Higher insurance limit requirements becoming industry-wide trend, broker says

Greg Doherty, managing director of the dietary supplement practice group with the Pasadena, CA-based insurance firm Bolton & Co., said that customers have told him that KeHE distributors have started requiring $5 million in liability insurance from their suppliers.  KeHE now joins others in the business such as Whole Foods Market, Walgreens, UNFI and NBTY in requiring higher insurance limits.

The knee jerk reaction among some in industry will be that the new, higher limits required by distributors, manufacturers and retailers is in response to recent bad press the industry has received. Doherty said he’s not so sure.

“This is a trend for sure. It’s  probably too soon to say if it is a response the actions of the New York Attorney General or other AGs, or if the news about the amphetamines being in sports products had anything to do with it,”​ Doherty told NutraIngredients-USA. 

 Doherty said there are other, longer-term drivers of the insurance market, and that underwriters have to manage risk over years, rather than risk that might be momentarily heightened by a spate of bad press.  After all, insurance limits within the industry had remained stable for many years prior to the most recent rises, and reflected perhaps a more casual view toward managing risk.

“Each company depending on what sector of the industry they’re in has to set in their own mind what insurance they are comfortable with in requiring from their suppliers.  The CFO of Nature’s Best put it at $2 million for years and just left it at that.  Now that Nature’s Best has been acquired by KeHE (the deal was complete in August of last year) their suppliers are now feeling the squeeze on liability,”​ Doherty said.

“The Walmarts, the CVCs, the Vitamin Shoppes of the world, all of those have been raising their limits because inflation keeps eating away,”​ he said.

Roller coaster market​

While the way underwriters go about analyzing risk has a veneer of mathematical impartiality to it, deciding how much it should cost to insure those risks is really more of an art than a science, Doherty said.  Rates have risen and fallen, without a strong argument that risk has risen and fallen in a similar cycle.  Liability insurance within the dietary supplement industry is currently less expensive than it has been on a cost-per-thousand basis, and Doherty said it’s not entirely certain why.

“A lot of people say to me it’s because the industry is getting safer and the underwriters are getting it. It’s a nice narrative, but it’s not true,”​ he said.

“What is the real driver is that the commercial insurance market in this country going back 150 years has been a roller coaster. It has been a market of extremes. There has hardly ever been an even, up sloping line in prices. It’s always either feast or famine,”​ Doherty said.

In recent decades, there was soft market in the commercial insurance industry from about 1989 to 2001, when 9-11 changed the landscape.  Prices then rose sharply to about 2005, and have been declining since, Doherty said.

“If you were, for example, paying $100 for insurance back in the day, now you are paying $15 or $20,”​ Doherty said.

Razor thin margins ​

Even with the low cost of insurance, Doherty said that the new, higher limits required by the big players is not welcome news for smaller companies.  The big retailers and distributors have enough market clout to drive down margins to the point that there’s not much left for added costs like more insurance, and the one-size-fits-all approach is especially burdensome for smaller firms.

“They have the mentality that if I’m big and I carry a lot of insurance, so should you. I have seen the demand for higher limits be the tipping point between smaller companies making a profit in doing business with these bigger companies and losing money on that business,”​ Doherty said.