Product recall insurance market shifts as major player adjusts strategy

Lloyd's of London
While the product recall market overall remains fairly unaffected by the hardening insurance market, a major player’s strategy shift is requiring more risk sharing and syndication in this niche segment.

Allianz, perhaps the largest player in the recall space via its subsidiary AGCS, has dramatically reduced its deployed capacity and geographical underwriting footprint following five years of aggressive expansion. This comes amid a general profitability push at AGCS. 

 

Market moves

Throughout 2020, Allianz curbed its average line for recall risks to $10m from $20m, or sometimes $50m deployed on some larger risks. This change in strategy has turbocharged the already visible trend of increased risk sharing or syndication across the 10-15 industry specialist players in product recall. 

Most risks of $5m or greater are now generally shared either within one large placement or by excess layers stacked on top. This can benefit the insurance buyer particularly in the case of larger placements as there is more competition to share a common exposure.

However, rates have been rising for higher capacity deals (towers of greater than $50m) as insurers apply a ‘cost of capacity’ test. This is to compare against other insurance classes where rates are skyrocketing and therefore may potentially offer a better return. 

 

Consequences 

The need for risk sharing has prolonged the underwriting process in some cases. At the same time, this has boosted London’s position as the centre for large and sophisticated recall placements due to its concentration of underwriting expertise. Most of the larger corporate insurers such as Axa, HDI and Allianz base their global product recall underwriting expertise in London with others like Swiss Re significantly increasing their presence. 

London is also seeing an upsurge in global deals where standalone recall policies are sought after being excluded from, or dramatically repriced by insurers that offer recall cover within a multi-risk package.  

For small/medium risks, the US domestic surplus line market (sales up to $100m) continues to offer a thriving local supply with Axon, Beazley, Chubb and Starr competing for business.

 

Recall market overview

Overall, insurance costs for product recall risks barely moved in 2020 despite the upheavals caused by Covid-19 and the dramatic cost increases seen across many other segments of the insurance market. 

The reasons why rates in product recall have remained subdued are complex, but perhaps one part of the explanation is the remedial action taken three to four years ago to aggressively raise the self-insured retention taken by policyholders, which has reduced the loss frequency and returned the market to profitability. 

This reduction in loss frequency and the short tail nature of this peril seems to have benefited recall insurers during the latest reinsurance renewals on 1 January. The focus was more on ensuring clarity on policy terms in relation to Covid-19 and cyber risks than achieving a pure pricing bounce, which would generally be passed on to retail clients in some fashion. 

 

Analysis of the key industry segments 

‘Recall insurance’ is somewhat of a misnomer for the various products designed by insurers to fully protect the different industries that have risk nuances within a product safety risk. It is best to analyse these according the customer segment they serve. 

•    Food processing 

For food and beverage processors, the coverage has a principal trigger of ‘contamination’. This could happen on the production line, causing a plant shut down before any product is offered to consumers. Technically the product would therefore never be ‘recalled’, but the insurance policy would still respond. 

The contaminated products segment of the market continues to be highly competitive in terms of pricing and coverage available. This is supported by the fact that product recalls declined in 2020, despite a few incidents where food service processors shifted the production focus to retail opportunities as the hospitality sector was closed down. We saw claims arising out of these labelling and packaging challenges. However, the general decline in recall events may well have been driven by the need to keep food production at full volume despite significant Covid-19 challenges in chilled production settings. This pressure on producers may well lead to an uptick in food recalls in 2021.

•    Industrial component manufacturing

The fastest growing segment in recall is for industrial component manufacturing. Here, the policy triggers have been expanded to include unsafe products (requiring a formal product recall) and a much broader trigger, namely failure to meet the product specifications. This risk area experienced a big drop in recalls in the first half of 2020, probably linked to clients’ lower product sales, particularly in components for vehicles.

However, production rebounded strongly at the end of 2020, boosting demand for insurance, especially for higher tech component supplies to electric vehicles and white goods, driven either by new buyers or buyers unable to secure sufficient sub limits for recall with their casualty insurers.

Insurers’ appetite to offer this cover to industrial manufacturers is also increasing, which could provide significant growth potential. 

•    Restaurant/food service

The recall market product for the restaurant/food service industry was hit extremely hard by losses during the pandemic. The standard policy trigger is economic loss after an isolated food borne illness type event (salmonella in a kitchen for example). Claims were driven by country-wide shutdowns that caused catastrophic losses to the food service industry. Some insurers had offered coverage extensions against a pandemic health event. Losses here have been significant, with many cases going through litigation over the policy interpretation. As a result, recall insurers are very unlikely to offer pandemic extensions on their food service policies going forward, particularly due to the potential aggregation risk.

•    Other segments
Demand for recall protection is growing quickly in industry segments such as medical devices and supplies and industrial/consumer packaging. 

•    Summary
Overall, the recall market outlook remains stable with adequate competition and underwriting capacity for 2021 available and subdued rate activity. It is, however, worth noting that as a niche market, any single major loss event or systemic activity can cause a shock and a rapid shift in the underwriting conditions. 
 

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