“The number of FDA [Food and Drug Administration] Class 1 recalls is clearly on the rise,” says David Bresnahan, client executive at the Horton Group in Orland Park, Illinois. The FDA defines a Class 1 recall as “a situation in which there is a reasonable probability that the use of or exposure to a violative product will cause serious adverse health consequences or death.”

Simon Oddy, a New York City-based partner with RGL Forensics, maintains that the 2011 passing of the Food Safety Modernization Act has accelerated the pace of recalls by giving the FDA added authority to trigger them. “Essentially, the FDA has increased authority over control and monitoring of the food industry — and if you're not in compliance with some new regulations, that increased authority allows the FDA to interrupt the supply chain” with either a suggestion of a recall or a mandatory recall, he says.

On the client side, compliance with Food Safety Modernization Act standards has been mixed, says Paul Primavera, executive vice president and practice leader with the national risk control group at Lockton Cos. While there's a large percentage of his clients for which the act has had minimal impact in terms of procedures and reporting requirements, “for other corporations that did not have those protocols in place — and we've seen some of those — it's been a little bit tougher.”

According to William Harrison, managing director at Marsh & McLennan Cos., the improved ability to trace causes of contamination has likewise helped drive the number of recalls. “The level of quality control in the food business — and non-food manufacturing business — is far better than ever before,” he says. Harrison offers a hypothetical example of a dozen people across the country getting sick and being diagnosed with E. coli. Today, government agencies have the technological ability to track the cause of those incidents to a company, restaurant or even supplier level, down to the manufacturer of a single ingredient.

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“What might have been viewed as a 24-hour bug 10 years ago, today more often they can find out the root cause and where it was shipped,” says Harrison. “It may trigger six, eight or 10 recalls, where 10 to 20 years ago it might not have caused any.”

What's more, “with social media, everyone finds out about it in an instant,” he adds. “It's a different world.”

Oddy says the combination of the Food Safety Modernization Act, increased recalls and the potential for criminal charges brought against executives — if it's found they knew their companies were disseminating contaminated products — has created a surge in demand for product recall coverage. The insurance market has made tremendous progress developing products to fill gaps in coverage, he adds, in order to keep pace with this evolving risk set.

Half a decade ago, insurers' limited product expense coverages would typically be limited to paying for the removal and disposal of the recalled product, and only if it was determined that the product would cause bodily injury or property damage. But over the past five years, Bresnahan explains, as supply chain risks increased the current product recall market emerged.

Today, policies cover government recalls: Even if a product is not 100% certain to cause bodily injury or property damage, Bresnahan says the policy will respond should the FDA trigger a recall. They also cover “loss of gross profits, first-party, third-party; they pay for crisis consultants, rehabilitation expense — the full gamut, compared to what it was,” he adds.

Businesses have been hard at work trying to identify risks in their supply chains after a series of events over the past five years exposed supply chain vulnerabilities.

Rates and risks

Bresnahan, who notes that food product recall is one of his company's biggest growth areas, says premiums for most standalone policies, depending on risk exposures, are relatively favorable, but do require insureds to take a higher retention. Deductibles, he adds, start at $25,000, “and it's not unusual to see them go up to $100,000 for mid-size businesses.”

While competition is keeping rates competitive, Harrison notes underwriters “would very much like to adjust the pricing upward to reflect the increase in the number and the size of recalls.”

On the one hand, Harrison notes the significant competition. On the other, he says there have been product recall underwriters that suffered too many losses, couldn't make money and exited the market. “It's a complicated time — a very difficult time — to be a product recall underwriter,” he states.

While food product recall coverage is competitive, recall policies for auto can be prohibitively expensive. “For the clients I handle, almost 100 percent of my food clients have product recall coverage,” says Bresnahan. “The same is not true for clients that supply into auto.”

Nicole Greene, director of brokerage, professional and executive liability at Burns & Wilcox, agrees, stating, “I've seen pricing overall remain steady, with the exception of the automotive industry.” There, she says, appetite is shrinking due to higher exposures, increased claims activity and greater potential for fatality.

Outside of product recall, overall pricing and capacity for manufacturing coverages largely mirror the broader trends in the soft commercial lines marketplace. Marsh's “United States Insurance Market Report 2016” states that rates are competitive and are expected to generally decrease for property and casualty coverages in the manufacturing sector. For directors and officers coverage, Marsh says favorable trends for buyers should continue, although companies with challenging loss profiles could see 10% or higher rate increases.

Supply chains, revisited

Businesses have been hard at work trying to identify risks in their supply chains after a series of events over the past five years (among them the 2011 Japan earthquake and tsunami, floods in Thailand that same year, dockworker labor strikes at major U.S. West Coast ports in 2014 and the Port of Tianjin explosion in 2015) exposed supply chain vulnerabilities, particularly how problems at a single supplier could disrupt the entire chain.

Although insurers have not necessarily rolled out new coverages over that time the way they have in product recall, Steve Rosenthal, a founding partner of RGL Forensics in San Francisco, says carriers and brokers have been working with risk managers to address supply chain risks by identifying weak links and implementing plans in the event of a disruption at a given supplier.

“I think the amount of money spent as a result of large supply-chain losses was a tremendous hit,” he says. “What risk managers and carriers are doing is understanding the supply-chain situation so that there aren't scenarios where a sole source [of disruption] puts you in trouble.”

With supply chain frailty being tested in recent years, Marsh's David Carlson, manufacturing and auto practice leader, says many companies are also taking steps to reduce their supply chains — or even buying them up entirely — to better manage them. Other companies such as Toyota, he notes, are making significant investments to help their suppliers improve their logistics to ensure the on-time delivery of quality products.

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