Steps to Prepare for the Worst and Best Outcome in Recalls

Product recalls are on the rise. Last quarter alone, there were dozens of recalls, including peanut butter, cars and bicycles. As consumer safety concerns come under greater regulation and scrutiny, recall risks are not only more prevalent, but the adverse, long-term effects they can have on the business can be significant. Most food processing and product manufacturers realize that product recalls are a reality and they need to be prepared. But what are the risks they should be prepared for and what are the key steps they should take?

The Real Risks

For food processors and manufacturers, the costs of a recall are much greater than providing customer refunds.

First, there can be large, tangible expenses associated with removing the product from the marketplace. Shipping and storage costs, and customer notification can add up quickly depending on the volume and nature of the products involved.

Recalls can also shut down production. Inspections or facility cleaning can cause an operation to have to cease production or a plant to temporarily close. A temporary production stop can be even more costly because many of today’s high-efficiency production and processing business models are not set up for quick production stoppages.

Finally, there is the harder to quantify, but often more critical, consequence of reputational damage. A recall can result in a dip in stock price, or the loss of customer loyalty and trust.

High Stakes

Not only are the number of recalls increasing, but the severity is also growing. Public data analysis shows that the number of food recalls in the United States have approximately doubled since 2002. The costs are significant with more than half of the companies affected having to pay $10 million or more.

Food processing and product manufacturing firms must also navigate through new legislation and the court of public opinion. Government regulations around product safety are tightening up. The Food Safety Modernization Act (FSMA), passed in 2011, has been rolling out over the past few years. By the end of 2015, a number of key rules were finalized, and by the end of 2016, these rules will be implemented and include FSMA inspections at food facilities.

Consumers also expect more from companies and prioritize products that are healthy, high-quality, organic, all-natural and pure. Companies are adapting to these drivers and marketing their products to meet these high standards. But these same firms face complicated challenges when safety-related product recalls occur. Because their brands are built on trust, safety-related product recalls can be particularly difficult to manage if consumers begin to believe the brand is violating its fundamental promises.

Managing the Risks

Companies can reduce exposures to product recall by focusing on two key areas.

First, updating processes and quality control can help detect problems before they occur. Many firms have reduced their risks significantly by taking steps to improve operations. But, even with the best operations in place, problems can still occur. Firms also need to be prepared for the worst so they can minimize the damage if a product recall occurs. Recalls, contaminations and defects affect even the most conscientious firms, but if there are processes in place to manage the impact, companies can avoid catastrophe.

Many of today’s insurance policies provide crisis response and crisis management components. Companies facing product recall should take advantage of these features.

For example, most stand-alone recall and contamination policies provide insureds with access to experienced crisis-management firms. Crisis response services are included in many insurance offers, and typically deductibles don’t apply to crisis response services.

These services give the insured immediate access to the advice and counsel of outside experts who can provide guidance on public relations, as well as communication and involvement with government authorities, logistics, testing and more. Crisis-management firms can also be engaged by the insured to consult with them on a proactive, pre-incident basis, which enables them to prepare ahead of time for the unthinkable event.

Prevent, Protect and Survive

With consumer expectations at an all-time high and regulations continually evolving, product recalls are more frequent and can be more damaging than ever. Successfully dealing with this increased exposure requires dedication and discipline when it comes to ensuring quality control as well as planning for situations where the quality process fails. As lean and efficient operations, food processing and product manufacturing firms seldom have the public relations experts, food safety scientists, and other specialists they need on staff, but the right insurance product can ensure that they have timely access to this specialized expertise.

By providing access to preventive counsel and crisis-management expertise, insurance products can offer a complete solution to the complex issues surrounding recalls and contamination incidents. In addition to providing the traditional financial risk transfer associated with insurance products, they can help insureds prepare for and reduce the increasingly devastating impact that these unexpected events can have on their reputation and profitability.