Product recall underwriters flag concern about recent large loss events

Expensive product recall events where whole food processing plants were closed for a considerable time have highlighted the catastrophic loss potential in the product recall/contamination space.

Consequently it is highly likely that underwriters will request more granular information on both key plant dependency and the supply chain aggregations from insurance buyers at renewal to better establish this severe risk exposure for their own balance sheets and those of their reinsurers .

Recent large recall cases

Barry Callebaut has warned (opens a new window) investors about a "notable" impact on its financial results after stopping production because of a Salmonella contamination at a factory in Belgium. On June 27, the cocoa processor and chocolate manufacturer detected Salmonella on a production lot manufactured in Wieze and lecithin was identified as the source of the contamination on June 29. All production lines within the factory were stopped (opens a new window). Lecithin is used in all chocolate production lines, so the company blocked all chocolate products manufactured from June 25 to 29.

Another recall event was triggered after Salmonella Typhimurium was detected (opens a new window) in a buttermilk tank in December 2021 at a Belgian Ferrero factory during the manufacturer’s own checks. By May 19, more than 300 people from 16 countries had fallen sick linked to Kinder chocolate made by Ferrero in the Belgian factory. Nicolas Neykov, the head of Ferrero France, suggested (opens a new window) in May that the incident will cost the company “tens of millions of Euros.”

Impact on insurance

In both recall events, food processing plants have remained closed for a considerable time, generating significant revenue losses for the companies. The cases show that the bulk of the losses from product recalls are less likely to be related to the physical recall costs but are mainly driven by business interruption costs of highly integrated, single plant dependent business operations.

These food/beverage losses have been matched by auto recall and consumer product loss events, suggesting a potential hardening of the market for larger loss prone accounts into the final quarter of 2022 and into 2023, particularly if reinsurance costs and general market conditions harden at the key January 1 renewal date.

Other speciality lines of cover have suffered dramatic and unforeseen accumulation losses (contingency during Covid-19, political violence in Ukraine and aviation in Russia). This is likely to increase reinsurers’ selective approach and pricing at renewal and may consequently affect insurance buyers both in terms of costs and required information on supply chain exposures.

Supply chain recalls can and do affect large numbers of end consumers and a single contamination can affect multiple insureds creating an increased aggregation/accumulation challenge in the relatively small recall/contamination market and its reinsurance backers.

Underwriters are likely to request more specific information from product recall insurance buyers at renewal to understand and quantify supply chain exposures. This does, however, also offer businesses an opportunity to better explain the risk mitigation measures they have in place to avoid or reduce their exposure to supply chain risks. These may include highly audited supply sources, back-up or alternative plant capacity, and ideally a wide list of key suppliers should a supply chain event affect them.

The product recall market has enjoyed very stable pricing in the past five years due to a benign loss environment and new flow of capacity attracted by appealing returns and a growing premium base.

Capacity continues to expand with the arrival of IQUW and BluNiche with experienced London market teams, creating new opportunities for insurance buyers.

For further information, please contact:

Ian Harrison

Partner, Global Head of Product Recall Practice Group

T +442079332297