CORRECTED-US erythrosine ban raises liability concerns for excess casualty captives

By Rebecca Delaney

April 11 - (The Insurer) - The U.S. ban of food additive erythrosine has sparked concern over potential excess casualty liabilities housed in captives of food and pharmaceutical companies, Augment Risk’s Steve McElhiney told The Insurer.

The U.S. Food and Drug Administration banned the use of erythrosine, also known as Red Dye No. 3, on January 15. The additive is used in confectionery, baked goods and some oral medications such as cough syrup. It was banned for use in cosmetics and topical medications in 1990.

The ban was introduced under the Delaney Clause, which bans additives found to induce cancer in humans or animals, after evidence that the dye caused cancer in laboratory rats.

There is currently no causal link (scientifically or legally) to cancer in humans, nor for the claims that erythrosine may be associated with attention-deficit hyperactivity disorder in children.

Food manufacturers must reformulate their products by January 15, 2027, while pharmaceutical manufacturers have until January 18, 2028.

McElhiney, partner in Augment Risk’s captives and alternative risk transfer solutions practice, said that the ban is likely to be a board-level concern for many U.S. and global conglomerates across the food, beverage and pharmaceutical industries.

“I imagine there's a lot of concern over whether mass tort litigation is coming. I think this is an area where we could definitely see this on the horizon,” he said.

For Fortune 500 companies with general liability policies, excess casualty business is likely placed in long-standing captives, with large retentions of $5 million or even $10 million in the current hardening market.

Limits can be purchased for around $250 million up to $500 million for a Fortune 500 captive through a syndicated placement, which may lead to stacking over time as a continuous trigger impacts multiple policy years.

“There's a potential for quite a net exposure to the captive, and invariably to the captive owner on the back end,” said McElhiney.

Large firms in sectors using erythrosine may require a carve-out to create finality for accumulating embedded liabilities, as well as to fend off potential shareholder and analyst scrutiny.

This would likely be in the form of a loss portfolio transfer (LPT), which would first require an assessment of exposure over time and the retained account to estimate a potential loss ratio.

“Armed with that, we'd talk to some global counterparties to ask if this is a risk they’d be interested in assuming,” McElhiney explained.

“(If) there's a pricing that works, then we would create a reinsurance contract for the LPT contract to novate those liabilities going back, and have them assumed by the reinsurance counterparty prospectively and over that time period.”

For legacy underwriters considering taking on the risk, the current lack of causal links and legal precedent make for a potentially attractive risk. If litigation does emerge in future, this will be the responsibility of the reinsurer, which is more likely to have complex large claims capabilities than the captive.

“It's that uncertainty as a broker that is appealing to us, that we could craft some solutions for existing captives fairly quickly, take it off to a counterparty on the other side that's more attuned to mass litigation risk and more comfortable to take that on,” said McElhiney.

For the holding company, as well as the litigation risk this will absolve any associated issues around the balance sheet, investor confidence and financial strategy.

“My personal opinion is that a year from now this will be a real hot-button issue and there will start to be a penalty in the share price,” McElhiney added.

“That's really the value. It's uncertain enough that the pricing we could get from the reinsurer counterparty would be competitive enough to make them want to take that trade. That makes for a perfect reinsurance placement.”

U.S. Secretary of Health and Human Services Robert F. Kennedy Jr. has promised to “Make America Healthy Again” by reducing artificial dyes and chemicals in food, which may pave the way for similar excess casualty liabilities in future.

“The plaintiffs' bar is always looking at new avenues for revenue growth. Sometimes insurance people tend to view mass tort from the lens of asbestos and Superfund sites, which was the case 20 or 30 years ago,” McElhiney concluded.

“These are emerging risks, and there's a whole host of them out there, like GMOs and food additives generally. I think we're going to see a lot of future litigation.”