Technology, Regulation Prove Double-Edged Swords in Product Recall Risk
Exploding Samsung phones, error-prone Takata airbags, faulty GM vehicle ignition switches, failing Johnson & Johnson hip implants — multi-billion dollar product recalls have become more common over the past decade.
According to one insurer, product-related risk is one of the biggest perils facing businesses today.
Allianz Global Corporate & Specialty (AGCS) in a new report says that with recall exposures increasing significantly over the past decade, there is the potential for larger and more complex losses than ever before.
The AGCS report, Product Recall: Managing The Impact of the New Risk Landscape, analyzes 367 insurance industry product recall claims from 28 countries across 12 industry sectors between 2012 and the first half of 2017. The researchers found that 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 $12 million, with the costs from the largest events far exceeding this total. In excess of 50 percent 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.
“Product recalls have risen steadily in the past decade. We are seeing record levels of recall activity in size and cost today,” says 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 research and development (R&D) as well as 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 $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.
However, the report notes that many businesses underestimate the impact a recall event can have. “Typically, the biggest costs are loss of sales and business interruption. However, even if a recall event doesn’t result in the billion dollar losses that hit the headlines, losses can mount,” the report notes.
Automotive recalls account for more than 70 percent of the value of all losses analyzed, which Allianz says is unsurprising given recent record levels of activity in both the U.S. and Europe. Some of the losses are due to what the report calls the “ripple effect,” where a single recall such as an airbag can impact whole industries and challenge managers of global supply chains.
“We see an increasing number of recalls with higher units in the automotive industry,” says Carsten Krieglstein, regional head of Liability, Central & Eastern Europe, AGCS. “This is driven by factors such as more complex engineering, reduced product testing times, outsourcing of R&D and increasing cost pressures. The technological shift in the automotive industry towards electric and autonomous mobility will create further recall risks.”
One of the largest recalls to hit the auto industry to date, involving defective airbags, is expected to result in 60 to 70 million units across at least 19 manufacturers being recalled worldwide. Costs have been estimated at close to $25 billion.
Food and beverage is the second most impacted sector, accounting for 16 percent of analyzed losses with the average cost of a significant product recall claim almost $9.5 million. Undeclared allergens (including mislabeling incidents) and pathogens are a major issue, as is contamination from glass, plastic and metal parts. Malicious tampering and even extortion incidents pose an increasing threat, as well as the growth of “food fraud,” which has become a major issue, resulting in reputational damage and major losses.
Regulators are more proactive now in the area of food safety as the U.S. and the European Union have enacted tougher laws and regulations. In the UK the number of recalls of food and drink products involving mislabeled allergens jumped by 60 percent in 2016 following the introduction of new European Union legislation, according to the report. Product safety regulation is also increasing for automotive and consumer goods. “Globally, when the regulatory bar is raised it increases risk for companies as they have to adapt their safety culture to maintain higher standards,” the report notes.
The report also identifies emerging recall triggers that will drive future risks and claims, largely stemming from new technologies. While advances in product testing such as genome-sequencing technology will make it easier for regulators and manufacturers to trace contaminated products in future, potentially saving lives, they may also lead to a spike in litigation as liable parties can be more easily identified.
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,” says Bentele. “We have already seen recalls due to cyber security vulnerabilities in cars and cameras.”
Robots may increase efficiency in manufacturing but they also increase cyber risk. Nanotechnology and 3D printing.
Social media, while fast and effective in communicating with customers, can also exacerbate recall risk. The report cites the reputational damage that can be done by an erroneous post.
Pre-event planning and preparation can have a major impact on the size of a recall and the financial and reputational damage sustained, according to the report. Specialized product recall insurance can help businesses recover faster by covering the costs of a recall, including business interruption. It also provides access to crisis management services, and consultants. AGCS also recommends organizing simulations to test a company’s procedures. A full product recall simulation goes beyond a traceability exercise to also incorporate media, customers and other stakeholders.