Tougher legislation, a growing number ofrecalls and amplified media scrutiny are driving increased interestin the market for Product Recall Insurance products, expertssay.

Brokers and carriers are responding with heightened pre- andpost-incident loss control efforts to ensure their clients canprotect themselves, should a product recall or productcontamination hit close to home.

The passing of the federal Food Safety Modernization Act (FSMA)in 2011, which tightened standards for food manufacturers in theU.S., has brought renewed interest among manufacturers andsuppliers in Product Recall cover, says Louis Lubrano, senior vicepresident of the Global Crisis Management division of LibertyInternational Underwriters in New York.

“The Food Act imposes stricter rules and regulations on the foodindustry for product safety requirements and gives the U.S.government the ability, for the first time, to order a recall onits own volition,” Lubrano notes.

But as the FMSA has not yet been fullyimplemented, those who are buying Product Recall products are doingso solely on awareness of the stricter guidelines, says MarkColgate, head of product recall at independent broker R.K.Harrison, a division of London-based RKH Group.

“There are definitely more inquiries and more buyers at thisstage,” says Colgate, originating mostly from manufacturer riskmanagers and CFOs. The leading industries in this arena areAutomotive and Food & Beverage, he adds.

It's a situation similar to that seen in Europe nearly a decadeago, when new food safety legislation enacted by the European Unionin 2006 likewise sparked new interest in Product Recall, says BillHarrison, Product Recall Practice Leader for Marsh in Princeton,N.J. In Europe, after the new laws were put into practice thenumber of food product recalls rose—something Harrison believeswill also happen in the U.S. over the next few years.

Such increased recall action likely won't come directly fromfederal demands, he says, but rather from the companies themselves,who would prefer to self-initiate a recall rather than waiting forthe government to force them.

“It's people realizing that 'I'm going to have to do thisanyway, so I might as well do this on my own terms,'” saysHarrison. “It's about maintaining control of the situation. It'syour customers, your shareholders—so if you want to protect thosegroups of people, it would be better to initiate and control ityourself.”

Product Recall Insurance is a narrow area of the Excess &Surplus lines segment, one that has several specialty productswithin it—and clients often confuse the terms and policy types:Warranty, Product Recall, Recall Liability, Product Contamination,Restaurant Contamination and Auto Recall, Harrison says.

Today, virtually all carriers include some level ofcrisis-management services in their insurance programs to helpclients immediately respond to a product recall event. It's anessential part of the program in a day and age in which “there aremore recalls now than ever before, and the losses are gettinglarger,” says Harrison.

Media exposure for a recall is also now greater than ever: Newsof a legitimate product recall—or even a rumored one—can rocketthrough social media outlets within seconds.

“A large percentage of the information that we absorb todaydoesn't go through an editor. Who edits the stuff that goes out onTwitter, Facebook, and some of the blogs and cable TV shows?”Harrison says. “It's just people speaking off the top of theirheads. This information, right or wrong, is just passed along. Andwhen something goes wrong with a product, everyone finds out. Sothis is a bigger risk today than ever,” says Harrison.

Because the way a recall is handled can make or break a company,“Brokers should know the space,” says Louis Roi, executivevice president and managing director of the Food & RiskPractice for Arthur J. Gallagher Risk Management Services inChicago.

There are four big areas of Product Recall that resonate today,he says: “Government recall verbiage; adverse publicity associatedwith a claim; making sure the trigger points are right, as far asdefense costs; and probably the most important, the third-partycomponents.”

Brokers need to take care of their customers,so those clients in turn can be there for their own customers, hesays.

“It takes you 10 years to get a client, and it can take you 10seconds to lose one,” Roi says, invoking the wisdom of BerkshireHathaway CEO Warren Buffett, who once said, “It takes 20 years tobuild a reputation and five minutes to ruin it.”

Brokers need to make sure that the client sees all thealternatives that are available before buying Product Recall, andthat they also understand the third-party aspect of such cover, hesays.

“Some policy forms do nothing for your client's customers,” Roisays. He has seen Product Recall policies in which the originalbroker had not included defense costs, which could be huge to aclient down the road. “It's not a cookie-cutter, commodity-basedproduct,” he adds. “That's why you have to work with a broker thatknows the space and has experience in this field.”

Ian Harrison, a partner at Lockton LLP in London and globalpractice leader for Lockton's Product Recall practice, says thereare about 15 to 20 carriers competing in the Product Recall markettoday, though they're approaching the segment from differentangles. Because of the intricacies that product recall brings toany industry, most of them are specializing in one area, hesays.

“They all tend to do different segments these days because it isgetting more sophisticated,” says Harrison. “Some people are verygood in the automotive recall segment; others in the markets foringredients, or packaging, or the supply chain segment. It's a muchmore sophisticated market than it was five years ago.”

The brokerage's Spring 2013 Market Update does show growth fornew markets coming into Product Recall Insurance, which Harrisonnotes is still “a very small segment of the insurance industry.”He's not quite sure if the recent movement is being driven bydemand for the product, or “the fact that some markets are lookingfor non-aggregating income outside the P&C world.”

One thing, however, is certain: An increased number of playersin the field has impacted pricing in this market.

“Pricing is flat; we're not getting the degree we were gettingin the last couple of years,” Harrison says. “That's probably afunction of some loss activity coming through the market.”

Luckily, he adds, the Product Recall market currently hassubstantial capacity.

“There's more capacity available, and the forms and endorsementsare wider than they've ever been,” says Colgate.

New players include Ace, Crum & Forsterand less recently, Swiss Re, says Roi at Arthur J. Gallagher.

“From a trend perspective, for the most part rates have beenflat or maybe slightly reduced,” Roi says. Brokers would be wise toprice coverage accordingly, he adds: “New players are pushing thatprice point.”

Clients who are asking A.J. Gallagher about Product Recallpolicies are “absolutely” also buying them—in part because themiddle-market brokerage tries to stay below the rates of largerbrokerage houses like Marsh and Aon for its clientele.

“That really has been an entry for us to bring in these accountsand build our food practice,” he adds.

Additionally, the larger food and manufacturing companies aren'tactually buying the insurance component of Product Recall—they'rejust interested in the crisis-management component, says Roi.“Global risk managers get it already. Lower-level risk managers nowrealize a hit to their balance sheet [from a product recall event]can cripple them.”

LIU's Lubrano, who says the carrier's pricing is “relativelyflat from a year ago,” would like to see rates increase.

“We feel rates must go up in this line of business,” he says.Increased loss activity in Product Recall won't slow down any timesoon, he notes, so the industry at large needs more premium tosupport the losses he believes will come. “It's very important forus to see rate increases immediately.”

Lubrano has noticed increased recalls in the Food & Beveragearena, where product issues are “industrywide” from peanut butterand spices, to “even a product as simple and innocent as driedpasta.” As far as manufactured goods, sports equipment and bicycleshave become hotter these days “not only in our book, butindustrywide,” Lubrano says.

Regardless of sector, however, product recalls are definitely anissue that bears continued attention. The U.S. Food & DrugAdministration enforcement report for 2012's fourth quarter shows552 product recalls from 166 companies, notes Nicky Alexandru, headof Crisis Management/vice president Global Casualty for AIG'sProperty & Casualty business.

“That is a staggering number,” he says. “It is the highestquarterly number of recalls in the past two years.”

What's more, 35 percent of the companies involved had more thanone product recall issued during the quarter.

RECALL IMPLICATIONS

Aon Risk Solutions approaches the Product Recall segment from athree-pronged aspect: pre-incident planning, crisis response, andfinancial safety net, says Bernie Steves, managing director of thecompany's Crisis Management Group.

While the logistics of the recall can be expensive, such ashaving to pull product from store shelves or destroying anyremaining warehoused product, those are finite losses based onbatch size from the product run or geographic considerations.

The bigger expense these companies face “is if consumers don'tcome back to using the product,” Steves says. “It's the long-termbrand or business interruption damage that can be done becauseconsumers don't feel your product is safe, that does the realdamage.”

Lubrano agrees that the expenses of a recall can be “enormous,”and, what's worse, the repercussions can often be permanent. Hementions a case in which an East Coast meat processing company inbusiness for some 75 years had a recall of ground beef so broadthat it led to its closing.

“The implications are the potential failure of your business,”he stresses. “You have to get around this problem quickly and havesupport from product recall carriers. Risk can be a deathblow.”

LIU's product-recall offerings allow for certain covered costsof the recall as well as certain covered Business Interruptionlosses also caused by the recall, says Lubrano. “A company can shutdown production for a couple of weeks and the loss of income runsup very quickly.”

Roi recalls a Chicago-based family-ownedsausage company, in business for 80 years, that couldn't overcomerepercussions from a singular batch of tainted product. “They shutdown; they didn't have recall cover,” he relates. But because ofthe awareness in the food industry about such cases, more of thesmaller to mid-sized family-owned companies are looking into theirown protections.

“It's really got them thinking about their exposures,” Roi says.The large firms already know their exposures and are moreknowledgeable in the space; they have the wherewithal to hire aboard of directors and other business-savvy company advisors.

The average family-owned food business with some $5 million to$30 million in sales may not be as intellectually advanced, sothey're turning to brokers like Gallagher for information andadvice.

The majority of U.S. manufacturers and suppliers do have acrisis-management plan in place, but not all have practiced thatplan as frequently as they should, says Steves. Having a crisismanagement team come in and run a client through a mock recall orcontamination event, he adds, can be invaluable.

“Step one: Have a plan. Step two: Are you prepared to implementthat plan?” he says. “All crises have in common that they areunanticipated, so a company has to be able to respond to theunanticipated as best as it can.”

The smaller manufacturers are really going to have to closelyfollow the FSMA and other legislation and regulations that affectthe manufacturing industry, says Colgate: “Customers are demandinghigher standards.”

That could require a financial investment on the part of smallercompanies to upgrade facilities, whereas larger corporationsalready have such controls in place. The costs to upgrade could be“considerable in many sectors for these smaller guys,” saysColgate, who predicts smaller manufacturers and suppliers maybecome interested in mergers or acquisitions to gain combinedstrength.

“On the flip side, some of the bigger guys won't want thesmaller guys because they've got to totally upgrade their plant ormanufacturing facility,” adds Colgate. “They may be struggling tomake their margins and struggling to invest properly to keep pacewith current standards.”