Product Recall Coverage for Auto Parts Helps Mitigate Supply Chain Risk

While original equipment manufacturers strive to reduce costly recalls; the automotive industry has suffered its fair share of setbacks in recent years. Perhaps the most notable of these recalls involved high-profile airbag manufacturer Takata, which recently issued a product recall for its airbags that has affected over 42 million vehicles across 16 car brands worldwide. A product that doesn’t perform as intended can cause irreparable damage the reputation of a brand, while costing the manufacturer millions of dollars to conduct a recall of the defective product. In the case of Takata, the cost was in excess of one billion dollars. In an industry plagued by defective parts, product recall coverage for auto parts is an essential part of a sound overall risk management strategy for all automotive manufacturers. Product recall insurance can be a valuable asset to manufacturers looking to mitigate the risks associated with conducting a product recall.


Insurance coverage is intended to address two main issues in the event of a product recall:
(1) Expenses incurred to conduct a product recall,
(2) Third party liability.

Automotive Product Recalls on the Rise
The number of vehicle recalls has been steadily on the rise in the USA, setting record highs in 2014,2015, and 2016, respectively. The historic surge in vehicle recalls could also be correlated to the increase in US traffic deaths, which also rose for the second straight year in 2016. According to estimates made by the National Safety Council, motor vehicle deaths rose by 6% in 2016. The two-year increase of 14% marks the largest increase in more than half a century. Vehicle recalls are also on the rise in Canada and some automakers are urging provinces to get involved to help solve unfixed recalls. While recall fix rates are available online in the USA, correction rates are not made public by Transport Canada.

Software Compounding Recall Problem

Product recall insurance is an integral part of effective supply chain management in the modern automotive industry. As more technology is implemented into new vehicles, the number of vehicle recalls will continue to rise. According to JD Power, the record number of software complaints and recalls have threatened consumer trust in automotive technology. Software-related recalls increased by 45% from 2014 to 2015 and accounted for 15% of total recalls in 2015, according to the Automotive Warrant & Recall Report 2016 conducted by Stout Risius Ross (SSR).

Product recalls are a reality in the modern automotive industry. Despite the best efforts of equipment manufacturers (OEMs) to minimize supply risk, the number of product recalls has risen to historic levels in each of the past three years. Product recall coverage for auto parts can help cover expenses associated with conducting a product recall and any third party liability incurred in the process. OEMs have modified terms and conditions of purchasing contracts in such a way that gives them more flexibility to terminate a contract when facing a supply risk. These termination clauses allow manufacturers to manage risk down the supply chain and mitigate any losses in the event of a defective auto part.

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