Is product recall insurance a necessity or frivolity?
By Florian Beerli, Product Recall Focus Group Leader with Beazley Group
With approximately 579,811 manufacturers in the US (i), the industry is vast and consists of a myriad of business types that live within the various levels of the supply chain. For many companies trying to navigate the trials and tribulations of running a business with minimal financial impact to their bottom line, the risk transfer they receive from their various insurance policies provides some buffer and protection. The reality is that many of these companies choose not to purchase, or remain unaware of, the coverages they need to close the gap in some of their largest exposures. One such exposure that is often overlooked by companies is how to protect their financial position and reputation in the event of a manufacturing defect or product recall.
It won’t happen to me In a trading environment where supply chains, more often than not, stretch across the globe, managing the impact of a product being recalled is also becoming a more frequent and complex occurrence for many companies. Over the past year, the pandemic has demonstrated just how intertwined many businesses are – from the manufacturers to the suppliers and distributors – and why this interdependency makes protecting against chinks in the chain all the more important.
The need for product recall insurance is comparable to that of cyber liability insurance a decade ago when companies were far more hesitant to purchase cyber coverage because they did not think their business was at risk. Fast forward to today, it is one of the highest priorities in their insurance portfolio due to the rapid rise in cyber incidents and far greater awareness and understanding of the risks.
There are several reasons why the occurrence of recall notices is a growing issue for any company in the supply chain. These include stricter regulatory requirements, outsourcing of manufacturing, and advancements in detection technologies. By way of example, in 2019, the National Highway Traffic Safety Administration (NHTSA), Food and Drug Administration (FDA) and the Consumer Product Safety Commission (CPSC) conducted over 1,500 recalls (ii).
As significant as that number is, many more incidents that occur during the manufacturing process do not lead to a recall of a product but would still be covered under a product recall policy. Companies can conduct due diligence and have the most robust quality control and supply chain procedures in place but there are still factors that fall beyond their control. Human error during the manufacturing process, unintended product design flaws, and the increased usage of a global supply chain can all lead to a manufacturing or product defect.
A recall is just one of the many consequences that come from these uncontrollable forces and companies of all sizes and in all industries can be affected one way or another.
I can’t afford it Despite the increased risk to firms of all sizes, there are still some barriers that prevent companies from purchasing product recall coverage. This is due to a perception that product recall coverage is either just for large companies or prohibitively expensive. In reality, product recall insurance is more affordable than perceived, with various limits and self-insured retention (SIR) options available to companies of all sizes, and premiums ranging from the low hundred dollars to as low as $3,500 for a $1,000,000 limit. The variance in pricing and coverage provides flexibility to companies and makes it an affordable coverage option that can bring peace of mind and add value to a company’s risk management portfolio. A product recall policy can also be tailored to cover a specific product or fulfill a contractual requirement, offering further flexibility and allowing it to be adapted to meet the requirements of a particular business.
Why do I need it? Every player within the supply chain, be it a manufacturer, distributor, importer, retailer, wholesaler, or broker, can be impacted by a product or manufacturing defect. The financial consequences that stem from such incidents are going to be a company’s responsibility and will affect their balance sheet unless they have proper risk transfer controls in place. While policies vary, a typical product recall policy provides coverage regardless of whether a product is recalled or not. In addition, this coverage will reimburse a company not only for the costs to remove a product from the stream of commerce but will also provide coverage to replace or repair their products, protect their brand and profits, as well as cover the damages incurred by a third party. In such a situation, only product recall insurance can adequately address these potential risks.
Necessity or frivolity? Akin to catastrophe-related coverages, product recall insurance is quickly becoming a “need to have,” not a “nice to have” insurance coverage. Company owners should not have to worry about the financial impact that could ensue if a manufacturing or product defect occurs, and can sleep tight knowing if an incident does occur, their balance sheet and their customers are protected. Having suitable product recall coverage in place can be the difference between having to absorb a six or even seven figure loss, providing an affordable solution that can protect far beyond just recalling a product, and as a company’s product moves through the supply chain, the coverage will follow.
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