PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...

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PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
ALLIANZ GLOBAL CORPORATE & SPECIALTY

PRODUCT RECALL
MANAGING THE IMPACT OF
THE NEW RISK LANDSCAPE

Loss Trends and Product Recall Claims Analysis
Risk Mitigation
Crisis Management
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                               PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

IN FOCUS                                                         CONTENTS
A product recall is potentially the most risk-laden situation
a company can face. And whether a manufacturer, retailer
or wholesaler, this risk is increasing, as supply chains grow
                                                                 04   Billion dollar product recall incidents

more complex and the regulatory landscape becomes
more robust. Yet businesses can often underestimate the
impact of a recall and the negative effect it can have in
                                                                 06   Executive summary

terms of financial and reputational damage, despite the
growing number of large loss events.                             08   Drivers of the product recall risk landscape

This report examines current and emerging risk and loss
trends in product recall and includes exclusive insurance
claims analysis. It focuses primarily on the automotive and
                                                                 10   By the numbers - product recall claims analysis

food and beverage industries, but also incorporates other
sectors. The report also highlights the increasingly important
role of crisis management services, including specialized
                                                                 12   Eight emerging developments in product recall risk

insurance, in a recall scenario and outlines what can be
done to mitigate the fall-out when an incident occurs.           22   Preventing a crisis – five key steps to managing a recall

All claims values in € originally. All $ US$ unless stated
otherwise.                                                       26   Insurance: financial and reputational recall protection

Allianz Global Corporate & Specialty business scope

Allianz Global Corporate & Specialty (AGCS) is the Allianz
Group’s dedicated carrier for corporate and specialty
insurance business. AGCS provides insurance and risk
consultancy across the whole spectrum of specialty,
alternative risk transfer and corporate business.
Insurance product lines covered include:

–   Alternative Risk Transfer
–   Aviation (including space)
–   Energy
–   Engineering
–   Entertainment
–   Financial Lines (including directors’ and officers’ [D&O])
–   Liability
–   Marine
–   Mid-Corporate
–   Property

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PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                                 PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

BILLION DOLLAR
RECALL INCIDENTS
                       A pedal that caused a car to inadvertently accelerate, a hip replacement device
                       that led to repeated surgeries and an outbreak of contaminated peanuts that
                       resulted in a 25% industry-wide reduction in sales. Below are some of the largest –
                       and most costly – recalls of recent times.

                                   2016 EXPLODING PHONES                                                     2010 HIP HICCUPS                               2008 PEANUT CONTAMINATION
                                   Samsung recalled 2.5 million Galaxy                                       Johnson & Johnson subsidiary, DePuy            One of the largest food recalls in US
                                   Note 7 phones after users reported                                        Orthopaedics, recalled hip replacement         history, triggered by salmonella fears.
                                   flames and explosions caused by                                           devices due to a high level of repeated        More than 4,000 products, produced
                                   overheating batteries.                                                    surgeries. More than 90,000 devices            by over 200 different companies, were
                                   Estimated cost: $5bn+1                                                    had been implanted worldwide.                  impacted, triggering an industry-wide
                                                                                                             Estimated cost: $3bn+4                         25% reduction in peanut sales. The
                                                                                                                                                            company responsible, Peanut
                                   2015 AIRBAG ERRORS                                                                                                       Corporation of America, filed for
                                   One of the largest recalls to hit the                                     2009 FAULTY PEDALS                             bankruptcy.
                                   auto industry, expected to result in                                      Automaker, Toyota issued a recall on           Estimated cost: $1bn+6
                                   some 60 to 70 million units across at                                     over four million vehicles to fix faulty
                                   least 19 manufacturers being recalled                                     pedals that led to unintended
                                   worldwide. Japanese manufacturer,                                         accelerations. In total an estimated           2005 ARTHRITIS DRUG RECALL
                                   Takata filed for bankruptcy in June 2017.                                 nine million cars were eventually              The Food and Drug Administration in
                                   Estimated cost: $25bn+2                                                   pulled back for pedal-related flaws.           the US requested the removal of the
                                                                                                             Estimated cost: $3bn5                          Pfizer arthritis drug Bextra from the                                                THESE EVENTS
                                                                                                                                                            market due to side-effects.
                                   2014 AUTO IGNITION FLAWS                                                                                                 Estimated cost: $3bn7                                                                COST ALMOST

                                                                                                                                                                                                                                                 $50BN
                                   AND OTHER ISSUES
                                   Issues such as ignition switch flaws
                                   meant General Motors had to recall                                                                                       2004 ARTHRITIS DRUG RECALL
                                   over 30 million vehicles in total                                                                                        Merck recalled Vioxx, another arthritis
                                   through 2014.                                                                                                            drug, after a study found that patients
                                   Estimated cost: $4bn+3                                                                                                   who took the drug were more at risk
                                                                                                                                                            from heart attacks and strokes.
                                                                                                                                                            Estimated cost: $5bn8

                                   1.       S amsung’s losses from Note 7 disaster keep mounting, money.cnn.com, October 14, 2016
                                   2.      T akata puts worst-case airbag recall costs at $24bn, Bloomberg, March 30, 2016
                                   3.   GM’s total recall cost: $4.1bn, money.cnn.com, February 4, 2015                                                    6. 2 016 Emerging Trends in Product Recall and Contamination Risk Management, Aon
                                   4.     A s lawsuits climb, J&J may have new hip trauma, Reuters, July 12, 2012                                          7. T he ten worst drug recalls in the history of the FDA, 24/7 Wall St, December 10, 2010
                                   5.    The most expensive product recalls, Bloomberg January 17, 2013; Top 10 product recalls, Time, January 29, 2010.   8. T he most expensive product recalls, Bloomberg January 17, 2013
4                                                                                                                                                                                                                                                                                                        5
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                             PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                    Tougher regulation brings more recalls:              The exacerbating effect of social media: It can

EXECUTIVE
                                                                                                                                    Regulatory scrutiny is increasing, as many           be a fast and effective way of communicating
                                                                                                                                    countries implement stricter product safety laws.    with customers, but social media can also
                                                                                                                                    Regulations such as the Food Safety                  exacerbate recall risk. An erroneous post can
                                                                                                                                    Modernization Act in the US means authorities        impact the size of the recall and cause
                                                                                                                                    are now far more proactive. In the UK the            reputational damage. Social media can even
                                                                                                                                                                                                                                                       200+

SUMMARY
                                                                                                                                    number of recalls of food and drink products         have a bottom line impact on those companies
                                                                                                                                    involving mislabeled allergens surged by over        not responsible. An academic study shows that
                                                                                                                                    60% in 2016 following the introduction of new        negative comments on social media sparked by
                                                                                                                                    European Union legislation. And product safety       recalls in the automotive sector helped erase
                                                                                                                                                                                                                                                  NUMBER OF CLASS
                                                                                                                                    regulation is also increasing for automotive and     $7.3m on average from the market cap of an               ACTION LAW SUITS
                                                                                                                                    consumer goods. Globally, when the regulatory        “innocent” firm over just six days. → Page 18            CONCERNING ALLEGEDLY
                                                                                                                                                                                                                                                  DECEPTIVE FOOD
                                                                                                                                    bar is raised it increases risk for companies, as
AGCS analysis shows that                                                                                                            they have to adapt their safety culture to           Recalls on the rise in China and across Asia:
                                                                                                                                                                                                                                                  LABELING IN THE US
                                                                                                                                                                                                                                                  SINCE 2012
                                                                                                                                    maintain higher standards. → Page 14                 Products from Asia continue to account for a
defective product-related risk                                                                                                                                                           disproportionate number of recalls in the US
is the single largest driver of                                                                                                     The rise of new recall triggers: Undeclared          and Europe, reflecting the eastwards shift in
                                                                                                                                    allergens are fast-emerging as a primary cause       global supply chains and historically weaker
liability claims. Product recall                                                                                                    of food recalls. Typically involving such products   quality controls in some countries. In 2015
losses are a major contributor.                                                                                                     as nuts, milk and wheat, such recalls can often      Chinese products accounted for over three times
                                                                                                                                    be the result of manufacturing error (mislabeling)   as many recall cases in the US as US products.              $183,000
                                                                                                                                    or unintentional cross-contamination. Toxins in      Across Asia product safety regulation is improving,
                                                                                                                                    consumer products, in many cases imported            and consumer awareness is growing, leading to
                                                                                                                                    from Asia, is another growing concern, while         more government-led recalls. → Page 19
                                                                                                                                                                                                                                                  PAID A DAY IN PRODUCT
                                                                                                                                    incidents of environmental contamination are                                                                  RECALL INSURANCE
                                                                                                                                    also rising. Recent cases have come from             “Cyber Recall” – technology to drive future              CLAIMS OVER FIVE YEARS
                                                                                                                                                                                                                                                  (€156,000)
                          Product–related risk is one of the biggest perils   However, many businesses still underestimate the      sources such as micro- and nano-plastics, while      risks and claims: Developments such as
                          businesses face today. Defective products not       impact a recall event can have, with the costs        the discovery of insecticide in Dutch eggs in        genome-sequencing provide an opportunity to

    $2bn+                 only pose a serious safety risk to the public but
                          can also cause significant financial and
                                                                              often exceeding expectations, due to inadequate
                                                                              planning. Typically, the biggest costs are loss of
                                                                                                                                    2017 triggered recalls in 16 countries across
                                                                                                                                    Europe and China. → Page 15
                                                                                                                                                                                         improve the quality and traceability of products
                                                                                                                                                                                         but new technology also brings new risks. Future
                          reputational damage to the companies                sales and business interruption. However, even if                                                          product recalls will come from new areas.
                          concerned. Defective product incidents have         a recall event doesn’t result in the billion dollar   Economic pressures and the growth of food            Automated manufacturing plants increase
OF LIABILITY INSURANCE
                          caused insured losses in excess of $2bn over the    losses that hit the headlines, losses can mount.      fraud: Economic pressures continue to bite in        efficiency but also increase cyber risk, which is
CLAIMS OVER FIVE YEARS    past five years, making them the largest            According to AGCS analysis of insurance               many sectors, increasing the risk of human error.    underestimated, despite recalls for cyber security
RESULTED FROM DEFECTIVE   generator of liability losses, according to AGCS.   industry product recall claims across 12 sectors,     Meanwhile, food fraud, including economic            vulnerabilities in cars and cameras. Motivated
PRODUCTS/WORK
                          Product recall losses are a major contributor.      even the average costs of a recall can exceed         adulteration and counterfeiting, has become a        by extortion or malicious intent, hackers could
                                                                              €1.4m ($1.65m), rising to over €12m ($14.5m)          major issue that has resulted in large recalls,      change or contaminate a product by controlling
                          Although recall frequency can fluctuate year-on-    and almost €8m ($9.42m) for significant claims        reputational damage and major losses. The            machinery. Nanotechnology and 3D printing are
                          year, and by industry sector, there has been a      in the two most impacted sectors – automotive         2013 horsemeat (substituted for beef) scandal        two further examples of innovations that could
                          steady rise in activity over time. A more robust    and food and beverage respectively. The loss          in Europe is a prime example. There have also        change recall exposures. → Page 20
                          focus on safety and regulation by authorities,      totals from individual events can far surpass         been issues with organic foods and milk powder.
                          the rise of complex global supply chains, the       these figures. → Page 10                              Many food fraud losses are uninsured. The            PREVENTING A CRISIS AND THE ROLE OF INSURANCE
                          knock-on effect from the current economic                                                                 insurance market is looking at solutions to
                          landscape, growing consumer awareness, and                                                                address this. → Page 16                              Pre-event preparation and planning can have a
                          the increasing influence of social media are        EMERGING TRENDS IN PRODUCT RECALL RISK                                                                     big impact on the size of a recall and the financial
                          among those factors ensuring recall exposures                                                             The rise of non-safety recalls: Non-safety           and reputational damage sustained. As part of
                          are growing significantly. In addition, malicious   “Ripple effect” drives larger product recalls:        recalls are an emerging phenomenon.                  a holistic risk management program, specialized
                          product tampering and even extortion incidents      Product recalls are also increasing in size.          Companies increasingly feel obliged to recall        product recall insurance can help businesses
                          pose an increasing threat. Meanwhile, advances      Global companies now sell their products to           products if it emerges that child or slave labor     recover faster. As well as covering recall costs,
                          in product testing could see a rise in litigation   millions. At the same time many manufacturers         has been used during production in the supply        including business interruption, it can also
                          activity in future, as DNA technology makes it      are sourcing components or ingredients from           chain or if there are issues around religious or     protect against other emerging triggers, such as
                          easier to establish the link between an incident    fewer suppliers. This has seen huge increases in      ethical designations, like halal or vegan food, in   malicious tampering. It also provides access to
                          and a company.                                      values of risk and the emergence of a multiplier      order to protect their reputations. → Page 17        crisis management services which can help
                                                                              or “ripple effect” where a single recall can                                                               companies prepare by putting both recall and
                                                                              impact whole industries. The recent recall of                                                              crisis management plans in place and
                                                                              Takata airbags is thought to have affected some                                                            organizing simulations which test a company’s
                                                                              60 to 70 million units worldwide. Managing a                                                               procedures, highlighting areas of improvement.
                                                                              complex global supply chain 24/7/365 poses an                                                              While companies periodically conduct a
                                                                              increasingly difficult challenge. → Page 12                                                                traceability exercise, a full product recall
                                                                                                                                                                                         simulation goes further, incorporating media,
                                                                                                                                                                                         customers and other stakeholders. → Page 22

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PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                                        PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

             INTRODUCTION
              Drivers of the product recall risk landscape.

                                                  Product recall poses an increasing risk            increased significantly over the past              non-food products that pose a safety                    Reported incidences are also on the                      incidents have caused in excess of
                                                  for businesses. In the past such recalls           decade. We are now seeing and                      risk, began. And as recent incidents in                 rise in this sector. Food recalls in the                 $2bn of losses over five years,
                                                  were relatively straightforward and                experiencing recalls on a scale not                the sector involving the likes of flawed                US doubled over a decade, according                      accounting for almost a quarter (23%)
                                                  could often pass unnoticed by the                  seen before, bringing record levels of             airbags, accelerator pedals and                         to reinsurer Swiss Re 2 while there was                  of the value of all claims analyzed 4 .
                                                  public. Today, they are much more                  activity and costs.                                ignition switches (see page 4)                          a 20%+ surge in US and Canadian                          This makes it the major cause of
                                                  complex, with the stakes far higher –                                                                 demonstrate – billion dollar loss bills                 recalls year-on-year in 2016 3, driven                   liability-related losses for businesses
                                                  both in terms of the potential impact to           For example, more cars were recalled               are no longer a rare occurence.                         by pathogens and undeclared                              globally and the third most frequent
                                                  a company’s profits and its reputation.            than ever before in the US during                                                                          allergens. At the same time,                             generator of such claims. The growing
                                                                                                     2016 – the third year in a row this                RISE IN REPORTED INCIDENCES                             introduction of new legislation on the                   number of recalls, and the fact that
                                                  Tougher regulation and harsher                     phenomenon has occurred. According                                                                         labeling of food allergens across the                    such claims are becoming larger and
                                                  penalties, the rise of large multi-                to the National Highway Traffic Safety             The food and beverage sector is                         European Union led to a 60%+                             more challenging to settle due to the
                                                  national corporations and increasingly             Administration, 53.2 million vehicles              another that is particularly exposed.                   increase in recalls in 2016, driven by                   fact that an issue with a component
                                                  complex and consolidated supply                    had to be returned – over three times              As well as having a catastrophic                        mislabeled allergens (see page 14).                      or ingredient can cascade through the
                                                  chains, the socio-economic landscape,              as many as during 2012 (16.5 million).             financial impact, a serious event can                                                                            supply chain, are major contributors to
                                                  increasing threat of litigation,                   This trend is mirrored across Europe.              also endanger public health. One of                     PRODUCT-RELATED RISK LARGEST                             this development.
                                                  technological advances in product                  The total number of automotive recall              the largest recalls in US food history,                 CAUSE OF LIABILITY LOSS
                                                  testing, as well as heightened                     events jumped 76% year-on-year in                  involving contaminated peanuts (see
                                                  consumer awareness – and growing                   2016, according to Stericycle Expert               page 12), began after more than 700                     Analysis of more than 100,000
                                                  use of social media – are just some of             Solutions1 - the highest total recorded            people in over 40 states fell ill. It                   insurance industry claims by AGCS
                                                  the contributing factors which means               since the European Union’s rapid alert             ended with the company responsible                      also shows the increasing risk for
                                                  product recall exposures have                      system (RAPEX), which warns about                  bankrupt and its CEO in prison.                         companies. Defective product/work

                         TOP 10 IMPACTED SECTORS BY PRODUCT RECALLS*: TYPICAL CAUSES OF INSURANCE CLAIMS

                                                                                                                                                                                                                                                                                                   * B ased on value of 367
                                                                                                                                                                                                                                                                                                      AGCS and insurance
                                                                                                                                                                                                                                                                                                      industry product recall
                                                                                                                                                                                                                                                                                                      claims. The average claim
                         1 Automotive/            2 Food/beverage         3 IT/electronics           4. Retail               5. Manufacturing/          6. Medical                  7. Transportation/          8. Domestic                  9. Chemical                 10 Engineering/              is influenced by the
                                                                                                                                                                                                                                                                                                      extreme values in the data
                         industrial supplier      e.g. contamination of   e.g. defective set-top     e.g. loose buttons on   packaging/metal            e.g. faulty syringes/       logistics                   appliances                   e.g. faulty packaging/      construction
                                                                                                                                                                                                                                                                                                      set. For example, in the
                         e.g. faulty electronic   cream; contamination    boxes; faulty batteries    baby clothes; faulty    processing/                tape; voluntary recall      e.g. faulty plant and       e.g. dishwasher recall       labeling chemicals;         e.g. leaking slurry          automotive sector, 57% of
                         steering systems; air    of infant milk;         for tablets; overheating   table; defective        industrial machinery       of stimulants due to        boiler components;          after fire damage;           defective plastic           pipe; defective              claims are below €100,000
                         conditioning unit        undeclared allergens    laptop computer            flashing toy            e.g. defective tow bar;    hazard concerns;            damaged                     exploding washing            panels                      construction dryer           causing a significant
                         outages; defective       in bagged salad                                                            faulty air compressor;     defective skin patches      transformers                machines; tumble                                                                      decrease in the average
                         rear view mirrors                                                                                   defective rail injectors                                                           dryer recall after fire                                                               value. The value of product
                                                                                                                                                                                                                                                                                                      recall claims can be
                                                                                                                                                                                                                                                                                                      significantly higher and
                         Average claim value:     Average claim value:    Average claim value:       Average claim value:    Average claim value:
Claims values in €                                                                                                                                                                                                                                                                                    lower than the average
                         €2.12m                   €1.31m                  €1.1m                      €649,000                €722,000                                                                                                                                                                 values displayed.
Source: Allianz Global                                                                                                                                  1 415 automotive recall events in 2016, RAPEX, Stericycle Expert Solutions
                                                                                                                                                                                                                                                                                                    Claims analysis does not
Corporate & Specialty                                                                                                                                   2 565 US Food and Drug Administration (FDA) recall events in 2014 compared with 240 in 2004, Food Safety In A Globalized World, Swiss Re    include pharmaceutical
                                                                                                                                                        3 7
                                                                                                                                                           64 food recall events in 2016 compared with 626 in 2015 based on FDA, US Department of Agriculture’s Food Safety and Inspection         industry drug recalls.
                                                                                                                                                          Service, Canadian Food Inspection Agency statistics, Food Safety Magazine
                                                                                                                                                        4 1
                                                                                                                                                           00,073 liability insurance claims analyzed between January 1, 2011 and September 13, 2016, Global Claims Review:
                                                                                                                                                          Liability In Focus, Allianz Global Corporate & Specialty
8                                                                                                                                                                                                                                                                                                                              9
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
Engineering/construction                              1%

                                                                                                                                                                                                  Total number of claims analyzed: 367. Sectors impacted expressed as a
 PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                                        PRODUCT
                                                                                                                                                                                                  % of claims received. Other sectors account for
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

PRODUCT RECALL
DRIVERS AND TRENDS
AGCS experts examine eight emerging developments in product recall risk.

                       1. “RIPPLE EFFECT” BEHIND LARGER PRODUCT RECALLS

                       Product recalls are increasing in size and number,                    This “ripple effect” has contributed to a number
                       predominantly driven by the increasing complexity                     of large product recalls recently, most notably in
                       of global supply chains and concentration of                          the food and automotive sectors. For example,
                       certain components or ingredients on a smaller                        in 2016, a recall of sunflower seeds due to
                       number of suppliers, as well as tougher regulation.                   possible listeria contamination impacted
                                                                                             hundreds of products across dozens of brands.
                       Global companies now sell their products to                           Similarly, a 2015 recall of cumin spice
                       millions of consumers. For example, since                             (contaminated by nuts) affected 14 companies,
                       launching the iPhone in 2007, Apple has sold                          100 brands, and 153 individual products, and
                       over a billion units. Meanwhile carmakers VW                          756 products in different packages2 .
                       and Toyota produced over 10 million vehicles
                       apiece in 20161 .                                                     The extent of supply chains in the food sector
                                                                                             was also revealed by the 2008 Peanut
                       At the same time, many manufacturers are                              Corporation of America (PCA) recall – one of the
                       sourcing their components, ingredients or raw                         largest ever – which was sparked by a
                       materials from fewer suppliers, as supply chains                      salmonella outbreak. Although PCA handled
                       become leaner and more global. This has seen                          just 2% of the US peanut supply, its peanuts
                       huge increases in values at risk and the                              found their way into around 4,000 products,
                       emergence of a multiplier or “ripple effect”,                         produced by over 200 different companies. The
                       where a single recall can impact numerous                             recall was estimated to have cost the food                                                                                                                     Photo: Shutterstock
                       manufacturers, brands and countries, causing                          industry some $1bn after an industry-wide 24%
                       reputational damage and large financial losses.                       reduction in peanut sales. Some leading brands        “In the automotive segment we see an                 hit the US automotive industry and is expected
                                                                                             saw sales almost half3, even though they were         increasing number of recalls with higher units,”     to result in some 60 to 70 million units recalled
                                                                                             not implicated. The company had to file for           says Carsten Krieglstein, Regional Head              worldwide, across at least 19 manufacturers 4 .
                                                                                             bankruptcy.                                           Liability Central & Eastern Europe, AGCS.            Costs have been estimated at close to €25bn. 5
7 REASONS RECALLS ARE RISING:                                                                                                                      “This is driven by factors such as automotive
                                                                                             In the automotive sector, large airbag and            engineering becoming more complex, faster            “A previously innocuous product can result in
– Increasing product safety regulation                                                       ignition switch recalls have rippled through the      speed-to-market, leaving less time for product       billions of financial losses for a sector without
                                                                                             supply chain, affecting millions of units across      testing, outsourcing of research and                 any recourse,” says John Turner, Director of
– Complex and consolidated supply chains                                                     multiple brands and countries.                        development to first and second tier suppliers,      Crisis Management at McLarens, a global loss
– Technological advances in testing                                                                                                                as well as increasing cost pressures. Modular        adjusting company.
– Identification of new pathogens                                                            “Today the automotive supply chain is totally         strategies of original equipment manufacturers
                                                                                             different to 15 or 20 years ago. Consolidation in     (OEM) means the number of recalled units is          “Companies are usually confident in their ability
– Economic pressures/cost-cutting                                                            the automotive industry has brought efficiencies      likely to increase further.                          to manage their own risks but it’s a different
– Rise in consumer awareness/use of social media                                             but it has also increased product recall risk,”                                                            story when it comes to suppliers. You just can’t
–R etailer/original equipment manufacturer                                                  explains Christof Bentele, Head of Global Crisis      “The technological shift in the automotive           manage a complex global supply chain
                                                                                             Management, AGCS.                                     industry towards electric and autonomous             24/7/365. That is a big driver for buying
  (OEM) pressure
                                                                                                                                                   mobility (see page 21) will create further           protection such as product recall insurance.”
                                                                                                                                                   recall risks.”

                       1   Toyota set to remain world’s largest automaker, Forbes, January 10, 2017                                                The recall involving Japanese airbag manufacturer
                       2   The Multiplier Effect Strikes Again, Stericycle Expert Solutions
                       3   Peanut Outlook – Impacts of the 2008-09 Foodborne Illness Outbreak Linked to Salmonella, US Department of Agriculture   Takata illustrates just how concentrated recall
                       4   Takata Airbag Recall - Everything You Need to Know, Consumer Reports, July 14, 2017                                     risk has become. The recall is the largest ever to
                       5   Takata puts worst-case airbag recall costs at $24bn, Bloomberg, March 30, 2016
12                                                                                                                                                                                                                                                                          13
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                               PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE
                                                                                                                                                     Photo: Shutterstock

                           2. TOUGHER CONSUMER REGULATION BRINGS MORE RECALLS

                           In response to a number of high-profile recalls                Meanwhile, the number of product recalls in the
                           and rising consumer expectation around                         UK hit a record high in 2015/16, increasing 48%
                           product quality and safety, regulatory scrutiny                on the previous year, according to analysis of
                           has been increasing around the world. Many                     statistics by law firm Reynolds Porter
                           countries have implemented stricter product                    Chamberlain (RPC). The increase was also seen
                           safety laws (see graphic).                                     in consumer goods, automotive and
                                                                                          pharmaceuticals but was particularly acute in
                           “There is now much more attention on how                       the food sector, driven in part by new EU
                           companies deal with defective or contaminated                  legislation on the labeling of food allergens. The
                           products, how responsive they are and how                      number of recalls of food and drink products
                           resilient their product safety systems are,” says              involving mislabeled allergens increased by 62%
                           Christof Bentele, Head of Global Crisis                        in 2015/161 following its introduction.
                           Management, AGCS. “More than ever, consumers
                           are also part of the agenda and are driving                    Product safety regulation has also been
                           company behavior by making their choices                       increasing for automotive and consumer goods.
                           subject to how companies deal with crises.”                    For example, the 2008 Consumer Product Safety
                                                                                          Improvement Act in the US introduced whistle-
                           Authorities are now far more proactive,                        blower protections and new testing
                           particularly in the food sector. Following a                   requirements for substances, such as lead, in
                           number of fatal outbreaks in the US, the Food                  consumer products.                                                               3. U
                                                                                                                                                                               NDECLARED ALLERGENS, TOXINS AND ENVIRONMENTAL CONTAMINATION:
                           Safety Modernization Act (FSMA), signed into                                                                                                       THE RISE OF NEW RECALL TRIGGERS
                           law in 2011, has resulted in the most sweeping                 “Whether it is the US, Europe or Asia, when the
                           reform of food safety laws in more than 70                     regulatory bar is raised, it creates a risk zone.                                Typically, a product recall is triggered by safety                     Meanwhile, toxins in consumer products, in
                           years. It sees a big shift in regulatory focus –               Companies have a mixed ability to maintain                                       concerns that could cause harm or cause bodily                         many cases imported from Asia, have been
                           from reaction to prevention – giving the US Food               higher standards and adapt their safety culture,                                 injury, although there are many reasons why a                          another cause of concern in recent years. Lead,
                           and Drug Administration (FDA) greater powers                   and this increases risk,” says John Turner,                                      company might recall a product.                                        arsenic and cadmium have been found in toys,
                           to investigate and order recalls. In the wake of a             Director of Crisis Management at McLarens.                                                                                                              jewelry and cosmetics, leading to a number of
                           contamination scandal involving infant milk,                                                                                                    During 2016, a number of major food recalls                            recalls and a tightening of safety regulations. In
                           China also made significant revisions to its Food                                                                                               were sparked by undeclared allergens and                               2007, Fisher-Price 3 recalled 1.5 million toys
                           Safety Law in 2015.                                                                                                                             bacterial contamination (in particular listeria,                       worldwide due to a potential lead poisoning
                                                                                                                                                                           but also E. coli and salmonella). For example,                         hazard, while cadmium in children’s jewelry
                                                                                                                                                                           listeria found in soft cheeses, frozen vegetables,                     made in China has resulted in a string of recalls
                                                                                                                                                                           ice cream, apples and cantaloupes have all                             by retailers in recent years.
RECENT REGULATIONS AND NETWORKS IMPACTING                                                                                                                                  caused large recalls in the US in recent years.
THE PRODUCT RECALL LANDSCAPE INCLUDE:                                                                                                                                                                                                             Environmental contamination has also triggered
                                                                                                                                                                           Across North America and Europe, allergens                             several large recent recalls, as chemicals and
                           • E
                              uropean Union                                                                                                                               have become a significant public issue – around                        plastics used in industry and agriculture have
                             RAPEX; European Consumers Product Safety and Market Surveillance                    • J apan                                                 15 million Americans are said to have food                             found their way into food.
                             Regulation; EU Food Information for Consumers Regulation                               Food Safety Basic Law; Food                            allergies1 . In fact, undeclared allergens are fast-
                                                                                                                    Sanitation Law; Food Labeling
• C
   anada
                                                                                                                    Law; Product Liability Law;
                                                                                                                                                                           emerging as the primary cause of food recalls in                       In August 2017, insecticide found in Dutch eggs
  Safe Food for                                                                                                                                                            the US. In the first quarter of 2015, 95% of recalls                   triggered a massive recall of egg products in 16
                                                                                                                    Consumer Product Safety Act
  Canadians Act
                                                                                                                                                                           were due to undeclared allergens, with 91%                             European countries and as far afield as China.
                                                                                                                                                                           attributed to undeclared nut/peanuts2 .                                Early estimates suggested that Dutch chicken
                                                                                                                      • C
                                                                                                                         hina                                                                                                                    farmers suffered losses of almost $40m in that
• U
   S                                                                                                                   Food Safety Law; Auto                              Undeclared allergen recalls (typically involving                       month alone as a result 4 . In China, there have
  Consumer Product                                                                                                      Recall Regulations
                                                                                                                                                                           nuts, milk, wheat and soy) are often a result of a                     also been a number of recalls due to heavy
  Safety Improvement
  Act; Food Safety
                                                                                                                                                                           simple manufacturing error, such as mislabeling,                       metals getting into food.
  Modernization Act;                                                                                             • T
                                                                                                                    aiwan                                                 mispackaging or unintentional cross-
  US TREAD Act                                                                                                     Agricultural Production and                             contamination. But they can also be the result of                      Micro- and nano-plastics are another potential
                                                                                                                   Certification Act; Health Food
                                                                                                                   Control Act; and Food Safety
                                                                                                                                                                           food fraud (see page 16).                                              source of environmental contamination. Tiny
                                                                                                                   Protection Fund Act                                                                                                            particles of plastic, invisible to the naked eye,
                                                                                                                                                                                                                                                  have been found in seafood, table salt, honey,
                                                                                                                                                                                                                                                  sugar and beer.
                                                             • S
                                                                ingapore                            • S
                                                                                                        outh Korea
                                                               Consumer Protection (Safety             Food Safety Basic Act; Food Sanitation Law;
                                                               Requirements) Regulations; Consumer     Functional Health Food Act; Consumer
Source: Allianz Global Corporate & Specialty                   Protection (Consumer Goods Safety       Protection Act; Agricultural and Fishery
                                                               Requirements) Regulations               Products Quality Control Act                                        1   Centers for Disease Control and Prevention
                                                                                                                                                                           2   Stericycle Recall Index US Q1, 2015
                                                                                                                                                                           3   Mattel recalls nearly 100,000 toys after lead paint alert, The Guardian, August 3, 2007
                           1 UK product recalls reach new high – up 48% in a year, RPC                                                                                     4   Contaminated eggs cost Dutch chicken farmers 33 million euros, Reuters, August 23, 2017
14                                                                                                                                                                                                                                                                                                    15
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                              PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                                                   WHAT’S IN YOUR SHOPPING BASKET?
                                                                                                                                                                   The food and beverage sector is particularly prone to product recalls
                                                                            4. IMPACT OF ECONOMIC PRESSURES AND                                                   and contamination issues. Based on reported insurance claims, here
                                                                               THE GROWTH OF FOOD FRAUD                                                            are some of the most potentially dangerous items on your shopping list.

                                                                            Economic pressures continue to bite across
                                                                            many sectors, putting a growing number of
                                                                            companies and supply chains under pressure. In
                                                                            some cases this is leading to increasing risk of
                                                                            human error and criminal activity. Tougher
                                                                            trading conditions can lead to companies
                                                                            sourcing cheaper suppliers or cutting back on                     SINGLE CREAM                SWEETS                      INFANT MILK                  GREEN BEANS         COOKIES
                                                                            experienced personnel. It can also tempt                          Recall risk:                Recall risk:                Recall risk:                 Recall risk:        Recall risk:
                                                                            individuals into acts of fraud, such as using                     bacteria                    plastic in                  bacteria                     insect              bacteria
                                                                            inferior or cheaper ingredients or components.                    contamination               packaging                   contamination                contamination       contamination

                                                                            Food fraud, including economic adulteration
                                                                            and counterfeiting, is a growing risk. And from
                                                                            olive oil to wine, to honey to cinnamon, it is big
                                                                            business. Organized crime groups mix foods
                                                                            with cheaper ingredients or sell inferior products
                                                                            as genuine. At the same time some businesses                      COCONUT DRINK               BREAD                       BAGGED SALAD                 CANNED PRUNES
                                                                            can be tempted to commit fraud by the need to                     Recall risk:                Recall risk:                Recall risk:                 Recall risk:
                                                                            boost profits. Notable incidents include the 2008                 lack of                     glass in                    undeclared                   rubber in can
                                                                            infant milk scandal in China, where milk powder                   sterilization               packaging                   allergens                    packaging
                                                                            was deliberately adulterated with melamine,
                                                                            and the 2013 horse meat scandal in the UK. The
                                                                                                                                              Based on analysis of 367 standalone product recall claims.
                                                                            latter involved a massive recall after a                          Source: Allianz Global Corporate & Specialty
                                                                            manufacturer mixed imported horse meat with
                                                                            beef before selling its products as 100% beef.

                                                                            “Food fraud has become a major issue that has
                                                                            resulted in large recalls, reputational damage       5. T HE RISE OF NON-SAFETY RECALLS AND LONGER TAIL EVENTS
                                                                            and major losses,” says Christof Bentele,
                                                                            Head of Global Crisis Management, AGCS.              Non-safety recalls have become something of a                        Product recall exposures are also becoming
                                                                            “The horse meat scandal is a perfect example,        phenomenon in recent years. These can involve                        longer-lasting. For example, frozen food has not
                                                                            but we have seen similar issues with organic         the use of child or slave labor during production,                   historically been associated with product recalls,
                                                                            foods, religious foods and milk powder. While        issues around labeling, food fraud and religious                     but in 2016 some 456 consumer products sold
                                                                            some of these food fraud cases can be                or ethical designations, like halal or vegan food.                   under 42 separate brands1 were recalled after
What is economic adulteration?
                                                                            addressed by insurance, the majority of resulting    When consumer expectations are not met in                            frozen vegetables from US-based producer CRF
The fraudulent, intentional substitution or
addition of a substance in a product for
                                                                            losses are uninsured. The insurance market is        such areas, companies often feel obliged to                          Frozen Foods were found to contain listeria. The
the purpose of increasing its value or                                      looking for solutions to address this.”              recall products in order to protect their                            nature of frozen food means any contamination
reducing production costs.                                                                                                       reputations.                                                         only emerges once the food is consumed, which
                                                                            At the same time, the trend for shorter product                                                                           may be many months after it was produced,
Since 2012, there have been more than                                       development cycles means less time to test           UK and US retailers withdrew food products                           particularly given best-before dates have been
200 class action law suits in the US                                        products or to fully understand the health           after media reports revealed that certain fish                       creeping up to as long as 24 months for some
against food and beverage companies                                         implications of new materials and ingredients.       products could be traced back to boats using                         products.
regarding allegedly deceptive labelling.1                                   For example, the use of Bisphenol A (BPA) in         slave labor in Asia. In 2015, US and European
                                                                            food packaging was not an issue 10 years ago.        confectionary companies were accused of using                        In the automotive sector, US regulations now
                                                                            Today, there are questions over its potential        cocoa produced with child labor.                                     require manufacturers to attempt a 100% recall
                                                                            impact on human health and the environment.                                                                               rate over a period of at least 15 years. A recent
                                                                            Recent years have also seen increasing health        “There will be incidents when there is no legal or                   ignition switch recall affected millions of
                                                      Photo: Shutterstock   concerns about the use of chemical solvents          regulatory requirement to recall but it is the right                 vehicles, some as old as 18 years old. Notifying
                                                                            known as phthalates, which are used in toys,         thing to do. This is a genuine business risk that                    consumers and repairing older vehicles is more
                                                                            cosmetics and other products.                        companies have to be prepared for,” says                             complex and expensive than for newer vehicles.
                                                                                                                                 Christof Bentele, Head of Global Crisis
                                                                                                                                 Management, AGCS.

1 Swiss Re Institute                                                                                                             1 FDA Investigated Listeria Outbreak Linked To Frozen Vegetables, US Food & Drug Administration
16                                                                                                                                                                                                                                                                                   17
PRODUCT RECALL MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE - Loss Trends and Product Recall Claims Analysis Risk Mitigation Crisis Management ...
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                            PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                                7. G
                                                                                                                                                    ROWTH OF PRODUCT RECALLS AND INSURANCE IN CHINA AND ASIA

                                                                                                                                                Products from Asia continue to account for a                       safety regulation and consumer expectations
                                                                                                                                                disproportionate number of recalls in the US                       are rising. Government-led recalls are becoming
                                                                                                                                                and Europe, reflecting the eastwards shift in                      more common – particularly in China. Recall
                       6. G
                           OING VIRAL - THE EXACERBATING EFFECT OF SOCIAL MEDIA FOR IMPACTED                                                   global supply chains and historically weaker                       numbers are also on the rise elsewhere, with
                          AND “INNOCENT” FIRMS                                                                                                  product quality controls in a number of countries                  Singapore and the Philippines among those
                                                                                                                                                across the region.                                                 seeing increased activity.
                       Social media is a double-edged sword when it         “Social media is a real game-changer,” says
                       comes to recalls. It can be a fast and effective     Stewart Eaton, Head of Product Recall,                              According to the US-China Economic and                             “More and more Asian companies realize that
                       way of communicating with customers, help            Regional Unit London, AGCS. “An erroneous                           Security Review Commission, Chinese goods                          buying product recall insurance makes sense,
                       early identification of issues and aid restoring     post or tweet can cause reputational damage                         accounted for 23% of all goods in the US in 2014,                  even when they only operate domestically,” says
                       brand and reputation following an incident.          and directly impact the size of a recall. Social                    but represented 51% of all product safety                          AGCS’ Bentele. “It is hard for any company to
                                                                            media adds a whole new dimension to product                         recalls. Meanwhile, China’s share of US toy                        survive in a market with a bad or faulty product.
                       However, it can also exacerbate product recall       recall losses, meaning companies need to react                      recalls rose from 10% in 1988 to 98% in 20071 . In                 That is as true for Asia as anywhere else.”
                       risk if it is not well managed and can be used as    much faster.”                                                       2015 China accounted for 2,124 product recall
                       an outlet for disgruntled customers and groups.                                                                          cases in the US, compared with 685 from US
                                                                            Research also shows that social media can even                      companies. 2 The country also accounted for 62%
                       Bad news travels fast and a situation can rapidly    impact “innocent” brands. A study analyzing                         of the product safety alerts issued by the
                       escalate and become out of control. Even a           1,000 automotive social media sites following                       European Union in 2015. 3
                       relatively small recall can become a major crisis.   recall announcements involving four
                       Social media channels can quickly spread false       manufacturers revealed a sharp increase in                          “There is a clear link between product recall
                       or fraudulent information, which can be              negative comments about “innocent” brands in                        claims and the shift in manufacturing to Asia
                       detrimental to a company’s brand.                    addition to those directly impacted by the recall                   and China. Product quality management levels
                                                                            event; a phenomenon the study called a                              in Asia are improving but they are not yet up
                                                                            “perverse halo”1 - a perception that others                         with the levels seen in the US and Europe,” says
                                                                            share the problem of the car being recalled.                        Christof Bentele, Head of Global Crisis
                                                                                                                                                Management, AGCS.
                                                                            This phenomenon can also impact the bottom
                                                                            line. Researchers aggregated car models across                      Asia is still a relatively small market for product
                                                                            each analyzed brand and found that the                              recall insurance, compared with North America
                                                                            negative comments sparked by a rival brand’s                        and Europe. But while Asian companies once
                                                                            recall also erased $7.3m, on average, from an                       only purchased product recall insurance for
                                                                            “innocent” firm’s market cap over just six days.                    exports to the US and Europe – especially in the
                                                                                                                                                automotive sector – many are now starting to
                                                                            “If not well managed, social media can mean a                       buy cover for their home markets, where product
                                                                            company has less control of a crisis, but if social
                                                                            media is approached in a professional and
                                                                            sensitive way, it can actually help keep a recall
                                                                            under control,” says AGCS’ Eaton.

                                                                                                                                                                                                                                                                                     Photo: Shutterstock

                                                                                                                                                1 China Product Recalls: What’s at Stake and What’s Next, NERA Economic Consulting
                                                                            1 Social media amplifies damage of product recalls to firms - and   2 Consumer Product Safety Commission
                                                                            their rivals, University of Washington Foster School of Business    3 Toys and Clothing Top The List of Dangerous Products Detected in 2015, European Commission
18                                                 Photo: Shutterstock                                                                                                                                                                                                                               19
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                                PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                                                                                                                             GENOME SEQUENCING:
                                                                                                                                                                                                                                             TECHNOLOGY IMPROVES TRACEABILITY
                                                                                                                                                                                                                                             New technology is also making it
                                                                                                                                                                                                                                             easier for regulators and manufacturers
                                                                                                                                                                                                                                             to trace products and identify liable
                                                                                                                                                                                                                                             parties. For example, advances in
                                                                                                                                                                                                                                             genome-sequencing technology are
                                                                                                                                                                                                                                             providing food safety regulators with
                                                                                                                                                                                                                                             a powerful new tool to identify
                                                                                                                                                                                                                                             sources of contamination or food-
                                                                                                                                                                                                                                             borne illness outbreaks, such as
                                                                                                                                                                                                                                             listeria and salmonella.

                                                                                                                                                                                                                                             “This is an exciting advance,” says
                                                                                                                                                                                                                                             Marcos Garcia Norris, Crisis
                           8. “ CYBER RECALL” - TECHNOLOGY AND INNOVATION TO DRIVE RISKS                                                                                                                                                    Management Regional
                              AND CLAIMS OF THE FUTURE                                                                                                                                                                                       Practice Group Leader, North
                                                                                                                                                                                                                                             America, AGCS.
                           Advancements in technology are both a boon                           introduction of innovative but untested                             Recalls involving emerging technologies are
                           and a challenge for product recall. On the one                       advances, such as artificial intelligence,                          also likely to be even larger and more complex                           The Food and Drug Administration
                           hand, they offer an opportunity to improve the                       nanotechnology or biotechnology.                                    than today. Widespread introduction of                                   (FDA) in the US is using genome
                           quality and traceability (see column) of                                                                                                 autonomous driving in future, for example, is                            sequencing to match pathogens found
                           products. On the other, they create new risks.                       “Cyber is currently an underestimated risk for                      likely to see a shift in liability from individuals to                   in sick patients with those found in food
                                                                                                product recall,” says AGCS’ Bentele. “We have                       product manufacturers, a move that could                                 or production facilities. It also uses
                           “What we see today in supply chain                                   already seen incidents of recalls for cyber                         potentially see an increase in recall risk. If a                         technology to track down the root
                           management would not have been thought                               security vulnerabilities in products like cars and                  series of accidents raises safety concerns for the                       source of contamination by identifying
What is genome
sequencing?                possible even five years ago. The speed of                           cameras. Concern about automation and                               artificial intelligence technology behind                                exactly which ingredient is responsible
The process of             development and the potential for                                    machine learning is also likely to be                               driverless cars, it could trigger a massive recall.                      for an outbreak and where in the world
determining the
                           improvements in product safety have been                             accompanied by an increase in product risk.”                                                                                                 the contaminated ingredient may have
complete DNA sequence
of an organism’s           quite amazing,” says Christof Bentele,                                                                                                   New technology will raise interesting questions                          originated. Genome-sequencing helped
genome at a single time.   Head of Global Crisis Management at AGCS.                            In 2015, Chrysler recalled 1.4 million vehicles to                  around liability and insurance.                                          trace a large listeria outbreak to soft
                                                                                                fix a software flaw revealed by security                                                                                                     cheese manufactured by a New York-
AGCS works with SGS, a
leading inspection         Manufacturing plants are now mostly                                  researchers while webcams2 were recalled                            “How will insurance policies interact, including                         based company in March 2017. The
company, to utilize full   automated. And while automation should                               following a cyber-attack in 2016. In August 2017,                   product liability, recall and cyber? As yet there                        FDA was able to match the genetic
genome sequencing and
                           increase efficiency and reduce human error, it                       the FDA 3 ordered a recall of almost 500,000                        are no definite answers,” says AGCS’ Bentele.                            fingerprint of the listeria bacteria
DNA testing, when
companies want to          also introduces the risk of a cyber-attack.                          pacemakers in the US to patch cyber security                                                                                                 found in a number of ill patients with
understand the root        Motivated by extortion or malicious intent,                          vulnerabilities.                                                    Already used to manufacture products ranging                             samples taken at the production
cause of a product
                           hackers could theoretically change or                                                                                                    from aircraft parts to food, pharmaceuticals and                         facility. It ordered production to be
contamination. This can
help enable businesses     contaminate a product at the point of                                “There are huge pressures to get innovations                        human tissue, 3D printing is another area that                           ceased and all products were recalled.
to take recourse against   manufacture by controlling machinery or                              and advances in material sciences, artificial                       could change recall exposures.
suppliers and gather
                           changing processes. For example, the US                              intelligence and biotechnology to market. And                                                                                                POTENTIAL RISE IN LITIGATION
evidence for authorities
and customers in case of   Department of Homeland Security (DHS)                                while fast-evolving technology is good news for                     “Future product recalls will come from new                               However, increasing use of such DNA
an incident.               recently warned that syringe pumps used in                           the efficiency of products, it also produces new                    areas,” says Stewart Eaton, Head of Product                              technology could result in an increasing
                           hospitals around the world have flaws hackers                        recall risks,” says AGCS’ Bentele.                                  Recall, Regional Unit London, AGCS. “As                                  appetite for litigation in future, due to
                           could exploit to change the dosages being                                                                                                insurers, we have to keep abreast of emerging                            it becoming easier to establish the link
                           delivered to patients.1                                              “Failures can happen when there is a shortage                       technology issues, such as nanotechnology or                             between illness and an individual
                                                                                                of time and not enough testing. This is also                        3D printing, to ensure we are able to respond                            company. Conversely, it could also
                           Technology itself is likely to become a bigger                       where human error creeps in. And that increases                     and be proactive.”                                                       result in faster claims settlement
                           driver of product recalls in the future, whether                     the risk of a recall.”                                                                                                                       because of swifter identification of
                           it’s recalls around cyber security or the                                                                                                                                                                         contaminated products.

                           1 Security warning over hospital syringe pumps, BBC, September 12, 2017
                           2 Chinese firm recalls webcams, Daily Mail, October 24, 2016
                           3 Firmware Update to Address Cybersecurity Vulnerabilities Identified in Implantable Cardiac Pacemakers, US Food & Drug Administration
20                                                                                                                                                                                                                                                                                     21
PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                                                PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                                       “The key to how fast and how well a recall works            “’Pre-incident’ training needs to be fine-tuned or

PREVENTING
                                                                                                                                                       is; prepare, prevent and practice,” adds Marcos             a recall could result in a disaster. In the military,
                                                                                                                                                       Garcia Norris, Crisis Management Regional                   for example, if an army unit is going to do a
                                                                                                                                                       Practice Group Leader, North America, AGCS.                 beach landing it knows there is a chance it
                                                                                                                                                       “A company that is well prepared will have the              could be ambushed, so it prepares accordingly.
                                                                                                                                                       information in advance that there is the                    The same approach needs to apply in a product
                                                                                                                                                       potential for a recall, such as chemical analysis           recall. If unprepared, anything can happen.”
                                                                                                                                                       results and checks etc., and will therefore have

A CRISIS
                                                                                                                                                       time to warn authorities and consumers.

                                                                                                                                                       2: DISCOVERY

                                                                                                                                                       The speed with which a company identifies and               Companies should constantly monitor a wide
                                                                                                                                                       acts upon a potential issue can have a                      range of indicators to establish if something might
                                                                                                                                                       significant impact on the size of a recall and its          have gone wrong as early as possible. For example,

FIVE KEY STEPS TO MANAGING A RECALL                                                                                                                    impact. Every recall is different, but the first few
                                                                                                                                                       hours are particularly crucial when consumer
                                                                                                                                                       safety and a company’s reputation are at stake.
                                                                                                                                                                                                                   monitoring social media can be a good way to
                                                                                                                                                                                                                   find out what customers are saying. Customer
                                                                                                                                                                                                                   help lines and other forms of feedback can also
                                                                                                                                                       Discovering a problem does not mean just                    be tracked to see if complaints have spiked.
                                                                                                                                                       waiting for a call from the regulator or a
WHEN A PRODUCT’S SAFETY                                   1: PREPARATION                                                                               supplier. Frequent product testing is critical to           “Perception is everything. Everyone wants to see
COMES INTO QUESTION, TIME IS                                                                                                                           identifying potential issues early and therefore            a company do the right thing. And a poorly
                                                          Pre-event preparation and planning can have a big impact on the                              limiting the size of a recall – infrequent testing          managed recall can quickly get out of control.
EVERYTHING – PARTICULARLY IN                              size of a recall and the extent of financial and reputational damage.                        will mean more products find their way to                   So how you handle the initial stages of a recall
THE DIGITAL AGE. DECISIONS                                                                                                                             market before a problem is apparent.                        is critical,” says AGCS’ Eaton.
                                                          “Around 75% of our work is pre-event crisis consultation, testing
NEED TO BE MADE QUICKLY, BUT                              protocols and recall plans and running scenarios to put the crisis
ILL-JUDGED ONES CAN ADD COST                              team through its paces,” says Christof Bentele, Head of Global
AND DAMAGE REPUTATION.                                    Crisis Management at AGCS.                                               FROM A POORLY-MANAGED RECALL TO A SUCCESSFUL RECALL IN FIVE KEY STEPS

RESPONSE CAPABILITY IS VITAL                              Product recall insurance (see page 26) gives access to crisis                          POORLY-MANAGED RECALL                                                     WELL-MANAGED RECALL
IN FIGHTING THE SIZE OF A                                 management consultants who are experts, having experienced
                                                          recalls first hand. For example, AGCS works with red24, a leading risk               NO                                                                                              A clear recall plan is in place with
PRODUCT RECALL CLAIM. A                                   and crisis management specialist, with operating experience in over
                                                                                                                                                                  Unclear roles and
                                                                                                                                                                                                               RECALL                          defined roles and responsibilities.
COMPANY THAT EMBRACES                                     120 countries. These consultants can use this expertise to help a
                                                                                                                                           RECALL        1        responsibilities due to no recall
                                                                                                                                                                  plan or insurance in place                PLANNING                1          Tracing and mock recalls have
                                                                                                                                             PLAN                                                                                              been carried out
CRISIS MANAGEMENT AND                                     company prepare for a potential situation, putting both recall and
                                                          crisis management plans in place. Plans need to be implemented
MAKES IT PART OF ITS DNA IS                               and tested at least annually.                                                                                                                                                        On discovery of potential
                                                                                                                                                                  Initial discovery of potential
                                                                                                                                           FIRST                                                                FIRST
FAR LESS LIKELY TO SUFFER A                                                                                                           DISCOVERY          2        defect in products but no one is
                                                                                                                                                                                                           DISCOVERY                2
                                                                                                                                                                                                                                               issue company acts
                                                                                                                                                                                                                                               immediately, putting tested
                                                          They can also organize product recall simulations to test a                                             sure how to proceed
MAJOR INCIDENCE.                                          company’s recall and crisis management procedures, which help
                                                                                                                                                                                                                                               recall plan into action

                                                          familiarize people with the plan and crisis consultants, as well as
                                                                                                                                                                                                                                               Further investigation begins
                                                          highlighting areas of improvement. While companies will periodically                                    Company tries to keep issue
                                                                                                                                                                                                                                               in collaboration with crisis
                                                          conduct a traceability exercise, a full product recall simulation goes        REACTIVE                  quiet and continues to sell
                                                          further, incorporating social and traditional media, customers and           RESPONSE          3        product. Results in chaos within
                                                                                                                                                                                                      INVESTIGATION                 3          management consultants.
                                                                                                                                                                                                                                               Cause of issue discovered.
                                                                                                                                                                  company and market
                                                          other stakeholders.                                                                                                                                                                  Resolution agreed

                                                                                                                                                                                                                                               Clear announcement made
                                                          “How a recall is handled can impact the size of the recall but also               SOCIAL                Online complaints handled                                                    by company. Multi-channel
                                                          the potential damage, including the potential for litigation, loss of                                                                             COMPANY
                                                                                                                                             MEDIA       4        poorly or ignored. Issue                                          4          communication ensures

             70%                                          customers and the impact on brand value and reputation,” says
                                                          Stewart Eaton, Head of Product Recall, Regional Unit London, AGCS.
                                                                                                                                           IMPACT                 escalates and goes “viral”                  RECALL                           maximum number of
                                                                                                                                                                                                                                               customers reached

                                                          “Many companies are still woefully inadequate when it comes to                                          Incidents continue. Regulator
                                                                                                                                                                                                                                               Customers and media recognize
                                                          preparing for a recall, but crisis management services that are            REGULATOR                    orders forced recall. Company              POSITIVE
                                                          included with specialty recall insurance give you invaluable             INVOLVEMENT           5        investigated for continuing to            FEEDBACK                5          how well-managed recall
                                                                                                                                                                                                                                               process has been
                                                                                                                                                                  sell product
                                                          guidance when you do not know what to do,” says
70% of recall plans are estimated to be inadequate 1
                                                          John Turner, Director of Crisis Management at McLarens.
                                                                                                                                   Cons Significant impact on profits; Brand damaged;                 Pros No significant impact on profits; No loss of key
                                                                                                                                   Production plants closed down; Loss of client; Legal               clients or impact on brand value; Normal service resumes
                                                          1 Allianz Global Corporate & Specialty                                   action from regulator and consumer                                 Source: Allianz Global Corporate & Specialty
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PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                                                                                                                             PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                                                                                                         CRISIS MANAGEMENT SUPPORT:
                                                                                                                                                                         7 WAYS IT CAN HELP

                                                                                                                                                                         –   Crisis scenario planning and preparation
                                                                                                                                                                         –   Product recall and traceability
                                                                                                                                                                         –   Product testing
                                                                                                                                                                         –   Legal support
                                                                                                                                                                         –    Regulatory liaison
                                                                                                                                                                         –   Crisis communications expertise
                                                                                                                                                                         –   Malicious product tampering
                                                                                                                                                                               investigations and support

                                                                                                                                        4: COMMUNICATION                                       5. RECOVERY

                                                                                                                                        The hallmark of a good recall is timely and            Recalling a product is a logistical operation, but
                                                                                                                                        honest communication. Early and informed               equally as important is to return the business to
                                                                                                                                        notification is key, especially given the potential    normal as quickly as possible. A well-managed
                                                                                                                                        for bad news to go viral via social media.             recall will proactively work to rehabilitate the
                                                                                                                                                                                               brand and return sales to pre-recall levels.
                                                                                                                                        Relationship management comes to the fore in
                                                                                                                                        a recall. Ongoing regular communication with           Follow-up communication with customers,
                                                                                                                  Photo: Shutterstock   customers and stakeholders, like regulators, will      directly or through social media, can help
                                                                                                                                        help smooth the process.                               restore confidence. Offering customers a reward
                       3: ACTION                                                                                                                                                               for their loyalty, such as vouchers or money off
                                                                                                                                        Recall rates in some sectors remain low,               future purchases, can also help boost sales. For
                       Making an informed decision in a recall situation      A good well-rehearsed crisis management plan              especially food and beverage where products            example, following the recall of Samsung’s
                       is critical, and is an area where planning can         will, however, help make the decision-making              are quickly consumed or disposed of. But good          Galaxy Note 7 smart phone, the company
                       really pay off. Ultimately, a company will need to     process smoother. By working through recall               and timely communication should help                   offered customers a sizable discount on pre-
                       make the call whether their product is at fault        scenarios in advance, the right people should be          maximize the recall rate. Today, there are a wide      orders of the Galaxy Note 8 model when it
                       and if it needs to be recalled. This decision is not   prepared and in a position to make more                   range of communication channels available to           launched a year later.
                       always black and white.                                informed decisions.                                       inform the public of a recall, but not all
                                                                                                                                        companies make full use of them.                       “Being upfront and transparent is the best
                       Senior managers will be under immense                  “Deciding whether or not to trigger a recall is a                                                                policy. If a company says that it is sorry and
                       pressure to take a snap decision, even when all        difficult and time-pressured decision, especially         “Withholding facts and dishonesty will not make        makes a goodwill gesture then customers are
                       the facts are not known – it may not be clear          when the company’s brand and reputation                   a potential recall go away. It will only make the      more likely to remain loyal. And these additional
                       their product is at fault, or they may not have        hang in the balance. But it is more likely that the       situation worse,” says John Turner, Director of        costs of rehabilitating the brand can be covered
                       had time to carry out the necessary testing.           right decision will be made if the process is             Crisis Management at McLarens. “Be upfront             by product recall insurance,” concludes Stewart
                                                                              planned and rehearsed,” says Stewart Eaton,               and honest. No one likes the perception that a         Eaton, Head of Product Recall, Regional Unit
                                                                              Head of Product Recall, Regional Unit                     company is being underhanded.”                         London, AGCS.
                                                                              London, AGCS.

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PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE                         PRODUCT RECALL: MANAGING THE IMPACT OF THE NEW RISK LANDSCAPE

                                                                                           Not to be confused with product liability
                                                                                           insurance – which covers the third party liabilities

           THE ROLE OF
                                                                                           arising from a faulty product – specialist product
                                                                                           recall insurance is designed to help manage the
                                                                                           considerable costs of a recall and limit
                                                                                           reputational damage. Coverage is tailored to
                                                                                           meet the needs of different industry sectors.

           INSURANCE
                                                                                           Demand for product recall insurance has been
                                                                                           increasing over the past decade with greater
                                                                                           awareness of the potential for reputational
                                                                                           damage and significant financial loss.

                                                                                           Take-up has been highest in the food and
                                                                                           beverage sector, reflecting high levels of

           FINANCIAL AND
                                                                                           regulation and the size of companies relative to
                                                                                           the exposures. However, automotive, consumer
                                                                                           goods, pharmaceutical and medical device
                                                                                           manufacturers are also typical buyers.

           REPUTATIONAL                                                                    Product recall insurance covers the cost of a
                                                                                           recall and crisis management consultants.

           RECALL PROTECTION
                                                                                           “For most businesses crisis management
                                                                                           services can be of huge assistance,” says
                                                                                           Marcos Garcia Norris, Crisis Management
                                                                                           Regional Practice Group Leader, North
                                                                                           America, AGCS. “Few people have the expertise
                                                                                           to know what to do in a recall, especially given
                                                                                           changing regulations.”

                                                                                           Crucially it can also cover business interruption
                                                                                           losses and associated additional costs of
                                                                                           working. If, for example, a listeria outbreak
                                                                                           forces a food company to close a plant and
                                                                                           cease production, insurance can cover the cost
                                                                                           of using an alternative plant or competitor to
                                                                                           produce the goods.

                                                                                           Product recall insurance typically responds when
                                                                                           a product causes actual bodily injury or property
                                                                                           damage, or poses an imminent risk of doing so.
                                                                                           But it can also be extended in some circumstances
                                                                                           to include other triggers, such as malicious
                                                                                           tampering in the food and beverage sector.

                                                                                           In the automotive sector, the main trigger is
                                                                                           typically bodily injury and property damage, but
                                                                                           policies can also include product impairment
                                                                                           cover, where a product is recalled because it
                                                                                           fails to perform the function for which it was
                                                                                           manufactured.

                                                                Photo: Shutterstock
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