Avoiding Total Recall

Defective, shrapnel-shooting airbags have prompted recalls that could result in some 60-70 million vehicles being called in for service worldwide. The death of an eighth young child by toppling furniture caused a major home retail chain to recall 29 million chests and dressers in 2016.

These are just two recent highly publicized cases involving product recall. In the United States, one product is recalled every day on average and the variety is staggering - goods ranging from cars, sofas, dangerous playground equipment, pet food, cosmetics and too-potent gin to fire extinguishers and even rocking chairs.

“Product recalls have risen steadily,” says Christof Bentele, Head of Global Crisis Management at Allianz Global Corporate & Specialty (AGCS) at the launch of a new report on the costs of product recall. “We are seeing record levels of recall activity in size and cost.”

Product recall average value

Defective products pose a serious safety risk and can cause significant financial damage to the companies responsible. Defective product and work-related incidents have caused insured losses in excess of $2 billion over the past five years and both the size and number of recalls are set to increase. Factors contributing to the increase include: tougher regulation and harsher penalties; the rise of large multinational corporations and complex global supply chains; growing consumer awareness; impact of economic pressures in research and development and production; and even growth of social media.

“Product-related risk is one of the biggest perils facing businesses and there is potential for larger and more complex losses than ever before,” says Bentele.

Product recall reasons

The report, ‘Product Recall: Managing the Impact of the New Risk Landscape,’ analyzes 367 insurance industry product recall claims from 28 countries across 12 industry sectors between 2012 and the first half of 2017. Overall, defective product or work is the major cause of recall claims, followed by product contamination.

According to AGCS, the average cost of a significant incident (events with claims greater than 5 million euros) is more than $12 million (10.5 million euros), with costs from the largest events far exceeding this total. The automotive industry is the most affected by recalls, followed by the food and beverage sector. Automotive recalls account for over 70 percent of the value of all losses analyzed.

Product recall affected sectors

“We see an increasing number of recalls with higher units in the automotive industry,” says Carsten Krieglstein, Regional Head of Liability, Central & Eastern Europe, AGCS. “This is driven by factors such as more complex engineering, reduced product testing times, outsourcing of R&D and increasing cost pressures.”

Cars feature ever-increasing numbers of gadgets and services. Each new one increases the complexity of the vehicle and the chance that something may go wrong, resulting in another recall. In 2016, a record 53.2 million vehicles were recalled in the U.S. alone. In Europe, automotive recalls jumped 76 percent year-on-year. One of the largest recalls to hit the auto industry involves defective airbags. Up to 70 million units across at least 19 manufacturers are being recalled worldwide. Costs have been estimated at close to $24 billion. The report says this incident exemplifies the growing “ripple effect”, which impacts not only the automotive sector, but also other industries. Given the use of many common components, a single recall can impact a whole industry.

Food and beverage is the second most affected sector, accounting for 16 percent of analyzed losses with the average cost of a significant product recall claim almost $9.5 million (8 million euros). Undeclared allergens (including mislabeling incidents) and pathogens are a major issue, as is contamination from glass, plastic and metal parts. AGCS also notes that products from Asia continue to account for a disproportionate number of recalls in the U.S. and Europe, reflecting the eastwards shift in global supply chains and historically weaker quality controls in some countries. Yet, increasing safety regulation and consumer awareness are ensuring recall activity is also rising across Asia.

New technologies will drive future risks and claims, but could also help solve some issues. Advances in product testing, such as genome-sequencing technology, will make it easier to trace contaminated products in the future, potentially saving lives. AGCS believes cyber recalls may become a reality. Hackers could change or contaminate a product by controlling machinery in automated production plants. “Cyber is currently an underestimated risk,” says Bentele. “We have already seen recalls due to cyber security vulnerabilities in cars and cameras.”

Recalls for ethical and reputational - rather than safety - reasons are also on the rise, such as in cases where child or slave labor has been used in the supply chain or where food has been mislabeled or counterfeited as ‘halal’ or ‘vegan’. “There will be incidents when there is no legal requirement to recall but it is the right thing to do. This is a genuine business risk which companies have to be prepared for,” Bentele says.

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: Marine, Aviation (incl. Space), Energy, Engineering, Entertainment, Financial Lines (incl. D&O), Liability, Mid-Corporate and Property insurance (incl. International Insurance Programs). Worldwide, AGCS operates in 32 countries with own units and in over 210 countries and territories through the Allianz Group network and partners. In 2016, it employed around 5,000 people and provided insurance solutions to more than three quarters of the Fortune Global 500 companies, writing a total of 7.6 billion euros gross premium worldwide annually.

AGCS SE is rated AA by Standard & Poor’s and A+ by A.M. Best (2017).

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Heidi Polke
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