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ESG drive puts product recall market resilience to the test

Electric cars charging in street.jpg

The push to create and sell more sustainable technologies is rapidly changing the dynamics of the product recall market, with claims rising and the demand for capacity greater than ever, sources have told Insurance Insider.

The focus on ESG – like in most industries – is a hot topic in insurance. But for a market that uses history as such a vital component when underwriting its risk, the drive among both consumers and corporations to be more sustainable has begun to throw a few curve balls for recall underwriters.

This is currently manifesting itself most strongly in the auto recall market, although underwriters speaking to this publication also warned that the push for plant-based food products could drive higher claims frequency further down the line for the food and beverage market.

The drive for sustainable technologies has caused a rise in product sophistication, with which the recall market has needed to keep pace. Given the new technology, there is now a greater potential for higher frequency and severity of claims in what has been a largely profitable class to date.

Particularly in focus is the rise in claims related to lithium-ion batteries used in electric vehicles, as outlined in more detail below.

Automotive electronics-related recalls increased by over 300% between 2009 and 2019, according to a 2019 Stout automotive defect and recall report.

David Page, head of product recall at Apollo, said: “We are constantly looking to increase our understanding of the technology as automotive components generally become more sophisticated and reliant on new processes and componentry.”

Meanwhile, the demand for the product in auto recall is rising, with carriers in the niche class of business struggling to keep pace.

A recall broker noted one auto component business came looking for $500mn worth of limit, but they simply had to inform the client that level of cover “just isn’t available”. It is usually the case that tier one suppliers – those that deal with the original equipment manufacturers – are the companies that require the biggest cover.

The same broker mentioned that if the whole US recall market deployed its entire capacity on one auto component risk, they could potentially pull together a recall tower worth around $250mn.

The recall market in its entirety had an estimated specialist (standalone) premium income of around $500mn last year, shared between around 25 markets centred on London, Bermuda and the US, according to Lockton global head of recall Ian Harrison. However, not all of this capacity is available for automotive component recall cover – which, in tandem with recent loss experience, is exacerbating the squeeze in that market.

As multinational auto and tech businesses continue to expand and merge, manufacturers of the components that supply these companies are requiring bigger limits on their recall policies, and are therefore likely to generate larger claims when things go wrong.

Sources also warned that the potential recall “ripple effect” on insurers and component manufacturers supplying ever-expanding auto companies is enormous.

If certain businesses want access to bigger towers going forward, sources suggested one solution will likely involve insureds agreeing to terms and conditions that would see them increase their self-insurance retention, and ultimately commit to a greater share of risk.

Page said: “The more skin in the game the insured has, the more confident the carrier taking on the risk will be. We are looking to work with clients not only to provide suitable risk transfer options but also to help these clients pioneer better sustainable technology.”

Other key takeaways from this publication’s conversations with the recall market include:

  • Fires from lithium-ion batteries are a key focus for future claims in auto recall, with the Chevrolet Bolt recall shining a light on the potential for claims severity for this risk

  • The consumer desire for plant-based products is likely to change the risk profile in the food and beverage recall market significantly, although this is not yet a major claims issue for the market

  • Rates in the product recall market are up in the range of 5%, although this varies by product line. Pricing is rising substantially in automotive component recall in response to battery losses

Lithium-ion batteries

Lithium-ion batteries are an established technology commonly used in rechargeable devices such as phones, laptops, and electric toothbrushes, but they are also now being used on an industrial scale in electric vehicles.

The main risk with lithium-ion batteries is that they are fire prone, and this risk only increases when the battery required needs to be bigger and more powerful, as is the case with electric cars.

The Tesla roadster was the first highway-legal car to use a lithium-ion battery back in 2008, but its use in cars on an industrial scale – where errors can be more likely – is a more recent phenomenon.

Additionally, the scale of production is set to increase as governments begin the drive to phase out petrol vehicles. By 2030, the UK government wants half of all vehicles on UK roads to be electric.

The risk has been brought into focus for (re)insurers by a massive recall by General Motors (GM). All of GM’s Chevrolet Bolts produced between 2017-2022 are being recalled at a possible cost of $1bn to the company because of the risk of a battery fire.

This publication revealed that London-based insurers have significant reinsurance exposure to the LG Chem and LG Electronics policies, which are written out of Asia and total around $150mn between them.

It is understood that Allianz Singapore was the lead insurer on the LG Chem policy and that they were both brokered by Marsh.

Insurers will have a keen eye on the lawsuits currently taking place in both Michigan and California surrounding the Chevrolet Bolt.

Broadly speaking, both lawsuits claim that GM’s actions in response to fire safety concerns with its Chevy Bolt vehicles were too little too late.

Jason McNerlin, partner and head of product recall and liability at BLM, said: “The lawsuits are reminders that product safety issues can involve a broad spectrum of loss and claims, sometimes extending way beyond the costs and expenses of conducting the recall itself.

“There have also been investor class actions alleging, for example, that company statements about risk, reserves and product controls were misleading, and caused loss of share value.”

“Whether insurance policies provide any relevant cover, such as defence costs, will of course depend on the claims and the policy concerned,” McNerlin added.

Data from the US Consumer Product Safety Commission shows that the number of lithium battery-related recalls in the US spiked in 2021, with one of the main battery recalls this year involving 2.5 million Verizon Wireless internet devices.

US consumer product recalls relating to lithium-ion batteries reached a new high in 2021 ID 14 Sept.png

Moreover, US National Highway Traffic Safety Administration data highlights that the number of cars recalled in the US due to lithium-ion battery safety concerns has sky-rocketed this year, with figures including 109,805 of the GM Chevrolet electric vehicles recalled.

The batteries are a big focus for the market as they are often one of the most expensive parts of a costly electric car. Those companies supplying the batteries usually demand the biggest capacities the market can offer.

Sources said there is still a fair appetite to insure these risks, but heavy recent battery-related auto losses will likely put the market’s appetite and pricing strategy to the test.

A few sources stressed that if lithium-ion batteries losses continue on a similar trajectory and the safety record of the product does not improve as we learn more about its technology, “they could eventually become uninsurable”.

This year has also seen more cars recalled for lithium-ion battery issues than ever before ID 14 Sept v2.png

Plant-based alternatives

The sustainability drive is also altering the game in the food and beverage side of the recall market, and the trend of people considering plant-based alternatives to meat consumption is growing – and as a result, the risks involved are changing.

With plant-based foods, although there isn’t the risk of causing an E coli contamination for example, it is countered by the fact that vegan and planet-based meat alternatives come with their own allergen risks.

Moreover, there is also the looming threat that if tiny traces of meat are found in a vegan product, then it can easily cause a large-scale and costly recall.

Natasha Catchpole, practise leader of crisis management at CFC, said: “Processed foods may be less exposed to naturally occurring pathogens, but the increased reliance in a kill step in the production process, as well as exposure to a range of supplied ingredients, changes [the] exposures and consideration of risk.”

Processed foods may be less exposed to naturally occurring pathogens, but the increased reliance in a kill step in the production process, as well as exposure to a range of supplied ingredients, changes [the] exposures and consideration of risk
Natasha Catchpole, CFC

Catchpole added: “Not only this, but as traditional meat processors look to diversify their product lines with plant-based ranges, the increased exposure of cross-contamination needs to be considered.”

Rates show modest rises

Rates in the product recall class have hardened, although not to an extent seen in other markets, with estimates from sources averaging at a 5% increase over the next 18 months.

Lockton’s Harrison said in a recent company article: “Despite a generally hardening market, rates for product recall risks have remained stable.”

Rate changes for recall insurance – whether food or auto – are not necessarily market-wide. Although the cost will be within a product-specific pricing band, it will often vary depending on the company, with insurers intensely scrutinising a client’s previous safety and loss history before underwriting the risk and setting the individual price.

Some substantial rate corrections on certain policies where the risk of recall is higher – such as those involving lithium batteries and unproven ESG technologies – have already been seen.

One broker mentioned that they were in discussions with an auto component supplier over the renewal of a $50mn policy and had to inform it that the cost of its policy had quadrupled, while the percentage of cover willing to be written had decreased substantially.

Sources said that recent auto recall losses, such as the GM case, will mostly hit the overseas casualty insurance market rather than the London recall market, which tends to have specific, standalone recall expertise.

Apollo’s Page said: “Some Asian carriers, purely as an example, often have reinsurance treaties that allow them to write recall product lines locally as part of general casualty programmes, and London often gets reinsurance requests to take on these recall exposures.”

Overseas, recall policies are typically written as an extension to casualty line insurance, rather than standalone recall cover.

This has resulted in recall premiums being undervalued by many overseas underwriters, London-based sources claimed. When all the risk has been considered, London insurers are left feeling the whack of heavy recent losses.

Potential rate increases have also been stifled by new MGAs recently entering the recall market, which bring fresh capacity to the market and don’t have the same history of recall losses as the more established players.

MGA Dual recently ventured into the product recall market with a brand-new team – spearheaded by Mark LeBlanc after he and the majority of his team defected from Swiss Re Corporate Solutions.

CFC’s Catchpole said: “There is capacity both entering and exiting the market. Product recall can be volatile as it is intended to respond to crisis scenarios, and volatility isn’t always welcomed by certain business models.”

There is capacity both entering and exiting the market. Product recall can be volatile as it is intended to respond to crisis scenarios, and volatility isn’t always welcomed by certain business models
Natasha Catchpole, CFC

Moreover, product recall is not like other insurance markets – such as property or general liability – where it is all but essential to have some degree of policy cover.

In recall, carriers and brokers are aware that if prices are hiked to a level that leaves a customer pondering its value, they may decide not to purchase, and instead take their chances on having to pay out for a loss themselves.

However, most sources agreed that recall is quickly becoming more of a “need to have” rather than a “nice to have” policy, as a result of the developing risks involved with modern manufacturing and food production, which could eventually affect pricing.

It is also becoming more standardised for manufacturers, particularly in certain product sectors, to be obliged to have varying degrees of recall cover as part of their contractual agreements.

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