"Made in China" – A heightened liability risk?

Liability insurance companies and consumers are concerned about recent accumulations in recalls of defective products made in China. Manufacturers are now facing, among other things, requests for more controls and even calls for boycotts. However, there are other means to meet this issue.

August 2007

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  Manufacturers are conducting a worldwide recall of about 1.5 million Chinese-made toys, due to a possible health hazard resulting from the use of a pigment containing impermissibly high levels of lead.
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  Almost 20 million toys and accessories are the subject of a worldwide recall because of magnetic parts which may loosen.
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  A toy store chain recalled millions of baby bibs because the products contained excessively high concentrations of lead.
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  In the USA and European countries, toothpaste contaminated with the anti-freeze diethylene glycol was recalled.

This is only a small selection of examples that occurred in August 2007. The list of examples could easily be extended. The number of cases registered at RAPEX, the European early-warning system for hazardous consumer products has increased by a multiple in the period from 2003 to 2006. Toys head the list of reports, with 24% in 2006. 48% of all reports concern products made in China. The People’s Republic leads the recall statistics by a clear margin.

Requests for sanctions, to the point of calls for boycotts of products "Made in China", are arising on different parts. At this point, it is only safe to say that more controls and stricter laws will lead to higher prices for these products, whereas it is doubtful if this would be accompanied by a rise in quality.

The evaluation of liability risk

Do the most recent recalls affect the insurability of certain manufacturers? Will there perhaps even be greater demand for certain forms of cover in the future? Or is the risk to primary insurers and reinsurers now generally increasing?

The current CRC letter highlights the underwriting factors that affect the insurance industry and shows whether the risk involved in product liability and recall insurance has in fact increased. Yet this not only concerns Chinese products, but also those from other, primarily Asian, low-wage countries. The insurance of recall costs, however, always has to be seen in the context of intensive, individualised risk management. And there are many risks that have to be tackled from different perspectives. The complexity of commodity flow alone means there are many ways for unsafe products from Asia to reach the consumer. Apart from that, the definition of risk awareness will be different in the country of origin and certainly there is worldwide pricing pressure.

Consumer products from China are (still) insurable

Despite all the known risks, calls for boycotts or even the exclusion of China by insurers are not the right way of going about the problem. Still, risk management, underwriting, und claims management have to react to the situation since the risk of product liability claims and recalls of products from low-wage countries will continue.

Risk management

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  Genuine, product-specific risk management takes in the entire supply chain, and must include at least risk identification and assessment.
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  The loss frequency and extent of loss must be determined in order to estimate the actual degree of exposure as a scenario.
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  A customised, up-to-date recall plan is a prerequisite for providing first-party recall cover.
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  In order to qualify for extended recall cover (including malicious product contamination and/or elements of balance-sheet protection), a company must have crisis management in place.

Underwriting

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  The first step in providing primary and facultative reinsurance cover should be to conduct an intensive risk check to find out about the exposure and, if necessary, make a selection.
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  The individual exposures of the products, the industry and the possibility of recourse in the supply chain should have a significant influence on the insurability of the products and the insurance solution offered.
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  In the case of treaty reinsurance, underwriters should check whether the treaty takes into account high exposures in terms of loss frequency and/or extent of loss and whether the form of participation is commensurate with the risk.

Claims management

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  The formulation of the claim or corresponding proofs must state unambiguously whether a recall has actually been conducted or the policyholder is requesting a promise of cover before carrying out the measure.
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  It is important to clarify whether there was in fact a real danger of personal injury to justify an insured recall and whether the entire supply chain was included in claims management so that possibilities of recourse exist on the side of the originator of the damage.

Provided that risk management is good and combined with high-quality underwriting and loss management, recall costs and product liability are insurable and reinsurable at present.