The insurability of product recall in food supply chains

Abstract

Insurers face growing difficulties with insuring food-related risks among others due to an increasing number of product recalls and an increasing amount of claims being pushed back into the chain. This paper focuses on the risk of product recall in dairy supply chains. The paper aims at providing insurers with useful tools for insurance design and claim handling. More specifically, the objectives of this paper are (1) to define product recall, aimed at recognizing recall perils and losses; (2) to identify important precautionary action points and related control measures, for underwriting and class-rating purposes; (3) to develop a risk assessment framework, as a tool for calculating premium levels; and (4) to evaluate third-party verifiability of due diligence, aimed at identifying eligibility for insurance payments. Precautionary action points are prioritized with adaptive conjoint analysis. In the risk assessment framework, case studies are used to quantify the size of losses. Additionally, throughout the paper, expert consultation has been an important source of information. Results show that perils and losses of product recall need to be strictly defined, preferably on a case-by-case basis. Also, case studies show that recall losses easily cumulate as losses are yet between Euro 210,000 and Euro 2,300,000 for only a limited number of recall expenses and contaminated products. Furthermore, in relation to the third-party verifiability of due diligence, difficulties are encountered at the farm level. We conclude that, if risks are properly defined and insurance schemes incorporate adequate due diligence and disclosure incentives for all chain participants, product recall remains an insurable type of risk, even if the number of recalls will further increase.