and brand damage they have incurred back to their ‘faulty’ suppliers via a contractual obligation.

“This, in turn,” he said, “is passed back down the supply chain creating demand for recall insurance from multiple parties now exposed to customer financial loss, right back to original ingredient /basic component suppliers. Whilst insurance never mirrors the contract exposure, it does allow both a transfer of this contractual risk and allow evidence of protection for customers.”

Do businesses understand the risks that they’re facing?

As to whether businesses tend to be aware of the full extent of the product recall exposures they face, Harrison highlighted that once companies are able to run a worst-case financial scenario of a recall or brand failure, the insurance discussion tends to be around what limits are adequate on a cost/benefit basis. That’s as opposed to previous discussions about whether a quality control system could fail and if insurance is necessary.

However, he said, the reality is that product failures will always happen despite great QA – the question is how to protect against the fallout when that failure happens, rather than if.

For McGill and Partners, he said, the emphasis is on working closely with clients to help them better understand their exposures. Client discussions tend to start with explaining the broad coverage available and the likely limit and pricing structure for their risk based on peer group, revenues, key products and loss potential. The next step is helping them present their business and QA story to potential markets most likely to meet their needs.

As to what a great product recall insurance policy looks like, Harrison noted that while the recall market may never offer a full balance sheet restoration following a product failure, “it is getting ever closer. Extensions of cover to watch for revolve around government regulatory actions to force recall actions and plant closures flowing from a product failure.”

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