Earlier this year, Australian manufacturer Patties Foods recalled 1kg packets of Nanna’s Mixed Berries following allegations that over three dozen people had fallen ill with hepatitis A after consuming the berries. In June, managing director and CEO of Patties Foods, Steven Chaur, said the company had been significantly impacted by the frozen berries recall and that it was expected 9% would be wiped from the company’s net profit for 2015.
According to the ACCC, there were 513 product recalls in Australia in 2014, compared to 359 recalls in 2010.
Andrew Beare is liability underwriting manager for Australasia for HDI-Gerling, which provides contaminated product insurance to businesses in the food and beverage industries. Beare says upwards of $49bn worth of food fraud occurs globally each year. “That involves contamination, extortion [and] anything to do with food not being what it should be,” he adds.
While organisations obviously incur high costs as a result of dealing with recall events, reputational damage can ultimately have an even greater impact. “Reputational risk is one of the greatest risks to a business in the event of a recall, especially if it’s not handled professionally and honestly,” says Beare. “If the reputation is damaged to such an extent, a business may never recover.”
Former crisis management underwriter turned tech founder, Nga Nguyen, says many organisations tend to forget the ‘soft costs’ (or indirect costs) of product recalls, including reputational damage. “Typically, in a major recall, soft costs are disproportionately higher than hard costs,” he says. “I’ve read studies that have shown that the hard costs represent less than 20% of the total costs. The actual rehabilitation, repairing the organisation’s brand equity, accounts for the majority of the total costs.”
And when significant reputational damage occurs, substantial profit losses can follow. Andrew Beare highlights other consequences that can flow from product recalls. “There are significant recall expenses, which include recovery of affected product from retail outlets. You then have to dispose of it. There’s also the loss of other lines of business and products from the same manufacturer going by the same name. They can all be tarred with the same brush,” he says.
Nguyen mentions the risk of manufacturers losing major supply contracts with retailers. “Particularly in Australia, if you’re in the food and beverage space, retail is dominated by major players. If you lose a contract with one of the major retailers, you’re in a lot of bother.”
He says companies make three common mistakes in handling product recalls. “Number one would be lack of preparation. A big thing is failure to conduct mock recalls,” says Nguyen. “Number two would be allowing an incident to escalate into a crisis. That could mean allowing the investigations to be protracted. So, in other words, failure to take responsibility and act decisively on a known problem, and also failure to monitor the effectiveness of recalls that are in flight and adjust strategies as required.”
The third mistake Nguyen cites is a failure to conduct adequate supplier audits. “Supply chains of today are highly distributed and extremely complicated,” he says. “A lot of manufacturers nowadays purchase components from offshore companies.” He says that leads to a raft of issues around how to properly audit overseas suppliers and identifying the standards to which they should adhere.
As to essentials for good product contamination and recall policies, Beare stresses that no two policies are identical, but identified some features he sees as important. “Firstly, you’ve got to have a good broker. They need to know what’s going on in the marketplace [and] what’s available,” he says.
“From a policy containment situation, direct access to a globally-experienced crisis management consultant is absolutely essential.” He also mentions provision of pre-incident planning simulations. “This is done usually through the crisis management consultant,” he adds.
Beare says there should also be product recall expense coverage, and product rehabilitation expenses to help reduce reputational damage. He also says it’s important that coverage extends to government-instigated recalls.
Finally, he says good policies should include coverage for loss of profits from the recalled product, coverage for loss of profits due to decrease in the organisation’s overall turnover, and coverage for third party recall expenses.
So what types of questions should brokers ask their clients to ensure they can organise appropriate coverage? For brokers with clients in the food and beverage industry, Beare says he considers a few particular questions to be very important. “First and foremost, brokers need to understand and demonstrate to insurers that they know what their client’s risk is because they have to tell us what it’s all about,” he says. “For example, does the applicant have a documented product recall plan? When was it written? When was it last reviewed? When has it been tested? And what was the outcome of the tests?
“Another one is how does the applicant manage his suppliers and vendors for quality control? What is the traceability of products? Are they barcoded?”
Next, Beare mentions the client’s history. “Has there been any previous need to recall any of their products, and what were the reasons for that? And what did they learn? What risk mitigation strategies are employed? Have these been tested?”
Beare adds it’s essential that clients buy the right limit of coverage. “There’s plenty of capacity around in the marketplace, so they shouldn’t hold back on buying the right limit because, if [they] buy the wrong limit, once the limit’s exhausted, everything else that has to be paid comes off their bottom line.”
Nguyen’s CrisisFlo, an Australian technology firm that specialises in crisis management systems, has just launched CrisisFlo Recall Manager, a web-based tool that provides workflow orchestration for a business’ product recall team with the aim of facilitating better communication, coordination and collaboration before, during and after a recall event. Nguyen says the intent is to resolve issues at incident level, preventing situations from escalating into crises.
And while CrisisFlo’s technology should serve as an adjunct to good insurance, the company hopes its technology can contribute in some way to lowering the cost of product recall claims which, longer term, could result in an adjustment of premiums that makes the coverage more accessible to a wider range of suppliers and manufacturers.