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Buyer demand for recall cover exceeds supply


Risk managers seeking product recall coverage for food and beverages are finding a market with fewer players, smaller capacity and higher prices.

The combination of the soft market and an increase in frequency and severity of product recall losses over the past few years-particularly in the meat and poultry industry-has sent many reinsurers and insurers running from the market. As a result, few underwriters remain, which leaves many food and beverage manufacturers and retailers in need of coverage but unable to find adequate limits and prices.

The food and beverage product recall market "pretty much collapsed about two years ago, and capacity has fallen ever since," said Ed Wu, senior vp-global broking for Marsh Inc.'s FINPRO unit in New York.

"I think the soft market-when there was some competition-burned a lot of reinsurance companies," he said. "At that time, they underwrote policies inexpensively to gain market share. So when losses started coming in, it was full-limit losses because a recall, when it occurs, is a very large loss."

The market tends to look at product recall coverage as a low-frequency and high-severity exposure, said Bernhard Steves, a vp with wholesaler Swett & Crawford Group in Chicago.

"The problem that happened a few years ago was there was a spate of recalls and suddenly this became a higher-frequency, high-severity situation, which isn't going to work for this type of coverage," Mr. Steves said.

"We're seeing underwriters being more selective in their risks now, and they seem to be more concerned with retentions than with premiums, although premiums are going up as well," Mr. Steves said.

"If the pricing continues to go up to a certain level where we maintain some consistency over the next few years and it becomes profitable again, then you might see some reinsurance companies come back into the marketplace," Mr. Wu added. "But, for the foreseeable future, I don't see it changing much."

The number of product recalls occurring today cannot be helping the situation.

Greeley, Colo.-based ConAgra Beef Co.'s recent voluntary recall of 19 million pounds of beef that may be contaminated with the dangerous E. coli bacteria is just the latest example of more than 50 active meat and poultry product recall cases that are currently being monitored and coordinated by the U.S. Department of Agriculture.

Various other federal and state agencies monitor and coordinate recalls of beverages and privately owned food and beverage retail outlets.

ConAgra's beef recall, which is linked to illnesses in more than 20 people in several states, is the second-largest recall in U.S. history. In 1997, Rogers, Ark.-based Hudson Foods Inc. recalled 25 million pounds of ground beef after 15 people in Colorado fell ill from E. coli. Hudson Foods, which soon after shut down its Nebraska beef processing plant and sold it to a competitor, did not carry product recall coverage.

Calls to ConAgra were not returned.

Despite the challenging environment, there are still markets that can provide product recall insurance for the food and beverage industry, Mr. Steves said. He noted, however, that the underwriting criteria today are "pretty tough."

"They're looking quite closely at quality control as well as the type of product," he said. Underwriters over the years have gathered enough data to be more selective about which risks they underwrite.

At the same time, underwriters also are increasing retention levels, Mr. Steves said. Standard minimum attachment points run anywhere from $10 million to $50 million and up, depending on the risk involved, he said.

Premiums for product recall coverage also have risen due, in part, to changes in pricing and rising reinsurance costs, said Diane Borden, vp and head of the crisis management division of American International Underwriters, a unit of American International Group Inc. in New York. AIG started offering accidental contamination coverage in 1993, she said. "We now have 10 years of loss statistics and can price the product where we need to for us to stay in business," she said.

AIG offers $10 million in accidental product contamination limits, with varying deductibles. The policy provides coverage for recall costs, lost profits and rehabilitation costs following an accidental contamination. It also provides crisis management planning and loss prevention services through specialty consultants.

Jane McCarthy, product line manager-contaminated product insurance for AIU in New York, noted that "there are desperate buyers out there trying to scramble to get the capacity they feel they need for the size of their company."

"We do see a few companies walking away and taking (the exposure) net where they have not before. And there are small companies that feel they need coverage, but they have to buy much higher attachment points to get the price they can afford," she said.

"We have no coverage for product recall, and that really opens a window for us," said Joe Hardy, director of risk management and insurance for Hudson's Bay Co., a Toronto-based retailer that sells general merchandise and food.

"No insurer to my knowledge has come forward and said, `By the way, retail industry, here's the best thing since sliced bread for your product recall program,' " he said. "If they did, we would definitely look at it."

"I think you always have to be cognizant of the exposure," said Paul W. Pressley, director of risk management and insurance for Gold Kist Inc. in Atlanta. The poultry processor does not carry product recall coverage. "If the insurance was available and if we thought it was cost-effective, we would buy it," he said.

Brokers and underwriters say that, given the current market conditions, it's only a matter of time before risk managers turn to alternative risk financing options.

"As for alternatives, I can't say necessarily that any clients have purchased finite risk as a way to manage the impact of the cost of the recall over several accounting periods, but a lot of clients have looked at that," said Joe Peiser, managing director and head of global broking excess casualty for Marsh Inc. in New York. In addition, "a lot of clients have talked about forming industry groups and risk retention groups, which might make some sense, but frankly it's all preliminary," he said.

"We haven't seen it or tried to convert it, but I think (alternative risk financing) is the next frontier for us to try and push that side of it," said AIU's Ms. Borden.

Swett & Crawford's Mr. Steves noted, however, that because product recall losses are more of a severity type of risk rather than a frequency type of risk, it's difficult to get the historical loss data from a company because the losses don't happen every year.

"You need that kind of information to do any ART program or finite program," he said.