Insurers could be exposed to catastrophic losses if the EU makes product recall insurance compulsory for manufacturers of animal feed.

The proposal is a part of a new set of EU regulations for feed hygiene being considered by the European Parliament. This follows contamination problems in recent years.

The BSE outbreak in Britain and the dioxin contamination crisis in Belgium in 1999, cost more than E2bn (£1.4bn).

Under the regulations, feed manufacturers, who in many instances are farmers, would be required to have a financial guarantee such as insurance.

This would cover the costs arising from withdrawing contaminated products from the market and the treatment or destruction of feed or affected food.

Financial guarantees are considered central to the proposals under the EU's "polluter pays" approach, which opposes the use of public funds to pay for avoidable damage.

According to one broker, the potential for recalls to turn into major catastrophic losses triggering a range of policies makes product recall an "extremely difficult" class of business to underwrite.

Major players in the product recall insurance market include AIG, QBE, Swiss Re, XL Capital and Ascot.