Executive Vice President
Area Executive Vice President
The short answer is simple: more contaminations are discovered today, leading to more recalls than ever before. The financial damage following these incidents is far larger than in the past, and senior executives are coming to the realization that their reputation is at stake during a product contamination crisis—and even a well-constructed basic property and casualty program does not cover this catastrophic risk.
Technology around testing food and beverage products is more sophisticated and effective than ever before. Industry, government agencies, retailers and food and beverage processors themselves have greater ability to detect product imperfections—and more quickly. This has enabled us to discover the root cause of a contamination, which in many cases is a contaminated ingredient. In these cases, government and industry can then research where else that ingredient was sold or used and force the recall of multiple additional products. Consider the loss caused by a large nut processing company, whose gross annual revenue was approximately $250M. This caused over $1B in uninsured contamination and recall-related industry losses. As a direct result of this event, it no longer exists. This is not because of the bodily injury cases, but because of the recall liability for the consequential damages to other companies and the loss of confidence of customers.
Today’s powerful handheld devices like mobile phones, tablets and laptops, combined with software and social media applications, have a significant effect on the time it takes for information to travel. Information regarding serious product safety issues or contaminations arrive on our devices, television and radio in seconds or minutes after the first announcement having an immediate effect on reputations, revenue and profitability. This information can also arrive in the hands of retailers who will stop selling contaminated products very quickly. The cash register itself can shut down a transaction. The FDA estimates that the food and beverage industry alone loses over $70B annually due to contaminated food incidents. Additionally, this data has been analyzed, but government authorities have deduced that the damage done via business interruption and brand damage is roughly 4X the amount lost in bodily injury cases. Even false positives, or publicity and hoaxes, have caused tens of millions of dollars in financial damage before they can be corrected.
The realization is that the combination of more recall-related losses, and larger losses than ever before, has changed companies’ view of risk. People only buy products from companies whose reputations they trust, and nothing violates the trust of parents, young adults and, ultimately, society as a whole more than a dangerous food contamination. What was once viewed as an obscure risk is now viewed as a foreseeable and meaningful risk to the corporate balance sheet. More plainly put—even with great quality assurance procedures and capital improvements, there is still a very real chance of a contamination. And this type of loss can cripple a company’s ability to function, as seen over and over again by companies big and small in size. When a board then discovers that their typical property and casualty coverages specifically exclude this risk, they realize something must be done as a duty of their position. In addition to an increased focus on food safety and supplier audits, transferring the risk through a tailor-made Contaminated Products Insurance program is an increasingly common decision.
Weather Risk Management
Parametric insurance is indexed coverage with a customized set of triggers for claims. It’s relatively simple—as claims are triggered by the set of events occurring as they are defined in the policy, not on adjusted losses. Where do you find it? Parametric insurance is most often used to manage weather-related risks across a broad range of industries, though large global reinsurers are the main source of this type of coverage.
In short: If an event can be defined, measured and has accurate historic data, a price to protect against it can typically be offered.
When speaking with food and agriculture industries, this becomes redundant—“Crop insurance, right?” It’s not quite that simple. Weather coverage can cover virtually anyone within the supply chain, as they manage their exposure to weather-derived cost and profit variability. Weather coverages can be tailored to the individual weather risks and even yield coverage, whether you’re a grower of a noninsurable crop by RMA standards or you’re one step beyond the grower, as either a supplier to or a buyer from the producer. Precipitation, temperature, growing degree days, wind— almost everything except hail can be covered. Yield coverage is also available, and in certain scenarios and for shorter durations, commodity price can be included.
If you are looking to manage weather risk but do not have federally subsided programs available, either by county, crop or by the fact you do not have a direct-insurable interest, parametric weather coverage is an option to consider.
The process of securing coverage is typically iterative—the trigger may or may not be efficient at protecting against the risk as originally thought, and/or it may not be economic to transfer. We find that most clients are usually very good at finding the general averages—examples include rainfall in a given month or temperature in April. What we don’t typically see is that the long term historic data yields somewhat different than expected understanding of best- and worst- and expected-case scenarios. By evaluating the cost of risk transfer, we find clients find value in getting the metrics back from the carrier when pricing out the transfer of risk—this could be tail scenarios or unlikely, but worrying, events—or as simple as a second crop with the risk of early freeze.
Below is a very simple example of a risk structure for soybeans. This policy could be for the grower, or the storage, or marketer—the only thing that matters from an insurance perspective is that you have financial exposure to the freeze event. This example pays out per degree below 30F (<=29F) with a total limit of $500,000 at equal increments of $125,000. You might also see the trigger where the policy referred to the “strike,” the incremental payout referred to as the “tick,” and the minimum temperature of 26F referred to as the “exit.”
|Weather Station||Fargo Hector International Airport|
|Historical Expected Low Temperature||35F|
|Historical Minimum Temperature||26F|
|Payment Begins At||29F|
|Total Coverage Paid At||26F|
|Payout Per Degree||$125,000|
The data is crucial to tailoring coverage. If, in the example above, 28F would likely be a total loss, and at 31F we start incurring operational costs to protect, you would change the triggers and have the carrier reprice the risk. You can also set payouts at nonlinear payouts. An example would be if, at 33F degrees, the additional cost is $50,000, but at 30F you start to incur both increased costs and lost crop with expected total of $200,000, you simply set that amount as the payout for 30F. While we could go into any series of scenarios, hopefully this provides a simple illustration of how you might tailor to your specific risk.
Things to consider when evaluating: Would the policy design have paid out in years past when you would have expected it to, or wanted it to? Are you evaluating incremental steps in risk assumption to the change in price? Is it the truly catastrophic event happening two years in a row that causes problems? If so, inquire about multiyear policies. Is it a combination of price and volume/ yield that really keeps you up at night? Ask how you might protect both. While not always available, many carriers can, and will, underwrite both.
If you know when, where and what weather events would or could cause significant financial stresses, we can work with you and the underwriters to come up with a price to transfer that risk. Each business and ownership is unique in its risk tolerance. Giving yourself, your broker and carriers enough time to work to make sure you see all the available options is important. Underwriting turnaround times vary, and we suggest starting this discussion a few months before you would want the policy to incept. This gives you plenty of time to go through calculations of pricing and customizing weather triggers to appropriately and efficiently transfer that risk.
Cold Storage Losses Lead to Multiple Insurance Problems
Loss frequency and severity have increased dramatically during the past three (3) years, totaling millions of dollars and involving a significant number of businesses and public storage locations. The majority of losses have occurred at secondary storage locations, meaning storage locations having insufficient loss prevention features. The types of losses have been due to Change of Temperature, Fire, Collapse, Theft and Ammonia Contamination. The recent three-year loss history indicates that the magnitude of a number of these losses would wipe out an entire year’s earning for any business with annual sales up to $500 million.
Not only do these storage locations lack loss preventive features and practices to eliminate or reduce loss to reasonable severity and frequency levels, but many also demonstrate an impairment of subrogation due to either having no insurance or having deficient insurance.
Many businesses have not been effectively investigating the quality of the loss preventive features and practices employed by a prospective warehouse operation before storing their goods there. Also, the contract of storage is not obtained or reviewed by the business to identify loss recovery-limiting provisions. Further, there is little effort to obtain evidence of insurance for the purpose of evaluating the existence of, or the quality of, the warehouse operator’s insurance in the context of maximizing loss recovery by the company insurer.
To further exacerbate the problem, most Cargo/Stock Throughput Insurance policies issued to a business have an unnamed location limit feature. Under these circumstances, only the insured business knows the physical location where the goods are stored, how much is there and its value. The insurer knows nothing until the loss occurs.
In the current economic climate, most buyers advocate “just in time delivery” to minimize storage costs and dictate storage locations close to their retail distribution centers to minimize delivery time to them. With the buyers dictating when, where and how to deliver the products, it is imperative to have a properly constructed insurance and risk management program in place to protect the goods in storage should a catastrophic loss occur.
Oskri Organics Corporation of Lake Mills, WI is recalling Oskri Organic Sunflower Butter Lot # 099, Oskri Tahini Butter LOT # 193 and Thrive Sunflower Butter LOT # 233
Jan 2, 2019 These products have because it has the potential to be contaminated with Listeria monocytogenes.
Apio Inc. of Guadalupe, CA is expanding a voluntary recall of Eat Smart Salad Shake Ups single-serve bowls.
Dec 26, 2018 The recall comes after the Canadian Food Inspection Agency (CFIA) informed the company that another random sample of Eat Smart Salad Shake Ups Sweet Kale/Chou Frise Doux 156 gr. single-serve bowls (5.5 oz.) with Best Before Date of Dec 29, 2018, Lot 112 346, tested positive for Listeria monocytogene.
Columbia River Natural Pet Foods of Vancouver, WA is voluntarily expanding their current recall to include additional products.
Dec 24, 2018 261 packages of Cow Pie Lot # 72618 and 82 packages of Lot # 72618 and 82 packages of Chicken & Vegetables Lot # 111518 fresh frozen meats for dogs and cats, produced in July 2018 and November 2018, due to their potential to be contaminated with Salmonella and Listeria monocytogenes.
Funky Chunky, LLC, of Eden Prairie, MN is recalling 10 oz. Nutty Choco Pop Gift Box, 50 oz. Holiday Crowd Pleaser and 50 oz.
Dec 24, 2018 Crowd Pleaser, because it may contain undeclared Almond and Cashew Tree Nut.
Inspired Organics, LLC, has issued a voluntary recall of Organic Almond, Peanut and Tahini Butters due to potential contamination of Listeria monocytogenes.
Dec 20, 2018