51B-6

P. G. CRANDALL, Dept. Food Science, Uiversity of Arkansas, 272 Young Avenue, Fayetteville, AR 72704 and B. L. Dow, III, Department of Finance, University of Arkansas, Fayetteville, AR 72704.

This research presents one way meat and poultry processors can recover some of the variable production costs from implementing the new HACCP regulations. These increased variable production costs can not be passed directly on to consumers because food safety is a non-market good and is valued indirectly by consumers. This is the time for processors to determine if a reduction in food borne illness will reduce insurance liability and if these savings will be returned to the food processor.

This research is directed at small and medium size meat and poultry processors to outline a risk management program aimed at re-evaluating which parts of products liability risk to retain and what to transfer to an insurance company

This research details the current environment in the property / casualty (P/C) insurance industry, the way the industry works with food processors, sources of profitability, leverage and interpreting important industry scenarios to medium size food processor.

Initial surveys indicate HACCP implementation by smaller food processors are requiring more significant changes than for larger companies. The $1.04 to $2.2 billion implementation costs over a 25 year period were based on estimates of developing HACCP plans, training personnel, increased record keeping and testing. HACCP regulations should produce safer food products so the expenses associated with products liability should decline. However, economies of scale may prevent smaller processors from implementing a comprehensive risk management program directed at allocating product liability risks. These small processors rely on P/C insurance companies to assume part of these risks but it is unlikely that insurance companies will voluntarily pass their savings back to their food processing customer.

Timing is critical for medium sized food processor to be able to reduce their expenses associated with products liability by understanding: 1) where product liability fits into the balance sheet and 2) their position in recovering some of the additional expenses imposed by HACCP.