Product recall insured losses for 2015 and 2016 were worse than expected, which could lead to tightening capacity and higher rates in 2018, according to a new Aon Risk Solutions report. Although 2017 appears to be much better than prior years in the frequency or severity of insured recalls, the losses from 2015 and 2016 have matured, according to Aon’s Emerging Trends in Product Recall and Contamination Risk Management report, published Wednesday. The worse-than-expected losses, coupled with significant losses in the general insurance market for 2017, may result in more difficult reinsurance negotiations for specialty insurers, the report said. The number of recalls is increasing amid higher public awareness of product safety events, driven largely by technology and social media distribution of recall information, said Bernie Steves, managing director of Aon Risk Solutions’ crisis management practice in Chicago. “The risk seems to be increasing across all product lines,” Mr. Steves said. “That coincides with the growth of the market. It’s been available for roughly 30 years, but there has been an increasing acceptance of the coverage by companies making these types of products that might need to be recalled, as well as the general insurance marketplace in being able to offer this type of coverage.” Capacity previously available in the product recall insurance market may shift to other, potentially more profitable areas where insurance rates might be increasing, particularly given the number of catastrophic losses the insurance industry — especially the property market — sustained in 2017, according to the report. This capacity tightening will likely strain current rates in the short term, which would be a shift from the recent trend of flat to lower rates on recall renewals. Aon anticipates 2018 renewals to be potentially facing increasing rates or flat renewals at best, according to the report. But the insurance market is “fairly responsive and available” for good risks, Mr. Steves said. “Underwriters are becoming more selective in their risks and becoming more involved in managing that third-party risk,” he added. Generally, underwriters seem to be increasingly wary of food and beverage as a product category, particularly food processors and distributors of ingredienttype products, because of significant food contamination events and subsequent recalls in that category in 2016, according to the report. “The phenomena that we’ve seen over the last several years is that a lot of that risk is being pushed down the supply chain to suppliers who may have caused the problem,” Mr. Steves said. “On the food side, for instance, there have been significant ingredient-type recalls, whether it’s flour or spices or nuts, and you may have a single recall of a product that’s been distributed to 10 different companies and those 10 companies have made four different products with them — and suddenly you’ve got a recall of 40 different products because of this one ingredient that was involved. Certainly, that’s an area where we’re seeing the exposure.” The nonfood side is experiencing a similar phenomenon in recalled components, but it differs from the food category because those products are perishable, and the value is generally not high, Mr. Steves said. A recalled consumer product or automobile because of a component issue, however, could be costly. A significant risk management change in the Food Safety and Modernization Act requires regulated companies to better monitor and manage their supply chains, according to experts. The law’s hazard analysis and risk-based prevention controls framework requires that regulated entities have a written food safety plan that includes hazard identification; process, food allergen and sanitation controls, as well as supply chain controls and a recall plan; and monitoring, corrective action and verification mechanisms, according to the U.S. Food and Drug Administration. In response to the fact that about 15% of the U.S. food supply is imported, the law also requires food importers to verify that food imported into the country has been produced in a manner that meets applicable U.S. safety standards. “Certainly, an important aspect that underwriters are looking at is how are you managing your supply chain,” Mr. Steves said. “It’s one thing to look at your own quality control … to make sure that you yourself are doing all the right things. Then it comes down to how am I managing my supply chain and the products that are coming in.” “Are you able to push down that liability down contractually to a supplier?” he continued. “Probably most importantly, are you able to identify who the supplier is and does that supplier actually have the financial wherewithal to reimburse you? A lot of these smaller component parts or ingredient suppliers may not necessarily have the financial ability to reimburse a large branded company suffering not only the recall expenses and the value of the product, but also significant brand loss potential.”
Worse-than-expected product recall losses in 2015 and 2016 could lead to rate hikes in 2018, according to a report from Aon. These losses, particularly when combined with high general insurance losses in 2017, may make reinsurance negotiations for specialty insurers difficult, the report also noted. The growth of technology and social media is making more consumers aware when companies issue recalls, leading to a higher number of claims being made.