With the strengthening of government regulation and punishment, as well as the widespread use of social media, the frequency, scale, and cost of product recalls are showing a trend of continuous expansion. There are four main risk exposures that businesses may face, including product liability claims, government prosecution, business interruption leading to profit loss, recall implementation costs, and damage to reputation or brand value. In the supply chain structure, downstream companies - including final product manufacturers, distributors, retailers, and importers - tend to bear the brunt of product recalls resulting from supplier quality defects. In order to encourage suppliers to improve quality, in practice, many manufacturers and suppliers sign performance-based procurement contracts and allocate orders according to supplier performance. However, financially-constrained suppliers may weaken their investment in quality at the beginning of a period to increase their holding of working capital, in order to avoid financial difficulties in the later stages. Therefore, supplier financial constraints may lead to the failure of quality competition based on performance contracts which could instead exacerbate the risk of product recalls. In order to reduce recall losses and ensure that suppliers can fulfill partial compensation responsibilities, more and more manufacturers require suppliers to purchase recall insurance from designated credit-rated insurance institutions with a certain limit of indemnity in procurement contracts. So, is the widespread application of recall insurance mechanisms more conducive to quality competition among suppliers or does it lead to lower competition efficiency?Based on this, in this paper, we consider a scenario where two equally financially constrained suppliers compete for procurement orders through the quality of components, and the manufacturer uses a penalty mechanism and a recall insurance mechanism to make financially constrained suppliers bear partial responsibility for product recalls. By constructing a quality competition decision model and considering the random distribution of recall costs, we explore the impact of penalty mechanisms and recall insurance mechanisms on supplier quality competition behavior. Specific research questions include: How does the penalty mechanism affect supplier quality competition? How does the insurance mechanism affect supplier quality competition? Which mechanism can improve the efficiency of quality competition? Under which mechanism can suppliers obtain higher profits?The results show that 1) compared to the penalty mechanism, the insurance mechanism effectively alleviates the financial constraints of suppliers, making it easier for them to enter the market and participate in competition at lower procurement prices. 2) Although increasing the procurement price can improve the financial constraints of suppliers, this improvement does not necessarily enhance the efficiency of supplier quality competition. There is a “price black hole” area in both the penalty mechanism and the insurance mechanism with higher indemnity limits. When the procurement price is in the “price black hole”, raising the procurement price leads to lower quality of components. 3) The penalty mechanism or insurance mechanism with higher coverage limits is more conducive to the implementation of multi-source procurement. However, manufacturers using insurance mechanisms with lower coverage limits are more likely to trigger fierce quality competition among suppliers and form high-quality single-source procurement. 4) Under the insurance mechanism with low coverage limits, suppliers have to significantly improve their quality level to win orders. The high production costs caused by excessive competition offset the benefits of expanding market share and spoil supplier profits. Therefore, compared to insurance mechanisms with low coverage limits, suppliers prefer penalty mechanisms or insurance mechanisms with higher coverage limits. 5) When suppliers hold less initial funds, they often try to get more funds rather than improve quality at the beginning of the period to avoid bankruptcy due to high compensation responsibilities in case of recalls. At this time, with the help of an insurance mechanism, manufacturers can effectively eliminate the negative impact of financial constraints on quality competition. Compared to the penalty mechanism, the insurance mechanism motivates suppliers to produce higher-quality components and is beneficial to the performance improvement of the entire supply chain.