The role of business insurance in managing a manufacturer's product quality risk

We consider a risk-averse manufacturer that decides whether to accept an order from a retailer and can purchase a business insurance contract. Once the order is delivered to the retailer, a random part of it would turn out to be defective associated with external failure cost. We find that business insurance can substitute and complement with an operational strategy that shares external failure cost or reduces the probability of product defects occurring. (C) 2017 Elsevier B.V. All rights reserved.