Thursday, June 24, 2010

Product recall and INSURANCE in INDIA

Despite the growing trend of product recalls globally, Indian companies don’t have a comprehensive strategy to tackle the threat, with a majority still dependent on the traditional product liability cover, according to insurance experts.

Even as more Indian manufacturers exporting goods to the overseas markets opt for the product recall insurance plan, insurance experts say the time has come for India Inc to look at this policy as a ‘risk management tool’ and not as a mere obligation.

“Given the legal framework in India, there are limited damages slapped by consumers on to the manufacturers,” feels Shashwat Sharma, director at KPMG Advisory Services, adding that “the product has a great future with the consumer market becoming more sensitive to safety standards and regulatory provisions more stringent.”

In India, as it stands, most companies opt for product liability insurance that insures their liability against third party claims and bodily injuries. But they tend to overlook product recall cover that protects them against recall costs, consultancy fees, lab expenses, re-work and replacement costs, plus brand equity loss in case of a defective product.

The business for this product comes from sectors such as auto ancillary, food and beverages, pharma, telecom and electronics. “Majority of this demand is driven by contractual requirements, mostly from contracts of manufacturers with US and European entities,” says Ritesh Kumar, chief executive of HDFC ERGO General Insurance. On the other hand, multinationals have the recall cover built into their global progammes. Some of them seek cover locally to the extent of deductibles under those policies.

Over the last decade, US-based Food and Drug Administration (FDA) has triggered several recalls in the food and pharmaceutical industry as witnessed in the cases of Indian companies, Sun Pharmaceutical and Ranbaxy Laboratories. In recent times, carmaker Maruti Suzuki too faced a similar situation when it had to recall 100,000 A-Star cars for faulty parts.

Incidentally, this was not the first time the four-wheeler manufacturer was in a spot, in the beginning of the millenium the company had recalled 76,000 Omni vans. Earlier, even global biggies such as Honda and Nokia had to recall their products owing to defective parts. Insurance brokers say safety apart, a recall severely hurts a company’s reputation in the market.

“The repercussions are widespread. And that’s where the potential lies for this product,” says Sanjay Kedia, country head of Marsh Insurance Brokers. Even Rajive Kumaraswami, head of risk and reinsurance at ICICI Lombard General Insurance agrees. He says gradually owing to increased awareness, companies are waking up to cover their domestic sales too.

The product recall insurance, which was introduced in the Indian market as an extension under the product liability insurance, has evolved as a standalone product over the years. General insurers say the new recall liabilities arising from pollution and transportation has given rise to the newer comprehensive general liability policy that has practically replaced the traditional model of the product liability cover with extension for recall.

“There is also a demand for loss of stock due to recall. The product contamination cover which has its genesis in the food and beverage industry—chocolates and colas—has also triggered the demand for this cover,” says RK Kaul, chairman and managing director of Oriental Insurance.

Moreover, within this product, general insurance companies are now selling different types of recall covers—namely first party and third party recall. In India, the demand is primarily for the third party recall, as auto components and equipment parts form a major part of the export pool.

The pricing of this product has so far remained stable for the last few years and is a function of various underwriting considerations like the industry type, products territory where products are being sold, turnover of company, limits of liability being purchased. Insurers typically charge about 1-1.5% as premium of the limit of liability.

General insurers expect the rates to increase as globally there has been an increase in the frequency of claims reported on this cover. And since product recall is not an off-the-shelf cover, insurance brokers say if companies can negotiate with general insurance companies they can avail themselves of maximum possible triggers of recall covered under the policy.



Source

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