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What Is Recall Insurance?
The enactment of laws intended to promote consumer protection has advanced globally in recent years, and as product safety standards are raised year-by-year, product life cycles are becoming shorter as a result of the diversification of consumer preferences, the frequency of product improvements is increasing due to technological innovations, and companies are reinforcing protection of their brand image, resulting in a rising frequency of product recalls. For example, the increased use of shared modules typical in the automobile industry has caused the number of models subject to a single recall to rise, resulting in high total recall related costs.
In the case where a safety-related problem regarding a product supplied to the market is discovered and a recall is implemented, companies must bear a variety of expenses and they can incur substantial economic losses. Recall insurance provides balance sheet protection against these economic losses. One of the incidental services that Marsh provides with recall insurance is the provision of expert advice to minimize damage to brand image during risky circumstances, supporting companies that implement recalls.
The final decision-maker concerning whether to implement a recall is the manufacturer/supplier of the end product. However, in the case where the cause of the recall is a defect in a component supplied by a manufacturer/supplier that is a third party to the manufacturer/supplier of the end product, the parts manufacturer/supplier may be subject to a demand from the manufacturer/supplier of the end product to pay part or all of the recall expenses. With regard to recall insurance, an insurance policy that covers expenses incurred for a recall by the manufacturer/supplier of the end product is referred to as first party recall, and an insurance policy that indemnifies a component manufacturer/supplier for recall-related damage paid to the manufacturer/supplier of the end product is third party recall, and these two policies are handled separately for insurance underwriting purposes.
The methods of underwriting recall insurance vary depending on the insurer. There are two types of recall insurance. The first is the case where an independent insurance policy is underwritten as recall (expense) insurance. The second is the case where a rider (additional option) to product liability insurance is underwritten because of the close relationship with product liability risks.
Responses to Recalls
It is necessary to take measures depending on the scale of the recall.
Voluntary recalls, individual claim and so on that occur at a certain rate for products regularly supplied can be taken as a business risk and are a risk that should be handled by budgeting a certain percentage of sales revenues.
Details of Indemnification from Recall Insurance
The general definition of a recall that is covered by recall insurance is “the recovery of products from the market or users after public announcement of the recall for the reason that product defects have caused personal injury or property damage to third parties or a reasonable determination that there is a high probability that such injury or damage will be caused.”
The Recall Insurance Market
Because of the following reasons, there is a tendency for general insurers not to actively sell recall insurance.
- If a recall occurs even once, there is a high likelihood that the amount of insurance benefits paid will be high.
- The frequency of recalls has been high in recent years.
- The degree of efforts by companies to raise quality is reflected in the occurrence rate.
If, however, a business company is prepared for recalls, it is possible to procure a certain level of recall insurance. Also, the potential risks differ for each product, and as a result of the insurance terms differ for each product, but foods and beverages belong to a category for which it is relatively easy to obtain underrating, while automotive components are in a category for which it is relatively difficult, although it varies depending on the component.
Key Points for Arranging Recall Insurance for Automotive Parts and Materials
The enactment of laws intended to promote consumer protection has advanced globally in recent years, and awareness of product and food safety is rising year-by-year. In addition, the frequency of recalls is increasing as a result of reinforced protection of corporate brand image.
In the automobile industry, which is experiencing technological innovation, computerization, and automation, the increased use of shared modules as automotive components is expanding the scope of models and makers affected when recalls are conducted. This means that when a problem occurs with in-house manufactured products, the risk of a massive recall can have ripple effects on suppliers. For Japanese manufacturing industries, which are expected to supply growing numbers of products, components, and materials to the automobile industry, preparing for such recall risks has become a major issue involving the lifelines of corporate activities. Use of recall insurance can minimize risks, and with insurance, if a recall does occur, you can get an early start on restoring business and recovering trust.