The FAST Act - Underwriting Recall for Auto Components May Become a Little Harder

March 03, 2016| By Shinichi Kitazawa | Auto/Motor | English | Japanese

Region: Asia

In Japan product recall policies for automobile components are in high demand. As a casualty facultative reinsurer in Japan, we often see such requests for fac support, but underwriting this line of business is a real challenge because of the great variety of products. In addition to technological changes, recall underwriters must keep an eye on regulatory changes that may affect the nature of a recall, not only in Japan but also in other countries because today's recall policies commonly cover products worldwide.

Rate is based on frequency and estimated costs. Frequency is based on experience, but it may not foresee the future. In 2015 the U.S. saw a great deal of recall activity, perhaps most notably in multiple vehicle air bag recalls. It’s hard to know whether the increase in recalls can be attributed to heightened awareness or whether the increase indicates a “new normal” in recall frequency.

The Fixing America’s Surface Transportation Act (known as the FAST Act), signed late in 2015 in the U.S., will increase the likelihood of this “new normal.” The FAST Act will provide US$ 305 billion in total to the U.S. transportation network over multiple years, providing funding for improvements to both road and rail networks and aid in the creation of the infrastructure necessary to support coming generations of high-tech vehicles.

This U.S. legislation also includes two changes that are likely to have an impact on product recall exposures for vehicles sold in the U.S. It carries significant implications for recall underwriters in Japan since many Japanese automobile components are exported to the U.S., or assembled into vehicles in Japan and exported to the U.S.

  • While current U.S. regulations require automotive manufacturers to manage vehicle safety for up to 10 years, the FAST Act changes the timeframe to 15 years. This timeframe potentially increases the potential number of vehicles that can be recalled.

  • Current rules allow U.S. regulators to fine companies up to US$ 35 million for failure to manage individual product safety issues (in theory, this can be per incident), however, the FAST Act increases the fine to US$ 105M. The intention is to encourage the automotive industry to improve its product safety initiatives, but this increased fine is likely to motivate manufacturers to act and avoid such penalties.

The real challenge is that these changes are happening in the new era of driver-assist technologies - an area in which recall underwriters have limited experience, particularly where it concerns frequency data.

A vast majority of driver-assisted technologies employ high-tech electronic products, which could potentially lead to an increase in design defects on a large scale.

Relatively speaking, it is easier for recall underwriters to estimate PML/MFL for manufacturing defect than it is for design defect. The increase in driver-assist technologies will challenge our estimates on PML/MFL that may arise from design defects. With the increasing number of critical components and systems, we expect increases in recalls, and more importantly, greater willingness to recall by automobile assemblers.


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