After news of Toyota’s multibillion-dollar product recall, insurers and reinsurers are waiting to see what the consequences will be for their industry. David Banks finds that the impact may be threefold
Toyota’s global product recall, triggered by faulty accelerators, has now exceeded 10 million vehicles. The cost to the company was initially estimated at $2bn when the recall total stood at 2.3 million vehicles, but is now anyone’s guess. It could be months before a final cost can be calculated, since one of the costs – that of legal claims, particularly US class actions – is so difficult to quantify.
There are three main areas in which Toyota’s product recall will affect the insurance industry.
1. Recovery of past claims costs
First, motor insurers have a chance to be reimbursed by Toyota for claims arising from defective vehicles, and many are beginning case reviews of their claims databases to see whether they may be able to recover money from Toyota for previous cases, known as subrogation.
While the magnitude of such claims is unknown, rating agency Moody’s says the largest US motor insurer, State Farm, notified traffic authorities in 2007 about a spike in accidents involving the recalled models.
2. Impact on pricing
Secondly, Moody’s says that commercial lines carriers face potential obligations related to personal injury and product liability lawsuits, as well as obligations related to ‘product recall’ policies.
Toyota faces US class-action lawsuits over the Prius faulty brakes and from investors claiming they were misled about the accelerator problems in other models.
US officials continue to receive new details of serious or fatal accidents alleged to have been caused by faulty Toyota vehicles, and the number of alleged fatalities since 2000 has risen to 34.
A class-action suit filed on Monday on behalf of US shareholders accuses Toyota Motor Corporation of issuing “materially false and misleading statements” about its “operations, its business and financial results and outlook”.
It said the car maker “misled investors by failing to disclose that there was a major design defect in Toyota’s acceleration system, which could cause unintended acceleration”.
“As a result of defendants’ false statements, Toyota’s securities traded at artificially inflated prices during the class period, reaching a high of $91.78 per ADS [American depository shares] on 19 January 2010,” the suit states.
Meanwhile, Moody’s has said it is unlikely that there will be a credit impact for insurers as a result of any Toyota-related commercial lines losses. The rating agency’s ‘Weekly Credit Outlook’ states: “For commercial lines carriers, it is difficult to dimension the precise impact of these exposures, though again, we don’t expect a major credit impact.”
Cooper Gay’s head of terrorism and political risk, Andrew Stuart, believes it could affect pricing, however. “The more high-profile claims occur, the more premiums will rise in an already limited market.”
3. Covering the losses
The third area of impact for the insurance world could come from Toyota’s attempts to recover money for its own liabilities through the company’s captives and reinsurance. Details of these claims are likely to take the longest time to emerge and will depend on whether the accelerator faults are perceived to be a supply fault, a design fault, an installation fault or some combination of any of the three.
UK-based spokesman for Toyota John Brooks says: “It’s difficult to say which way it will go until they decide which one it is.”
“The company is investigating and will make a decision further down the line,” he adds. “If it’s proved to be a design fault, for example, there are certain indemnities that can be claimed for. It might also be found to be partly design and partly manufacturing.”
Brooks confirmed there are captives that might be involved in a claim for part or all of the company’s giant losses. Alternatively, Toyota may decide to absorb the losses it has incurred from the recall and avoid claiming in full or in part on its captive corporate liability insurance policies.
AM Best assistant vice-president Steve Chirico says: “We have some experience with US recalls and what generally happens is that the parent corporation will take on the bulk of that loss.”
This option may be the wisest: it can be advantageous for a company to bear the cost itself in order to offset tax and preserve the company’s standing – and that of its captives – with insurers and reinsurers.
Meanwhile, Toyota’s US-based captive will not be affected by the company’s product recall, AM Best has confirmed. The rating agency “remains neutral” on the financial impact on Toyota Motor Insurance Company, based in Iowa, which has an unchanged financial strength rating of A (Excellent) and a stable outlook.
AM Best says it has been in dialogue with the insurer and has established that none of the lines the US captive writes is affected by Toyota’s aggregated product recall.
But whatever Toyota decides with regard to covering its present liabilities, the scope for insurers to claw back claims costs and consumers to take legal action against the company means that this particular saga has some way to go yet. GR