the changing face of product recall insurance

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The Changing Face of

Product Recall Insurance


• Florian Beerli, SVP Product Recall, ACE Florian has 20+ years of insurance industry experience in crisis management, with 12 of those years focused on Product Recall. Florian is considered a global specialist in the Product Recall space.

• Gary Nesbit, Director of Risk & Insurance Management, Advance Auto Parts Gary has held various risk management positions at Belk Inc., Kohl’s’, Buffets Inc. and the St. Paul Insurance Co. Mr. Nesbit’s risk management teams have been recognized nationally by Risk & Insurance magazine, National Underwriter magazine, the Association for Financial Professionals, and other risk management organizations for developing and implementing the best in class risk management programs.


What to expect today• Understand product recall insurance and how it can

help your company

• Become familiar with the legal and statutory requirements for reporting safety issues

• Learn how to calculate limits and self-insured retention strategies that meet your company’s needs


Can a product recall happen to my company?


4,075 439 632

FDA1 CPSC2 NHTSA3

2012:

2009: 2,781 465 571

It happens more than you think!

+ 46% -6% +10%


Why do recalls happen?


Factors / reasons why recalls are occurring

• Design flaw

• Global supply chain

• Stricter product safety rules and regulations

• Manufacturing defect

• Human element


Global Supply Chain4


How do you manage your suppliers?

• Supplier qualification procedures

• Preventative & predictive maintenance protocols

• Insurance requirements

• Process change protocols

• Scope of contract in place with suppliers

• Product testing


How do you manage your suppliers?

• Evaluation of suppliers• Supplier / Vendor Approval Program?

• Contracts in place• Hold Harmless / Right of Subrogation?

• Insurance requirements for suppliers• Liability Insurance?• Product Recall Insurance?


US Product Safety Rules and Regulations

• FDA Food Safety Modernization Act

• Consumer Product Safety Act (CPSA)

• The Bioterrorism Act of 2002

• Consumer Product Safety Improvement Act (CPSIA)

• Food Drug & Cosmetic Act (FD&C Act)

• H.R. 2715: Updates to CPSIA


US Product Safety Rules and Regulations

• Transportation Recall Enhancement, Accountability and Documentation Act

• National Traffic and Motor Vehicle Safety Act

• Federal Hazardous Substances Act (FHSA)


What is the financial impact of a product recall?


The Possible Financial Exposure

• Business interruption / Loss of profits

• Replacement of product

• Damaged reputation

• Recall costs

• Loss of brand equity


Facts & Figures

• Peanut butter recall due to salmonella• Estimated - $70m5

• Fruit shots recall due to choking hazard• Estimated - $41m5

• Laptop batteries recalled due to overheating• Estimated - $400m6

• Toys recalled due to lead paint• Estimated - $30m6

• 14 million cars recalled due to overheating of an electronic switch• Estimated - $280m7


What is product recall insurance?


Product Recall Insurance

• Reimbursement of financial loss• Balance Sheet & Brand Name Protection

• No frequency but severity• Catastrophic Event Coverage

• Hybrid between Liability and Property• First Party Coverage

• Discovered and reported during policy period• Claims Made


Is there a one size fits all policy?

• Food & beverage, cosmetics, pharmaceuticals• Consumable Products

• Household appliances, clothes, electronics• Consumer Goods

• Components used in general manufacturing • Automotive & Aviation

• Component Parts


What is the trigger of the policy?

• Not the recall of the product• An Insured Event

• Knowing the use / consumption of product would cause BI / PD is sufficient

• No actual Bodily Injury or Property Damage needed

• Generally excluded in the GL policy• Impaired Property


What types of financial losses can be covered?

• Loss of gross profit / business interruption

• Replacement costs (first & third party)

• Recall costs (first & third party)

• Extra expenses

• Rehabilitation expenses

• Customer loss of gross profit

• Customer extra expenses

• Customer rehabilitation expenses

• Consultant costs


Consultant Costs

• Recalls can be very complex• Manufacturing knowledge• Recall knowledge?

• Use of a consultant has proven to limit potential damage• Loss mitigation work• Deployment of product recall

• 24/7 Hotline

• Consultant costs are unlimited and no SIR applies


Who is buying product recall insurance?


Why companies buy coverage

• Experienced a product recall

• Witnessed a competitor suffering a recall

• Contractually required

• Potential for negative press / publicity / social media

• Risk Management decision

• Brand has become a critical asset and must be protected

• Protect the balance sheet to avoid potential D&O exposure

• Increase in legislation

• Complexity in supply chain


What should I consider?


Considerations for buying Product Recall Insurance

• What limits do I need to protect my balance sheet?

• How much can my balance sheet absorb?

• Do I need all coverage’s available?

• Diversity of Product

• Diversity of Geography

• Diversity of Customer

• Diversity of Supply Chain

• Numbers of Manufacturing Plants

• Batch Size / Daily Output / Production Lines


Questions?


Contact Information

Gary A. NesbitDirector of Risk Management Advance Auto Parts, Inc.5008 Airport Road NWRoanoke, VA 24012Ph.: 540 561 3597Cell: 540 632 8622Email: [email protected]>

Florian BeerliSVP Product RecallACE Westchester110 Washington Ave.; 3rd FloorNorth Haven, CT 06524Ph.: 203 234 6311Cell: 678 234 8885Email: [email protected]


References• 1 - http://www.fda.gov/downloads/iceci/enforcementactions/ucm346964.pdf• 2 - http://www.cpsc.gov/Global/About-CPSC/Reports/Annual-Reports/FY12AnnualReport.pdf• 3 - http://www.nhtsa.gov/search?q=all+recalls+by+year&x=0&y=0Diversity of Product• 4 - http://onlinembapage.com/supply-chain-management-mba-is-hot/• 5 – http://www.ey.com/Publication/vwLUAssets/Capturing_Recall_Costs/$FILE/Capturing_recall_costs.pdf• 6 – http://www.investopedia.com/slide-show/car-recalls/• 7 - http://images.businessweek.com/slideshows/2013-01-17/the-most-expensive-product-recalls

the changing face of product recall insurance

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