Product-related risk is one of the biggest perils facing businesses today, with recall exposures having increased significantly over the past decade, as the insurer Allianz Global Corporate & Specialty (AGCS) warns in the report “Product Recall: Managing The Impact of the New Risk Landscape”. “Product recalls have risen steadily in the past decade. We are seeing record levels of recall activity in size and cost today – said Christof Bentele, Head of Global Crisis Management at AGCS -. Tougher regulation and harsher penalties, the rise of large multi-national corporations and complex global supply chains, growing consumer awareness, impact of economic pressures in R&D and production and even growth of social media are just some of the contributing factors behind this”. Defective products not only pose a serious safety risk to the public but can also cause significant financial damage to the companies responsible. Defective product/work-related incidents have caused insured losses in excess of US$2 billion over the past five years, making them the largest generator of liability losses, according to analysis of insurance industry claims by AGCS. Recall claims are a major contributor to this total, alongside product liability claims. The report analyzes 367 insurance industry product recall claims from 28 countries across 12 industry sectors between 2012 and the first half of 2017. Overall defective product or work is the major cause of recall claims, followed by product contamination. The average cost of a significant incident is in excess of US$12 million (€10.5 million), with the costs from the largest events far exceeding this total. Over 50% of losses arise from 10 incidents. The IT/electronics sector is the third most affected industry after automotive and food and beverage, according to the claims analysis.
The report also identifies emerging recall triggers that will drive future risks and claims, largely stemming from new technologies. Cyber recalls may become an increasing reality. Hackers could change or contaminate a product by controlling machinery in automated production plants. “Cyber is currently an underestimated risk – said Bentele -. We have already seen recalls due to cyber security vulnerabilities in cars and cameras”. Innovative but untested technologies such as artificial intelligence and nanotechnology could also transform recall risk, as the report explains. Besides, the social media are a fast and effective way of communicating with customers but can also exacerbate recall risk if not well-managed. “Social media is a real game-changer for product recall – commented Stewart Eaton, Head of Product Recall, UK, AGCS -. An erroneous post or tweet can cause reputational damage and directly impact the size of a recall, meaning companies need to react faster than before”. Pre-event planning and preparation can have a big impact on the size of a recall and the financial and reputational damage sustained. As part of a holistic risk management program, specialized product recall insurance can help businesses recover faster by covering the costs of a recall, including business interruption.
