Auto firms plan insurance cover against increasing recall costs
Firms seek cover from product recall risks ahead of govt passing new law that penalizes them for selling defective vehicles
Mumbai: Car companies and auto parts suppliers are contemplating buying insurance policies that would insulate them from product recall risks, ahead of the government passing a legislation that will make such recalls mandatory in the domestic market, said executives at close to a dozen auto parts’ firms and a few big vehicle makers.
The new Motor Vehicles Act, which also covers auto recalls, is likely to be tabled in the ongoing session of Parliament.
While such insurance covers are prevalent in mature auto markets such as the US and Europe, in India, in the absence of a recall policy, the number of firms opting for such cover for the domestic market, has been far and few in between, said experts.
Close to 29 million vehicles have been recalled globally till November, said Abdul Majeed, partner, auto expert at PricewaterhouseCoopers India.
However, unlike in mature markets, India does not have a policy for vehicle recalls.
In July, 2012, industry lobby Society of Indian Automobile Manufacturers (Siam) introduced a voluntary code to cajole vehicle makers to recall defective cars.
Since then, close to 600,000 cars and utility vehicles have been voluntarily recalled by auto makers in India.
Among other things, the law will also penalize auto makers for manufacturing and selling defective vehicles, increasing the overheads of car makers and auto parts suppliers.
The expenses incurred by Maruti Suzuki India Ltd, India’s largest car maker by sales, over product recall and warranties show the scale of costs.
In fiscal 2014, the firm utilized or reversed Rs.100.9 crore, revealed the company’s annual report in its provisional statement.
This included an addition of Rs.65 crore during the same year which it has shown in its “other expenses” column.
To be sure, the amount utilized or reversed was the highest in the last five years.
This was in a year when the company’s sales, including exports, contracted 1.4% to 1.15 million units, compared with a year ago.
In automobile recalls, parts or sub-systems that could potentially pose risk to car occupant’s safety are repaired or replaced at the company’s cost.
In an email response, a Maruti spokesperson said, “The actual for fiscal 2014 is in line with previous years, about 0.15% of net sales. Product recall would, therefore, be negligible with respect to sales.”
However, an analyst at a domestic brokerage who did not want to be identified said the jump is largely attributable to recall expenses.
“Even if we assume that the increase pertains to reversal of warranty, the cash flow statements do not indicate any large reversal of the provision,” he said.
While general insurance firms see the increasing expense on recall as a growing opportunity to sell their products, they are unlikely to jump into it without a careful deliberation of the risk factors, said officials.
“Once the legislation in India is passed, stringency of norms will increase, and we as an insurer will have to rework on the terms and conditions for providing such covers,” said G. Srinivasan, chairman and managing director at The New India Assurance Co. Ltd, India’s largest state-run non-life insurer.
The firm, said Srinivasan, will look at the standards of companies, the quality control and best practices they follow, before underwriting the risk on insurance products in this segment.
To be sure, companies in India with export commitments have been availing of insurance for product liability, including a cover for product recall.
Auto parts maker Motherson Sumi Systems Ltd, which draws 85% of its revenue from outside India, is covered for recall and liability, said G.N Gauba, chief financial officer at the firm, declining to divulge details on the policy.
At present, the share of such insurance is just about 1% of the total industry’s premium but it is definitely going to increase with the demand going up once the legislation is in place, said Sanjay Datta, chief of underwriting and claims at ICICI Lombard General Insurance Ltd.
Datta said once the market on this product picks up, most insurers are going to take the reinsurance approach since globally, reinsurers have more expertise in this space.
At present, for product recall insurance, the average rate online is 2-3% of AOA (any one accident) limit, he added.
“Depending on the options available and the understanding of cost of such policies, a decision will be taken post the government’s announcement of the policy.” said Sanjoy Gupta, vice-president of customer care at the automotive division of Mahindra and Mahindra Ltd.
A Maruti spokesperson said, “There are no such developments (related to insurance) that can be shared.”
In an email response, a Tata Motors Ltd spokesperson did not specify if the firm will consider an insurance policy. “We continue to look at global best practices to ensure we are able to meet the operational details in the best possible ways.”
Meanwhile, auto and ancillary companies have begun reading the fine print in the so-called general purchase agreement—the legal contract between the component suppliers and vehicle makers—to assign accountability and responsibility.
According to Ashok Taneja, managing director and chief executive at Shriram Pistons and Rings Ltd, “the GPA between vehicle makers and suppliers has thus far not been taken very seriously by most suppliers, including tier-Is and Tier-IIs. Business has been going on based on an ongoing understanding or relationship because there was hardly ever the need to refer to the purchase contract or GPA. All claims have been discussed across the table and settled.”
However, with increasing cases of product recall, there is growing awareness to take a relook at all the clauses of GPA, said Taneja.
Nishant Arya, executive director at Jay Bharat Maruti Ltd, (JBM) said that with recalls being only a recent phenomena, the industry lacks the necessary framework required. JBM, he added, is in talks with an insurance firm for the same.
“Historically, companies in India never thought through this, but with the new policy, which will make life tougher for vehicle makers and their suppliers, opting for insurance cover will be the way forward to mitigate risks,” said PWC’s Majeed.