But as the FMSA has not yet been fully implemented, those who are buying Product Recall products are doing so solely on awareness of the stricter guidelines, says Mark Colgate, head of product recall at independent broker R.K. Harrison, a division of London-based RKH Group.

“There are definitely more inquiries and more buyers at this stage,” says Colgate, originating mostly from manufacturer risk managers and CFOs. The leading industries in this arena are Automotive and Food & Beverage, he adds.

It's a situation similar to that seen in Europe nearly a decade ago, when new food safety legislation enacted by the European Union in 2006 likewise sparked new interest in Product Recall, says Bill Harrison, Product Recall Practice Leader for Marsh in Princeton, N.J. In Europe, after the new laws were put into practice the number of food product recalls rose—something Harrison believes will also happen in the U.S. over the next few years.

Such increased recall action likely won't come directly from federal demands, he says, but rather from the companies themselves, who would prefer to self-initiate a recall rather than waiting for the government to force them.

“It's people realizing that 'I'm going to have to do this anyway, so I might as well do this on my own terms,'” says Harrison. “It's about maintaining control of the situation. It's your customers, your shareholders—so if you want to protect those groups of people, it would be better to initiate and control it yourself.”

Product Recall Insurance is a narrow area of the Excess & Surplus lines segment, one that has several specialty products within it—and clients often confuse the terms and policy types: Warranty, Product Recall, Recall Liability, Product Contamination, Restaurant Contamination and Auto Recall, Harrison says.

Today, virtually all carriers include some level of crisis-management services in their insurance programs to help clients immediately respond to a product recall event. It's an essential part of the program in a day and age in which “there are more recalls now than ever before, and the losses are getting larger,” says Harrison.

Media exposure for a recall is also now greater than ever: News of a legitimate product recall—or even a rumored one—can rocket through social media outlets within seconds.

“A large percentage of the information that we absorb today doesn't go through an editor. Who edits the stuff that goes out on Twitter, Facebook, and some of the blogs and cable TV shows?” Harrison says. “It's just people speaking off the top of their heads. This information, right or wrong, is just passed along. And when something goes wrong with a product, everyone finds out. So this is a bigger risk today than ever,” says Harrison.

Because the way a recall is handled can make or break a company, “Brokers should know the space,” says Louis Roi, executive vice president and managing director of the Food & Risk Practice for Arthur J. Gallagher Risk Management Services in Chicago.

There are four big areas of Product Recall that resonate today, he says: “Government recall verbiage; adverse publicity associated with a claim; making sure the trigger points are right, as far as defense costs; and probably the most important, the third-party components.”

Brokers need to take care of their customers, so those clients in turn can be there for their own customers, he says.

“It takes you 10 years to get a client, and it can take you 10 seconds to lose one,” Roi says, invoking the wisdom of Berkshire Hathaway CEO Warren Buffett, who once said, “It takes 20 years to build a reputation and five minutes to ruin it.”

Brokers need to make sure that the client sees all the alternatives that are available before buying Product Recall, and that they also understand the third-party aspect of such cover, he says.

“Some policy forms do nothing for your client's customers,” Roi says. He has seen Product Recall policies in which the original broker had not included defense costs, which could be huge to a client down the road. “It's not a cookie-cutter, commodity-based product,” he adds. “That's why you have to work with a broker that knows the space and has experience in this field.”

Ian Harrison, a partner at Lockton LLP in London and global practice leader for Lockton's Product Recall practice, says there are about 15 to 20 carriers competing in the Product Recall market today, though they're approaching the segment from different angles. Because of the intricacies that product recall brings to any industry, most of them are specializing in one area, he says.

“They all tend to do different segments these days because it is getting more sophisticated,” says Harrison. “Some people are very good in the automotive recall segment; others in the markets for ingredients, or packaging, or the supply chain segment. It's a much more sophisticated market than it was five years ago.”

The brokerage's Spring 2013 Market Update does show growth for new markets coming into Product Recall Insurance, which Harrison notes is still “a very small segment of the insurance industry.” He's not quite sure if the recent movement is being driven by demand for the product, or “the fact that some markets are looking for non-aggregating income outside the P&C world.”

One thing, however, is certain: An increased number of players in the field has impacted pricing in this market.

“Pricing is flat; we're not getting the degree we were getting in the last couple of years,” Harrison says. “That's probably a function of some loss activity coming through the market.”

Luckily, he adds, the Product Recall market currently has substantial capacity.

“There's more capacity available, and the forms and endorsements are wider than they've ever been,” says Colgate.

New players include Ace, Crum & Forster and less recently, Swiss Re, says Roi at Arthur J. Gallagher.

“From a trend perspective, for the most part rates have been flat or maybe slightly reduced,” Roi says. Brokers would be wise to price coverage accordingly, he adds: “New players are pushing that price point.”

Clients who are asking A.J. Gallagher about Product Recall policies are “absolutely” also buying them—in part because the middle-market brokerage tries to stay below the rates of larger brokerage houses like Marsh and Aon for its clientele.

“That really has been an entry for us to bring in these accounts and build our food practice,” he adds.

Additionally, the larger food and manufacturing companies aren't actually buying the insurance component of Product Recall—they're just interested in the crisis-management component, says Roi. “Global risk managers get it already. Lower-level risk managers now realize a hit to their balance sheet [from a product recall event] can cripple them.”

LIU's Lubrano, who says the carrier's pricing is “relatively flat from a year ago,” would like to see rates increase.

“We feel rates must go up in this line of business,” he says. Increased loss activity in Product Recall won't slow down any time soon, he notes, so the industry at large needs more premium to support the losses he believes will come. “It's very important for us to see rate increases immediately.”

Lubrano has noticed increased recalls in the Food & Beverage arena, where product issues are “industrywide” from peanut butter and spices, to “even a product as simple and innocent as dried pasta.” As far as manufactured goods, sports equipment and bicycles have become hotter these days “not only in our book, but industrywide,” Lubrano says.

Regardless of sector, however, product recalls are definitely an issue that bears continued attention. The U.S. Food & Drug Administration enforcement report for 2012's fourth quarter shows 552 product recalls from 166 companies, notes Nicky Alexandru, head of Crisis Management/vice president Global Casualty for AIG's Property & Casualty business.

“That is a staggering number,” he says. “It is the highest quarterly number of recalls in the past two years.”

What's more, 35 percent of the companies involved had more than one product recall issued during the quarter.

RECALL IMPLICATIONS

Aon Risk Solutions approaches the Product Recall segment from a three-pronged aspect: pre-incident planning, crisis response, and financial safety net, says Bernie Steves, managing director of the company's Crisis Management Group.

While the logistics of the recall can be expensive, such as having to pull product from store shelves or destroying any remaining warehoused product, those are finite losses based on batch size from the product run or geographic considerations.

The bigger expense these companies face “is if consumers don't come back to using the product,” Steves says. “It's the long-term brand or business interruption damage that can be done because consumers don't feel your product is safe, that does the real damage.”

Lubrano agrees that the expenses of a recall can be “enormous,” and, what's worse, the repercussions can often be permanent. He mentions a case in which an East Coast meat processing company in business for some 75 years had a recall of ground beef so broad that it led to its closing.

“The implications are the potential failure of your business,” he stresses. “You have to get around this problem quickly and have support from product recall carriers. Risk can be a death blow.”

LIU's product-recall offerings allow for certain covered costs of the recall as well as certain covered Business Interruption losses also caused by the recall, says Lubrano. “A company can shut down production for a couple of weeks and the loss of income runs up very quickly.”

Roi recalls a Chicago-based family-owned sausage company, in business for 80 years, that couldn't overcome repercussions from a singular batch of tainted product. “They shut down; they didn't have recall cover,” he relates. But because of the awareness in the food industry about such cases, more of the smaller to mid-sized family-owned companies are looking into their own protections.

“It's really got them thinking about their exposures,” Roi says. The large firms already know their exposures and are more knowledgeable in the space; they have the wherewithal to hire a board of directors and other business-savvy company advisors.

The average family-owned food business with some $5 million to $30 million in sales may not be as intellectually advanced, so they're turning to brokers like Gallagher for information and advice.

The majority of U.S. manufacturers and suppliers do have a crisis-management plan in place, but not all have practiced that plan as frequently as they should, says Steves. Having a crisis management team come in and run a client through a mock recall or contamination event, he adds, can be invaluable.

“Step one: Have a plan. Step two: Are you prepared to implement that plan?” he says. “All crises have in common that they are unanticipated, so a company has to be able to respond to the unanticipated as best as it can.”

The smaller manufacturers are really going to have to closely follow the FSMA and other legislation and regulations that affect the manufacturing industry, says Colgate: “Customers are demanding higher standards.”

That could require a financial investment on the part of smaller companies to upgrade facilities, whereas larger corporations already have such controls in place. The costs to upgrade could be “considerable in many sectors for these smaller guys,” says Colgate, who predicts smaller manufacturers and suppliers may become interested in mergers or acquisitions to gain combined strength.

“On the flip side, some of the bigger guys won't want the smaller guys because they've got to totally upgrade their plant or manufacturing facility,” adds Colgate. “They may be struggling to make their margins and struggling to invest properly to keep pace with current standards.”