Authors: Bill Harrison Adam Nisenson Steve Kluting Jake Heckman Eddie Kurshumlija Harry Allhusen Camden Nisenson Susan Messmer

Supply chain issues, inflation, and costs for transportation, raw materials and labor continue to present challenges for companies in the U.S. Some industries have benefitted from these hurdles with revenue and margin growth, while others continue to — or have begun to — see struggles. In all of this, the Product Recall marketplace has remained stable due to the multiple entries of new markets in the last two years. With pandemic restrictions behind us, we're seeing a very competitive market despite increased regulatory activity and the return of some sizeable losses and more frequency.

What does all of this mean for insureds? Well, as of now, markets continue to be reasonably aggressive on accounts with favorable loss history — especially those whose operations fall into the primary appetite of underwriters. On the other hand, companies doing over $2 billion in revenue, tougher classes of business and/ or those with loss histories notable for frequency or severity are seeing more underwriting caution than this time last year. Stiff competition still exists amongst markets to grow their books in an increasingly congested market; however, some newer markets remain more cautious about where they are looking to deploy their capacity (as is expected).

Of the roughly 25 markets focused on product contamination and recall in the U.S. and U.K. (excluding those who deploy capacity on both sides of the pond), only about 60% were actively participating in the market prior to 2020. To be clear, the vast majority of these "new" markets are new companies to the Product Recall market, yet are run by experienced underwriting teams. These new entrants into the market are a benefit to insureds from the perspective of competition, but also comes with justified hesitancy for some of the riskier companies mentioned in the previous paragraph. Despite increased regulations, losses and other concerns, the market is in great shape for buyers until January 1, 2023 — and potentially beyond that depending on the reinsurance renewals.

Recall trends

A look at data compiled from the second quarter of 2022 shows the total number of impacted units recalled for the year has now surpassed the one billion mark — a mark surpassed only one other time, in 2018.* Given the current data, experts predict a record-breaking year for recalled products in the U.S.

Other trending items include:

  • Contamination outbreaks per year were down significantly in recent years due to COVID-19 and decreased regulator activity. But now outbreaks show signs of returning to pre-COVID levels.
  • The Food and Drug Administration (FDA) and U.S. Department of Agriculture (USDA) seem to be casting wider nets for the scope of product being recalled.
  • Environmental monitoring programs remain crucial, but active measures to eradicate are extremely important when working with the FDA/USDA on a recall.
  • One of the most common FDA form 483 issuance causes is failure to follow up or document corrective actions.

Recall trends by industry

Data in the "by the numbers" section for each industry trend is from Sedgewick's Recall Index Edition 2 2022.*

Automotive recall trends

The electric vehicle (EV) market push is in full force, with a majority of original equipment manufacturers (OEMs) focusing more on EV automobiles than internal combustion engines, as well as heightened focus from Washington D.C. on creating a national network of charging stations by 2030.

Going back to 2021, the scarcity of products (microchip/ semiconductors) continues to be a real hurdle for OEMs. As a result, some auto companies had to get creative with replacement parts and, although validation and testing processes were still completed, the processes weren't at the level of original assembly parts. With that, we can expect to see product liability and recall issues, given the relaxed requirements of validation and qualification that had to occur to keep production ongoing.

By the numbers: After decreasing for two consecutive quarters, the number of automotive recalls increased to 245 in Q2, up 10.9 percent from Q1's total of 221.*

Consumer goods recall trends

Perfluoroalkyl and polyfluoroalkyl substances (PFAS) are a class of more than 3,000 synthetic chemicals found in a wide range of consumer, commercial and industrial products. Dubbed "forever chemicals" because they break down slowly, they're used in everything from food packaging and high-performance outdoor clothing to household cleaners, carpeting and corrosion-resistant pipes and wires.

Even though these substances have been around since the 1940s, both state and federal regulators are starting to target these substances, given their reputation as being harmful to both humans and our environment. Companies need to start understanding these new regulations, their use of PFAS and what alternative substances they can use — not only future products, but also products currently in the marketplace.

By the numbers: For the seventh consecutive quarter, fire risks account for the top recall hazard for consumer goods products. The number of reported incidents increased for the third consecutive quarter, rising 37.9% to 1,178 in Q2. The number of injures reported rose slightly from 146 to 148.*

Food and beverage recall trends

Food and beverage companies continue to look for innovative ways to offer new products to consumers. With innovation comes additional risk for product claims and regulatory requirements if not carefully vetted. The marijuana-derivation cannabidiol (CBD) remains a hot idea, and the FDA continues to issue warning letters for these food additives. Any substance added to food must either be submitted to the FDA for premarket review and approval or be categorized as "generally recognized as safe" (GRAS) by food safety experts. Because CBD doesn't fit into either group, FDA prohibits food to which CBD has been added from entering interstate commerce.

By the numbers:

  • FDA: After dropping in Q1 2022, U.S. food recalls were up 9.1% to 120 in Q2 2022.*
  • USDA: Total recalls were up 62.5% in Q2 2022, from eight in Q1 2022 to 13. The number of units affected rose sharply to 973,374 pounds, a 1,391.3% increase.*

Pharmaceutical recall trends

The pandemic impacted regulatory plans over the past couple of years. Plant shutdowns as well as a large percentage of the workforce going remote have made it nearly impossible for the FDA to perform annual on-site audits.

Now that the pandemic is behind us, the FDA has started to introduce new tools in place of on-site inspections. One of the most popular new tools is remote regulatory assessments (RRAs), including electronic records requests. Given the backlog of on-site audits, these electronic record audits will become much more commonplace for drug companies and as a result, experts anticipate an uptick in warning letters being sent out.

By the numbers: The number of pharmaceutical recalls stayed flat from Q1 to Q2 2022, holding at 94 events. However, the number of units impacted dropped from 435.3 million units recalled in Q1 to 20.6 million in Q2 — the lowest number of units in the past five quarters.*

Regulatory food contamination updates

Bioengineered food contamination update

The National Bioengineered Food Disclosure Standard (NBFDS) that went into effect in January 2022 requires that certain retailers, manufacturers and importers disclose that food and drink products containing bioengineered ingredients are properly labeled for sale in the U.S.

If manufacturers make label claims such as "nonbioengineered" on their products — when in fact those products contain an ingredient that the company knows to contain bioengineered materials or that contain ingredients found in the USDA-provided list — that manufacturer risks facing false advertising or deceptive practices lawsuits (oftentimes threatened as class actions).

Allergen contamination update

Given that failure to declare an allergen remains one of the major reasons for food recalls, it's a noteworthy reminder that, pursuant to the Food Allergy Safety, Treatment, Education and Research Act of 2021 (FASTER Act), sesame has now been added to the list of major food allergens for which labeling disclosures are mandatory. Under the new law, food companies must declare the presence of sesame on food packaging labels by January 1, 2023.

We're already working with clients to ensure that they're prepared for this new labeling requirement from a risk mitigation standpoint, and we're providing counsel on strategic approaches to minimizing exposure from cross-contamination and labeling mistakes. There's also draft guidance that provides useful recommendations on voluntary disclosures of sesame between now and the effective date in 2023.

PFAS contamination update

Recent PFAS contamination events at dairy and beef farms in Maine and Michigan have generated attention on these forever chemicals and the human health hazard they may pose.

PFAS can enter the food supply system through environmental contamination — as allegedly was the case on those farms — or through migration from food packaging. Over the past decade, FDA has been developing new and more sensitive testing methods to measure PFAS concentrations in food. And, more recently, FDA has been testing foods for PFAS exposure — focusing on testing foods grown or produced in areas with known environmental contamination (near certain industry or landfills) — to detect and evaluate potential contamination of human and animal food. Once detected, FDA further evaluates whether the level detected is a human health concern, requiring FDA enforcement action.

California has passed a law banning the use of PFAS chemicals in certain food packaging, effective January 1, 2023, and other states are likely to follow suit. And class action lawsuits have already commenced against certain restaurant chains for their alleged used of packaging containing PFAS.

As the methodology for measuring levels of PFAS, testing by regulators and lawsuits brought by the plaintiffs' bar continue to develop, this risk will require more focused consideration and attention by the food industry.

Notable recalls of 2022

Automotive

  • On the same date, a large U.S. -based OEM incurred recalls of 345,000 vehicles because of engine oil leaks and 391,000 vehicles due to faulty brakes.
  • A large EU-based OEM incurred a recall of over 292,000 vehicles due to potential brake booster corrosion in vehicles manufactured from 2006 to 2012.
  • A U.S. -based manufacturer of recreational vehicles, cargo trailers, utility trailers, pontoon boats and buses had a recall of 99,000 vehicles — about 30 models — because of a gas leak and fire risk.
  • U.S. -based EV manufacturer recalled roughly 1,100,000 vehicles due to a suit claiming technical issues with window regulators in vehicles manufactured from 2017 through 2022.
  • An Asia-based OEM recalled roughly 300,000 SUVs manufactured from 2019 through 2022 because of a fire risk caused by a potential short circuit in the vehicle's engine.
  • An EU-based luxury car manufacturer recalled roughly 100,000 vehicles manufactured from 2019 through 2021 for the possible displacement of rear suspension levers.
  • An Asia-based OEM recalled approximately 700,000 vehicles manufactured from 2014 through 2016 for electric system tightness issues.

Consumer goods

  • Because of an entrapment risk for children, 117,100 residential elevators were recalled.
  • Thirty-four thousand golf carts were recalled due to the potential for steering knuckles and A-arms breaking during or after an impact, causing loss of steering.
  • A recall was initiated for 18,200 chargers for an overheating and fire risk (units).
  • Due to an overheating and fire risk, 13,800 battery packs were recalled.
  • Roughly 200,000 toy boxes were recalled for a choking hazard.
  • Nearly 800,000 hammocks were recalled for an injury hazard.

Food and beverage

  • A large peanut butter recall by a notable brand took place in Q2 2022 following the discovery of a potential salmonella contamination and associated infections matching a strain at the affected company's plant from 2010. This outbreak led to recalls of roughly 20 other companies (and nearly 50 types of products) that use this product as an ingredient in their finished products.­
  • The anticipated loss was publicly reported to be approximately $125 million, arising primarily from refunds, affected inventory and manufacturing downtime. It's anticipated that insurance will cover approximately $50 million.
  • A large beverage producer recalled approximately 90 different drinks due to the presence of dangerous bacteria (Cronobacter sakazakii and Clostridium botulinum).
  • An E. coli outbreak caused by romaine lettuce served by one of the nation's largest burger chains sickened more than 100 people in four states, requiring 43 hospitalizations.
  • Customers of a prominent U.S. based chicken chain were recently informed of an undeclared allergen.

Pharmaceuticals

  • Because of a poisoning risk, 210,000 units of a store-brand aspirin were recalled.
  • Under the FDA's watch, 367 other pharmaceutical recalls were executed from January through September 2022.

Medical

  • Ninety-five thousand catheters were recalled because of the potential of the tip breaking off.
  • Following 51 reported serious injuries, 227 infusion pumps were recalled because a software issue prevented the alarm from working.
  • Fifty-seven thousand ventilators were recalled due to a power issue that could prevent the alarm from sounding. Four injuries and one death were reported.

U.S./UK/Bermuda combined — market capacity

  • Product contamination: $350 million to $400 million
  • Product recall:
    • General component parts: $125 million to $160 million
    • Auto parts: $200 million to $240 million
    • Consumer goods: $200M million to $275 million
  • Restaurant contamination: $250 million to $300 million

The capacities listed above aren't based on each carrier's maximum capacity, but rather the limit they would likely deploy across a large limit tower. The numbers exclude other access points globally, additional reinsurance or large cap excess casualty market support).

Rate and premium outlook

Favorable renewals are continuing in this market. Many incumbents remain open to flat rates based on no changes in exposures. With notable growth and no new losses, rate reductions are often available along with potentially enhanced terms and conditions.

Timely marketing efforts can also be favorable to insureds. For those companies who have shown loyalty to their incumbents and have not approached alternate markets for three+ years, new underwriters are often quick to compete on their risks with a strong narrative and historical loss ratios.

However, this softer market has also caused excessive marketing by the brokerage community, which has led to a combination of market fatigue and selective targeting of risks — especially those insureds and brokers in the market annually. Underwriters are eager to compete, but also know how to recognize when an opportunity doesn't truly exist. This situation is why it remains crucial to work with a broker who:

  • Has strong market relationships
  • Maintains a balance of trust with both their clients and underwriters
  • Can help get the insureds to the top of underwriting submission piles via strong and detailed submissions

For new risks, now is the best time to consider insuring this risk. We're unsure if there will be a shift in the market in 2023, or whether it will hold through 2024 due to the number of very large losses sustained by the market and Hurricane Ian, which will undoubtedly affect some of the reinsurers who back product recall treaties.

But softer markets always harden to some extent, just as harder markets always begin to soften in time. Your underwriting profile ("submission") is crucial to obtain the best deal in this market.

Lackluster submissions will always frustrate underwriters and will go to the bottom of their stack. With deflated rates in the market due to overmarketing in the brokerage community, new business is crucial to underwriters to maintain a diversified book with rates that fit their profitability goals.

Author Information


Sources

*"Recall Index: Edition 2, 2022" Sedgewick, Aug 2022. PDF file.


Disclaimer

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