Canadian Underwriter

Product safety: Good for consumers but costly for insurers

October 6, 2020   by Adam Malik

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The good news is that Canada has stringent rules around food and consumer products, which makes it no surprise that there can be many recalls. The flip side, however, is that insuring for recalls is taking its toll on the property and casualty industry, even pushing many out of the space entirely.

Food and automotive product recalls are growing trends highlighted by a recent report from Allianz Global Corporate & Specialty, and are especially noteworthy in Canada.

“We’re very lucky in Canada. The Canadian system is very robust about protecting consumers,” explained Bernard McNulty, chief agent of Canada for AGCS. He cited the Canadian Food Inspection Agency as an example of a group that oversees Canadians’ safety.

He also noted that recalls happen on a smaller scale in Canada — for example, an automotive recall may affect a few hundred thousand vehicles in Canada as opposed to a few million in the United States — but are costly nonetheless.

“We’ve seen some significant auto recalls, particularly parts recall, [and] campaigns that we’ve been involved with as claims,” McNulty noted, highlighting recalls related to airbags, steering and electrical components and other engine parts that could lead to leaks and, ultimately, fires.

That’s leading insurers to make sure they’re putting greater oversight into how they write coverage for product recall.

For automotive parts manufacturing clients, insurers will use their engineering team to understand the manufacturing and quality control processes, McNulty explained. But the fact that there are so many recalls likely means “we’ve missed something — along with the manufacturer — in that review that has led to a product not meeting spec, that fails over time [and] ultimately results in the automobile being recalled.”

And vehicles are more expensive to fix, making a recall much more expensive than in the past. “It’s costly to bring the cars in, have the mechanics trained to change out a component and put the car back on the road. The costs are significant and that’s the concern,” he said.

Food is much the same in terms of it being an engineering function and understanding the process of how food is moved along the supply chain. “Where does a retailer buy a product, like produce, for example? Where’s that produce coming from? What quality control inspection process is in place?” McNulty listed as some key questions.

“The inspection process is very sophisticated. The equipment that monitors food — it’s monitoring everything from foreign particulate in the food or the possibility there’s a pathogen in the food — that equipment is very sophisticated, it has to be maintained, it has to be calibrated on a regular basis. That’s something we’re very invested in before we write a risk and sometimes when that equipment fails, claims and recalls occur.”

Why are there so many more food recalls nowadays? In addition to more sophisticated equipment monitoring what people end up buying, the supply chain is bigger than ever and food comes in from all over the world, McNulty said. “So that’s long timeframes for shipping. That means refrigeration, different delays, it changes hands a number of times through that process. So there are a number of different ways that products can be damaged before it gets to the consumer. And I think there has to be a high level of inspection all through that process.”

Insurers have found the product recall market challenging since it launched about 10 years ago. McNulty estimated that there were about 15 companies that covered the line in the beginning — that’s down to about a handful, he said.

“It can be a very volatile line of business and it requires a great deal of expertise; policy wording review; the client understanding what they manufacture, how they source their components, how they manage their own supply chain,” he said. “So it’s an endeavour not all insurers can do, for sure.”


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