- Product recall is split between food & beverage, automotive suppliers and pharmaceuticals
- In Germany in 2019 3.6m new cars were registered, while close to 3.2m cars were subject to recall
- Electric vehicle trend expected to increase demand for product recall insurance
- AstraZeneca’s long-term captive utilisation protected it from pricing surge during pandemic
The current utilisation of captives in the product recall market is infrequent, but the interest in putting the coverage in captives is increasing, particularly in the automotive space.
One of the main reasons for the lack of captives writing product recall in the UK is the current competitiveness of the domestic recall market, which usually does not inspire many new captive formations.
For example, there is surplus capacity for most risks, while new entrants have recently entered the Lloyd’s marketplace.
Capacity does vary depending on the coverage area, with those speaking to Captive intelligence highlighting electrical vehicles as an area where clients are wanting to buy more coverage than is available.
The product recall market is also largely split between three sectors: food and beverage (usually product contamination coverage), automotive suppliers, and less commonly, pharmaceuticals.
When it comes to the automotive sector, it is not usually the vehicle manufacturer that buys product recall insurance, but the suppliers of the components.
Although product recall cover is commonly written as a standalone policy in the UK, in continental Europe, it is usually written as part of a company’s general liability (GL) policy.
As a result, the recall coverage is usually under-priced, though the cover is less extensive that the standalone recall coverage available in the UK market.
“In Europe, you might very seldomly find some standalone product recall coverage, but that is really the exception,” Thomas Stamm, chief underwriting officer at HDI Global SE’s Swiss branch, told Captive Intelligence.
The general liability market, including coverage for automotive recall, over the past three years has fared less favourably than the standalone recall market in the UK, making it more favourable for captive utilisation.
“After around 20 years of a soft market, and an erosion of terms and conditions, three years ago, we came back to a hard market,” Stamm said.
“So, what we are seeing is a reduction of capacity, restrictions in terms and increases in premiums and self-insured retentions (SIRs), and that gets to a point where risk managers think about whether they should go self-insured and have a captive.”
Stamm highlighted that in Germany, in 2019, there was 3.6m new cars registered, and in the same year, close to 3.2m cars were subject to a recall.
“The number of cars recalled in a given year versus number of newly registered cars creates a recall rate and that has substantially been in excess of 100% worldwide over the past 10 years,” he said.
Product recall is also a discretionary purchase, so a large number of companies decide to take the chance that they will not have a recall and do not purchase any recall insurance.
“I know as many food companies that don’t buy recall insurance as do,” one market expert who asked not to be named told Captive Intelligence.
“It’s not like liability or property, not every single client buys recall.”
In addition to the UK and continental Europe, it also uncommon in the US or Canada for a company to use their captive to write product recall insurance.
“There aren’t very many clients in the grand scheme of things that put recall into the captive,” Kary Yates, product recall practice leader at Aon, told Captive Intelligence.
“I can count on one hand the number of recall clients we have in the US and Canada that utilise their captive for recall.”
Changing tide?
There has been increasing interest, particularly from automotive component suppliers in Europe, in utilising captives for writing product recall cover.
“We are seeing an increased interest in putting product recall in captives, but not usually with high limits, as they are being careful what they are taking in the captive,” Jelto Borgmann, captive portfolio manager at HDI, told Captive Intelligence.
Guy Malyon, EMEA strategic broking director at Aon, said one large auto part manufacture in the EMEA region buys recall insurance as part of their GL programme.
“And they’re probably going to be taking first £50mn in their captive, but that’s a very specific exposure,” he added.
The shift in focus from diesel and petrol to electrical vehicles is likely to be an important factor in the uptick of auto manufacturers buying recall insurance.
“As we move into the whole electric vehicle era, and more companies get into that space, they will need to purchase product recall coverage,” Yates said.
“Due to market loss experience which will affect pricing combined with the level of the self-insured retentions required, clients will probably want to explore something like a captive.”
Borgmann said that due to the cost of transitioning to electronic vehicles, a lot of automotive suppliers might not have the spare finances to fund a captive.
“Although, during the last two or three years, I have seen some of them looking into the space,” he said.
More auto manufacturers, however, are now stipulating in contracts that their suppliers must buy some sort of recall coverage.
Yates added: “There is billions of dollars’ worth of losses in the market for automotive recall, and the car manufacturers are being much more stringent with their requirements for their suppliers to purchase product recall insurance thus the contractual obligation to purchase is driving new buyers to market.”
Challenges
One of the main difficulties in writing product recall through a captive is the volatility of losses in the class.
“In its nature, product recall insurance is difficult to write because of the unpredictability of losses,” Borgmann said.
“One year nothing happens, and then next year, it could be a full limit loss. So, companies are starting to put recall in their captives, but they are hesitant to bring up the big limits.”
As a result, when companies are first putting recall in their captive, they usually start with lower limits for recall than for their general GL policy, in case there are large losses.
“After 10 years without any losses and paying premium which is 1/10 of the limit, people get very confident about the risk, and then they could take it into the captive, and first year they have a full limit loss,” Borgmann said.
“And this kind of volatility is usually not what the CFO of an automotive supplier wants on their balance sheet.”
How are captives used?
Ciaran Healy, chief commercial officer, EMEA at Aon Global Risk Consulting, highlighted that he has most commonly seen captives used in the recall market when clients have a history of losses.
“Where I’ve seen recall in captives, it’s usually difficult scenarios where it’s a sensitive industry, and they’ve had a pretty bad run of losses,” he told Captive Intelligence.
“In some cases, the deductibles are being forced on the client because of those losses and therefore they need some sort of solution like a captive to manage the financing of it.”
Healy revealed he is aware of one auto part manufacturer that set up a captive recently specifically for recall.
“The key driver for the establishment, which is the other key variable, is their performance,” he added.
“If you’ve got losses, it’s a very different market than if you don’t. If you’ve had a bit of a bad run of losses, clearly that changes the dynamic and then price goes up, and the whole risk financing balance can change significantly.”
Due to the nature of the risk, when product recall is written via a captive, it is usually written using a single parent captive rather than in a group captive structure.
“I think in general, recall is too personal to each company, and if you had a group captive or mutual, I can’t see that working,” Malyon said.
Pharmaceuticals
Pharmaceuticals is another sector that sometimes purchases recall coverage, albeit irregularly.
“In respect of the pharmaceutical drug area, companies tend to rely on their casualty programme and we haven’t seen many buy standalone contamination,” Yates explained.
“The industry feels that if there is an issue, their casualty policy will likely kick in, as there’s probably going to be bodily injury involved.”
Kevin Steed, head of group insurance at AstraZeneca, told Captive Intelligence that the company buys product recall cover as part of a non-damage business interruption policy (NDBI).
“In the pandemic, we became a household name practically overnight,” he said.
“Whilst we have a long heritage, the Covid vaccine pushed us into a different hemisphere.
“With heightened media coverage, organisationally you become an increased target and from an insurance perspective we saw increases on multiple market placements.
“Had it not been for our captive structure, product recall would have been another one underwriters would have been chomping at the bit to ramp up prices for.”
Steed noted that recall events are not always for obvious reasons you might expect, citing counterfeit as an example.
“There can be significant activity to understand whether material is our product versus third-party counterfeit,” he said.
“Even the word counterfeit and its application varies, for example if your own genuine product is destined for the UK, but is somehow sold in Japan, then that’s deemed counterfeit.”
Steed also noted that from a product recall exposure perspective, it can sometimes be challenging to quantify the costs of recalling products, which can make it difficult to put into a captive.
“We’ve got our internal models that have been built up over time to quantity the impact, be it from short term replenishment of local stock, through to total replacement of the supply chain from scratch,” he added.