The Changing Face of Product Recall Insurance

1. The Changing Face of Product Recall Insurance

2. Florian Beerli, SVP Product Recall, ACE • Florian has 20+ years of insurance industry experience in crisis management, with 12 of those years focused on Product Recall. Florian is considered a global specialist in the Product Recall space. • Gary Nesbit, Director of Risk & Insurance Management, Advance Auto Parts Gary has held various risk management positions at Belk Inc., Kohl’s’, Buffets Inc. and the St. Paul Insurance Co. Mr. Nesbit’s risk management teams have been recognized nationally by Risk & Insurance magazine, National Underwriter magazine, the Association for Financial Professionals, and other risk management organizations for developing and implementing the best in class risk management programs.

3. What to expect today • Understand product recall insurance and how it can help your company • Become familiar with the legal and statutory requirements for reporting safety issues • Learn how to calculate limits and self-insured retention strategies that meet your company’s needs

4. Can a product recall happen to my company?

5. It happens more than you think! FDA1 CPSC2 NHTSA3 2,781 465 571 2009: 4,075 439 632 2012: + 46% -6% +10%

6. Why do recalls happen?

7. Factors / reasons why recalls are occurring • Design flaw • Global supply chain • Manufacturing defect • Stricter product safety rules and regulations • Human element

8. Global Supply Chain4

9. How do you manage your suppliers? • Supplier qualification procedures • Preventative & predictive maintenance protocols • Process change protocols • Product testing • Scope of contract in place with suppliers • Insurance requirements

10. How do you manage your suppliers? • Evaluation of suppliers • Supplier / Vendor Approval Program? • Contracts in place • Hold Harmless / Right of Subrogation? • Insurance requirements for suppliers • Liability Insurance? • Product Recall Insurance?

11. US Product Safety Rules and Regulations • FDA Food Safety Modernization Act • The Bioterrorism Act of 2002 • Food Drug & Cosmetic Act (FD&C Act) • Consumer Product Safety Act (CPSA) • Consumer Product Safety Improvement Act (CPSIA) • H.R. 2715: Updates to CPSIA

12. US Product Safety Rules and Regulations • Federal Hazardous Substances Act (FHSA) • Transportation Recall Enhancement, Accountability and DocumentationAct • National Traffic and Motor Vehicle Safety Act

13. What is the financial impact of a product recall?

14. The Possible Financial Exposure • Business interruption / Loss of profits • Replacement of product • Recall costs • Damaged reputation • Loss of brand equity

15. Facts & Figures • Peanut butter recall due to salmonella • Estimated - $70m5 • Fruit shots recall due to choking hazard • Estimated - $41m5 • Laptop batteries recalled due to overheating • Estimated - $400m6 • Toys recalled due to lead paint • Estimated - $30m6 • 14 million cars recalled due to overheating of an electronic switch • Estimated - $280m7

16. What is product recall insurance?

17. Product Recall Insurance • Catastrophic Event Coverage • No frequency but severity • First Party Coverage • Hybrid between Liability and Property • Claims Made • Discovered and reported during policy period • Balance Sheet & Brand Name Protection • Reimbursement of financial loss

18. Is there a one size fits all policy? • Consumable Products • Food & beverage, cosmetics, pharmaceuticals • Consumer Goods • Household appliances, clothes, electronics • Component Parts • Components used in general manufacturing • Automotive & Aviation

19. What is the trigger of the policy? • An Insured Event • Not the recall of the product • No actual Bodily Injury or Property Damage needed • Knowing the use / consumption of product • would cause BI / PD is sufficient • Impaired Property • Generally excluded in the GL policy

20. What types of financial losses can be covered? • Loss of gross profit / business interruption • Replacement costs (first & third party) • Recall costs (first & third party) • Extra expenses • Rehabilitation expenses • Customer loss of gross profit • Customer extra expenses • Customer rehabilitation expenses • Consultant costs

21. Consultant Costs • Recalls can be very complex • Manufacturing knowledge • Recall knowledge? • Use of a consultant has proven to limit potential damage • Loss mitigation work • Deployment of product recall • 24/7 Hotline • Consultant costs are unlimited and no SIR applies

22. Who is buying product recall insurance?

23. Why companies buy coverage • Experienced a product recall • Witnessed a competitor suffering a recall • Contractually required • Potential for negative press / publicity / social media • Risk Management decision • Brand has become a critical asset and must be protected • Protect the balance sheet to avoid potential D&O exposure • Increase in legislation • Complexity in supply chain

24. What should I consider?

25. Considerations for buying Product Recall Insurance • What limits do I need to protect my balance sheet? • How much can my balance sheet absorb? • Do I need all coverage’s available? • Diversity of Product • Diversity of Geography • Diversity of Customer • Diversity of Supply Chain • Numbers of Manufacturing Plants • Batch Size / Daily Output / Production Lines

26. Questions?

27. Contact Information Florian Beerli SVP Product Recall ACE Westchester 110 Washington Ave.; 3rd Floor North Haven, CT 06524 Ph.: 203 234 6311 Cell: 678 234 8885 Email:  florian.beerli@acegroup.com Gary A. Nesbit Director of Risk Management Advance Auto Parts, Inc. 5008 Airport Road NW Roanoke, VA 24012 Ph.: 540 561 3597 Cell: 540 632 8622 Email: gary.nesbit@advance-auto.com>

28. References • 1 - http://www.fda.gov/downloads/iceci/enforcementactions/ucm346964.pdf • 2 - http://www.cpsc.gov/Global/About-CPSC/Reports/Annual-Reports/FY12AnnualReport.pdf • 3 - http://www.nhtsa.gov/search?q=all+recalls+by+year&x=0&y=0Diversity of Product • 4 - http://onlinembapage.com/supply-chain-management-mba-is-hot/ • 5 – http://www.ey.com/Publication/vwLUAssets/Capturing_Recall_Costs/$FILE/Capturing_recall_costs.pdf • 6 – http://www.investopedia.com/slide-show/car-recalls/ • 7 - http://images.businessweek.com/slideshows/2013-01-17/the-most-expensive-product-recalls