Product recalls and food safety: trends, losses and strategies

Product recalls and food safety: trends, losses and strategies | Insurance Business

Product recalls and food safety: trends, losses and strategies

As most parts of the world transition from agricultural to industrial and service economies, the supply chain of food and other important commodities becomes more and more complicated. With globalisation resulting numerous touch-points and interfaces, the likelihood of errors has increased, and these errors can cause harm to consumers.

Manzhi Zheng, senior casualty underwriter at Swiss Re Corporate Solutions, provided insight on how insurance can help facilitate product recalls, which are necessary to mitigate the damage caused by a faulty product entering the market.

According to Zheng, every manufacturer, including those dealing in finished products, components, and raw materials, is susceptible to product recalls, and new cases are reported almost weekly.

“Official figures across many industries, including automotive, food & beverage and consumer goods, show that recalls are on the rise,” she said. “Recent examples include Hyundai, Takata, Toyota, Maggi Noodles and Samsung Electronics. These high-profile product recall cases have made risk managers and CFOs question whether they also need to explore their recall exposure to ensure they have protected their balance sheet and have a clear understanding of how much risk they are potentially absorbing without having product recall insurance.”

The food industry is especially prone to cross-contamination, with recall notices affecting multiple brands. This is because many food manufacturers process their product lines in a single factory. Zheng cited a USDA report that said undeclared allergens accounted for 58 of the 150 food recalls in 2015.

In recent years, access to the internet and social media has amplified these trends, with information travelling fast among consumers. In one recent incident, a food sabotage case in Australia, where needles were found in strawberries, went viral and caused a scare among consumers. In another incident, American meat producer Cargill recalled over 130,000 pounds (around 59,000 kg) of ground beef due to E. coli contamination.

Manufacturers ignoring the threat of recalls
Unfortunately, Zheng said that many manufacturers are exposed to large recall events because they insist on purchasing only product liability cover, viewing product recall insurance as a ‘nice to have’ cover only, in the face of pressures to increase margins and reduce costs.

“Product recall is designed to cover the cost associated with taking a product out of the market that causes actual, or imposes an imminent threat of, bodily injury or property damage,” Zheng said. “In this sense, product recall is a loss mitigating insurance - the idea behind it is to withdraw defective products from the market before they have a chance of causing bodily injury, property damage or further body injury or property damage.”

She contrasted it with product liability insurance, which provides coverage for bodily injury and property damage that result from the use of the insured’s product. It does not provide coverage for claims of recalling or withdrawing the defective or faulty products from the market.

“It’s important that clients understand and consider the differences in cover when purchasing their insurance,” she said.

Another mistake Zheng mentioned was that firms often underestimate the cost of a product recall, which can reach billions of dollars.

“The news is littered with stories about the cost of product recalls,” she said. “A report by Bloomberg highlights some of the most expensive product recalls, from Toyota recalling 4.1 million vehicles in 2010 due to a faulty accelerator pedal and costing the company an estimated US$2 billion, to Cadbury-Schwepps recalling a million chocolate bars in 2006 after a Salmonella poisoning scare that cost the company an estimated US$24million.”

Many organisations naturally have limited capability to assess such risks, so, according to Zheng, it is important for these firms to use the services of insurers such as Swiss Re Corporate Solutions and professional insurance brokers that will be able to help determine the potential costs. They will also be able to provide a range of mitigation strategies, based on the experience of working with clients in that specific industry, as well as any appropriate insurance products that are available.

“Product recall insurance from a reputable insurer can get them into a position for if or when the problem happens,” Zheng said. “Companies should look for insurers focused on understanding, supporting, and partnering with corporate clients on pre-crisis support, helping the insured develop a recall plan, recall communications strategy, identifying crisis management services to help them in that process, all done before any loss has occurred.”

Recovering from a food recall incident
In the worst case, a failure to prepare can result in the company going under, especially if the cost runs into billions. However, the key to recovering from a recall incident is that the company can quickly regain the trust of consumers.

Zheng cited the Aon Global Risk Management Survey 2017, which found that the top risk for firms was protecting brands. or reputational damage. However, this is difficult to quantify and challenging to recover from financially. Coupled with high recall costs and plummeting sales following a recall, businesses can easily be forced into bankruptcy.

“In the case of the recent strawberry and beef recalls, an evaluation would be needed to see if there were any additional steps the companies could have taken to guard against the threat of alleged malicious tampering,” Zheng said. “Risk management techniques in terms of quality control could be extended to metal detection and X-ray of goods all the way from the farm to the fork. In addition, the traceability procedure should also be taken into consideration - how traceable are the products once they have left the company’s premises?

“No-one will expect such malicious tampering acts, but companies would need to review their crisis management plan to ensure that they know what to do if a similar event happens again. It is also crucial to conduct a mock event to test out the plan and ensure it would work.”

A product recall doesn’t necessarily spell the end of a brand. If done right, it can show to customers that the company is responsible, and this can restore trust.

Zheng cited the 1982 recall involving the painkiller Tylenol in the US, where the drug’s packaging was tampered and laced with potassium cyanide, leading to multiple deaths.

“Marketers predicted that the Tylenol brand … would never recover from the sabotage,” she said.  “Two months later, Tylenol was back in the market, this time in packaging that was tamper-proof and bolstered by an extensive media campaign. A year later, its share of the US$1.2 billion analgesic market, which had plunged to 7% from 37% following the recall, had climbed back to 30%.”