When China ordered the blanket recall of powdered and liquid milk that had been contaminated with melamine late last year, neighbourhood grocery store shelves in many Asian countries quickly emptied
of their products as parents scrambled to find safer alternatives.
At least six children died and close to three hundred thousand became ill after drinking the contaminated milk. According to the BBC News, it was the first time the Chinese government had ordered a blanket recall.
The milk products were deliberately contaminated with melamine to give the appearance of higher protein content, Chinese government prosecutors alleged at a criminal trial of the dairy company heads in December. Since then, two men have been sentenced to death and one woman sentenced to life imprisonment for their roles in the scandal.
Some Asian Manufacturers Turn to Product Recall Insurance
Bermuda-based Ace Insurance has been selling product recall insurance for a number of years to its Asian clients. The company's regional casualty manager for the Asia Pacific, Michael Gay, says most insurers provide this cover as an extension to product liability insurance cover. "However, standalone cover is available through a small number of niche markets, mainly in the UK," Gay said.
Medium to larger-sized Asian manufacturers are the largest purchasers of this type of insurance. They also have a more developed understanding of risk management and risk transfer. “It has been a natural evolution that demand for product liability and product recall insurance has been on the increase as manufacturing increases,” Gay said.
Product Recall Policies Differ
Not all product recall policies are the same, with each company potentially having different exclusions and extensions. While larger companies prefer to self-insure, “there are signs that companies are becoming more aware of their exposures and the publicity surrounding major recall incidents in this region”, Gay explained.
However, purchasing such insurance depends upon the type of product and the scope of cover. Companies need to consider two things:
- Is the manufactured product a completed product or is it an ingredient or component of another product?
- Does the cover insure both first party and third party recall costs? The more difficult the recall procedure, the more likely the client will have difficulty quantifying their costs and the more likely they will seriously consider the cover, Gay points out.
“While I have no figures to support this, my opinion is that a majority of manufacturers still do not have cover for recall,” Gay said.
Underwriting Challenges in Asia
The chief underwriting challenges for product recall policies, from Ace’s perspective are two-fold.
- The lack of effective product recall plans of many clients who wish to purchase the cover,
- Getting a handle on the extent of a recall. There is also the issue of assessing the risks posed by the various ingredients and components that go into a finished product.
- the general paucity of accurate data on product recalls
Gay noted that small to medium sized manufacturers in Asia usually purchase product liability insurance to meet the contractual obligations of their vendors/customers. The bottom line is, if they were not contractually obliged, they would likely not purchase such cover.
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