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PRODUCT RECALL IN THE LINE OF FIRE

Insurers, brokers and clients need to work together to combat the knock-on
impacts of soaring inflation in the product recall market according to John
Naughton, Manager of Berkley Product Recall, W/R/B Underwriting.
 
By W/R/B Underwriting W/R/B News December 12, 2022


PRODUCT RECALL IN THE LINE OF FIRE

If there is one word that dominated the news over the last few years it was
Covid ;but there is now a new kid in town, and one that looks like it will
continue to hog the headlines for some time yet – inflation. The resultant
Cost-of-Living and Cost-of-Business crises are impacting all areas of our lives,
including insurance, with the Product Recall sector – among many others –
anticipating increased claims frequency, increased claims costs and a resultant
impact on premiums.

But to understand why, it is necessary to look at how we have ended up where we
are.

In the wake of Covid-19, the lockdown induced scarcity of supply was suddenly
exposed following the release of pent-up customer demand, driving up prices
(Demand-Pull Inflation). This was widely anticipated by economists and should
only have been a short-term phenomenon whilst manufacturing and services ramped
up again. However, world events served to change all that.

It was followed by Cost-Push inflation as the War in Ukraine and partly the
consequences of Brexit created new challenges. The global supply of many core
ingredients, materials and goods shrunk almost overnight – with this scarcity
forcing up prices for those available. Associated labour and skills shortages
also resulted in higher wages, further increasing costs. And now of course we
have increased energy costs as a direct result of the War in Ukraine.
All of these factors are putting the squeeze on the low-margin, high labour
manufacturing and processing sectors that traditionally buy product recall
insurance – and increasing both the likelihood of a claim and the expected cost
to settle each claim.

Why are claims more likely?
When profits are squeezed, some companies and manufacturers will look at more
extreme ways to cut their costs than in normal times. This could have an impact
on quality management, machinery/building maintenance, or investment in staff
recruiting/training – all of which increase the likelihood that something will
go wrong and result in a claim. As does having to use supply chains that they
may not have used before and may be less reliable and of lower quality, a trend
that is being exacerbated by disruption to supplies from the world’s biggest
industrial manufacturer due to the return of intermittent Covid-19 lockdowns in
China.

Claims costs on the rise
And whilst claims are more likely in a recession, the costs of claims are also
rising fast. Inflation affects all costs associated with claims (from recall
costs to third party liability, loss adjusting to legal awards) so even a small
increase or small amount of volatility has a much greater impact on the total
claim costs in the future. Not to mention how the costs get worse when
compounded over years of high inflation over long tail classes like Casualty.

Underwriting for volatility
Underwriters build in the expected costs of settlings claims into premiums –
however at a time of inflation, there is often a mismatch between the expected
costs and the actual costs. Policies underwritten this time last year by some
insurers may not have built in the sufficient additional costs; policies written
now should.

The levels of deductibles or retentions set prior to high inflation may also now
be inadequate against estimated future costs. Theoretically, the same batch of
goods produced last year will cost more to produce this year so brokers can
really help here by ensuring manufacturers make this clear when citing any
overall sales increases. A failure to increase deductibles and retentions in
line with inflations exposes insurers to an increase in small attritional losses
which can quickly accumulate.

As the insurance market braces itself for more frequent and more expensive
claims, premiums will need to factor this in, and this is essential to ensure
there is a healthy insurance market that can pay claims when they do arise.
Unlike some manufacturers, who can reduce the quantity or quality of what they
produce, keep prices stable and hope customers don’t notice (such as less crisps
in each bag…known as shrinkflation) insurance cannot do that. Insurers and
brokers can however work closely with clients, help them understand why premiums
may need to go up, encourage them to be open and transparent, and remind them of
why this discretionary product is needed now more than ever as they look to
navigate through these difficult times.

John Naughton is Manager, Product Recall, W/R/B Underwriting

NEWS

CHANGES & CHALLENGES: BROKER Q&A WITH PIERS WINTON 
Piers Winton, Senior Vice President, Paragon International Insurance Brokers
December 12, 2022

Product Recall in the line of fire

Insurers, brokers and clients need to work together to combat the knock-on
impacts of soaring inflation in the product recall market according to John
Naughton, Manager of Berkley Product Recall, W/R/B Underwriting.

December 12, 2022

Claims Team Q&A: With Dan Cambage and David Roche

December 12, 2022


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