Food safety: the role of insurance in risk mitigation

A food production unit in South America might export to the USA, Europe, China and Australia, so a problem like Salmonella contamination at the production plant may have repercussions in all those countries. From the insurance perspective, it will be a case of accumulation exposure, and that possibility has to be considered in risk assessment and the development of insurance products.

A US survey of expected food recall costs (direct costs and loss of profit) showed that almost half of recalls cost are under USD 10 million, but in 5% of cases the costs exceeded USD 100 million, so there is a wide spread of potential risk, which also impacts insurance portfolios. A Swiss Re graduate project identified four changing trends in eating habits that may also affect the insurance risk landscape worldwide: meat consumption, organic foods, convenience foods and functional foods.

Meat consumption in China has tripled in the last four decades, while it has decreased in the USA and is stagnating in Europe. Since meat is heavily exposed to microbiological contamination, the product liability and associated product recall risk in China may increase substantially. The demand for organic food is rising in the USA and Europe especially. Because of a trust issue in the Chinese market due to recent food incidents, the growing middle class there is also buying more imported organic food. The insurance impact of this trend is uncertain, because some studies show organic food to be more susceptible to recall and others suggest recall rates no higher than for other foodstuffs. More research is required. The market for convenience foods is booming in all three economies studied, and the complex supply webs associated with the components of these products suggests a higher insurance risk. Demand for functional foods is also increasing everywhere, but they are subject to different regulatory regimes in the three regions. Their impact on insurance is highly uncertain. Regulation in the three economies is moving towards a farm-to-fork approach taking in the whole food chain. One reason for attaching more importance to this approach seems to be the perception that an increasing number of free trade agreements could jeopardise food safety.

There are basically three areas in which (re)insurance can help to mitigate food safety risks. The first is risk assessment, taking in identification of potential risks and preparing countermeasures. The second, more traditional insurance function is protection of the client’s assets through coverage of product liability claims and recall expenses. The third area is crisis management and claims handling, which would apply if a client’s product had actually caused harm and been the object of a claim. This form of insurance is offered by a few specialised insurers.