As Nestle SA slugs it out with India’s food regulator over the amount of lead in its popular Maggi instant noodles, the dispute is whipping up business for insurers.
The local unit of American International Group Inc. is predicting a 10-fold jump in product insurance sales, with more makers of food, beverages and cosmetics seeking cover for regulatory risks such as recalls. The Indian arm of Allianz SE said it has seen a sixfold jump in inquiries.
Businesses are seeking protection after the Food Safety and Standards Authority of India ordered the recall of Maggi packs last month, following tests showing excess lead. Disputing the findings, Nestle is battling to get the ban overturned by a court even as its Mumbai-listed shares sank, wiping out 144 billion rupees ($2.3 billion) of shareholder wealth in just 10 days.
“This is the first time the manufacturers have been shaken up so much,” said Sasikumar Adidamu, Mumbai-based chief technical officer for non-motor insurance at Bajaj Allianz General Insurance. “Earlier, they thought such a thing would never happen to them. Now, everyone is keener to buy this policy.”
After banning Maggi, a product deemed safe by Singapore and U.K. regulators, the FSSAI widened its net to include other companies that were selling products or using ingredients that weren’t approved yet.
Starbucks, Unilever
Hindustan Unilever Ltd., the nation’s biggest consumer- goods company, said June 11 that it was withdrawing its Knorr range of Chinese instant noodles, while Starbucks Corp.’s local unit said four days later that it was stopping the use of some elements and was working “diligently” with FSSAI on pending applications.
“As a result of the recent events, an impression is gaining ground among the public that all branded, packaged foods in India are unsafe,” the Associated Chambers of Commerce & Industry of India said in a statement earlier this month.
The lobby group sought Prime Minister Narendra Modi’s intervention to stem “consumer distrust being spread by the government machinery,” and added an investment of about 900 billion rupees rides on the need for clearer food safety rules and laws.
Yudhvir Singh Malik, chief executive officer of India’s federal food regulator, didn’t return an e-mail seeking comment and calls put through to his office were unanswered.
Maggi No. 1
Nestle India Ltd., which will announce its quarterly earnings on July 29, said in a filing on June 15 that the total value of the stock in the market was about $50 million, not including the costs associated with recall and destruction.
For each month Maggi remains off shelves, Nestle stands to lose about 1.8 billion rupees in sales, Sanjay Manyal, an analyst at brokerage ICICI Direct, said in June.
Nestle dominated the noodle market in the world’s second- most populous country, with a 63 percent share in 2014, six times as much as its nearest rival ITC Ltd. and the third- largest seller Bambino, which had a 5.1 percent share.
Himanshu Manglik, the New Delhi-based spokesman for Nestle India, didn’t immediately respond to an e-mail on whether the company has increased its liability cover. Hearings are underway in a lawsuit before the Bombay High Court where Nestle has challenged the recall of its noodle brand.
Nestle India’s shares rose 1 percent to 6,050 rupees on Thursday in Mumbai, trimming this year’s loss to 5.2 percent. Hindustan Unilever fell 1.7 percent to 904.60 rupees, paring this year’s gain to 19 percent.
‘Costly Process’
Tata AIG General Insurance Co. arranges and pays for reverse logistics when companies recall a product, public relations consultants for rebuilding public confidence in the brand and also compensates the manufacturer for any loss in profits, according to Sushant Sarin, the insurer’s senior vice president for commercial lines and broking.
“While companies have a mechanism in place to distribute and sell products, most of them don’t have a reverse logistics mechanism in place to get the product back,” he said. “It is a costly process, and there is a surge in demand for policy.”
Hurlene Kharbanda, Tata Starbucks’ external spokeswoman, declined to comment, while Hindustan Unilever in an e-mailed statement Wednesday didn’t reply to a question on whether it’s boosting its liability cover.
Of the 21 general insurers in India, HDFC Ergo General Insurance Co. and Universal Sompo General Insurance Co. were the two that added product recall policy to their portfolio in the fiscal year through March 2014, while Magma HDI General Insurance Co. started offering product liability cover, according to data on the website of the Insurance Regulatory and Development Authority of India.
The current market for such policies is minuscule in India, with no reliable estimates.
“Strong growth is coming on that small base and will take several years to become a sizable business” Karthik Srinivasan, Mumbai-based co-head of financial industry ratings at ICRA Ltd., the local unit of Moody’s Investors Service said by phone.
–With assistance from Adi Narayan in Mumbai.