- Defective product risk is an increasing peril for companies, causing significant financial damage, says Allianz Global Corporate & Specialty (AGCS) report.
- Tougher regulation, global supply chains, materials from fewer suppliers and consumer awareness are contributing to a rise in recalls.
- AGCS claims analysis: average cost of significant recall is US$12 million. “Ripple effect” events can cost billions.
Automotive industry most impacted, followed by food and beverage sector. - Emerging triggers include recalls for ethical reasons, cyber recalls from security vulnerabilities or hackers manipulating products, and social media.
Downloads
Defective products not only pose a serious safety risk to the public but can also cause significant financial damage to the companies responsible. Defective product/work-related incidents have caused insured losses in excess of US$2 billion over the past five years, making them the largest generator of liability losses, according to analysis 1 of insurance industry claims by AGCS. Recall claims are a major contributor to this total, alongside product liability claims.
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. The average cost of a significant 2 incident is in excess of US$12 million (€10.5 million), with the costs from the largest events far exceeding this total. Over 50% of losses arise from 10 incidents. The IT/electronics sector is the third most affected industry after automotive and food and beverage, according to the claims analysis.
Automotive recalls most expensive and large-scale due to “ripple effect”
Technology to prevent and drive future recall risks
Cyber recalls may become an increasing reality. Hackers could change or contaminate a product by controlling machinery in automated production plants. “Cyber is currently an underestimated risk,” says Bentele. “We have already seen recalls due to cyber security vulnerabilities in cars and cameras.” Innovative but untested technologies such as artificial intelligence and nanotechnology could also transform recall risk.
Social media is a fast and effective way of communicating with customers but can also exacerbate recall risk if not well-managed. “Social media is a real game-changer for product recall,” says Stewart Eaton, Head of Product Recall, UK, AGCS. “An erroneous post or tweet can cause reputational damage and directly impact the size of a recall, meaning companies need to react faster than before.”
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 such as halal or vegan has been mislabeled or counterfeited. “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.
Pre-event crisis management as part of corporate DNA
Pre-event planning and preparation can have a big impact on the size of a recall and the financial and reputational damage sustained. As part of a holistic risk management program, specialized product recall insurance can help businesses recover faster by covering the costs of a recall, including business interruption. It also provides access to crisis management services, and consultants, which can test a company’s procedures and offer global support in areas such as regulatory liaison, communications, product traceability and tampering investigations and even genome sequencing and DNA testing to understand a product contamination.
“There is now much more attention on how companies deal with defective or contaminated products, how responsive they are and how resilient their safety systems are. More than ever consumers are also part of the agenda and are driving company behavior by making their choices subject to how companies deal with crises. A company that embraces crisis management, and makes it part of its DNA, is far less likely to suffer a major incidence,” says Bentele.
[1] AGCS Global Claims Review: Liability In Focus. Based on analysis of 100,073 liability insurance claims.
[2] Significant event refers to product recall claims equal to or greater than €5m.
[3] A record 53.2 million vehicles returned in 2016 in the US according to the National Highway Traffic Safety Administration. In Europe, automotive recalls jumped 76% year-on-year in 2016, the highest since the EU’s rapid alert system (RAPEX) began, according to Stericycle Expert Solutions.
[4] Bloomberg, March 30, 2016. “Takata puts worst-case airbag recall costs at $24bn”.
Press Contacts
About Allianz Global Corporate & Specialty
Allianz Global Corporate & Specialty (AGCS) is a leading global corporate insurance carrier and a key business unit of Allianz Group. AGCS provides risk consultancy, Property-Casualty insurance solutions and alternative risk transfer for a wide spectrum of commercial, corporate and specialty risks across 12 dedicated lines of business.
Our customers are as diverse as business can be, ranging from Fortune Global 500 companies to small businesses, and private individuals. Among them are the world’s largest consumer brands, tech companies and the global aviation and shipping industry, but also wineries, satellite operators or Hollywood film actors. They all look to AGCS for smart answers to their largest and most complex risks in a dynamic, multinational business environment and trust us to deliver an outstanding claims experience.
We constantly strive to deliver the best for our customers through our global team of around 4,400 employees from over 70 nationalities in 34 countries worldwide. As the one of the largest Property-Casualty units of Allianz Group, we are backed by strong and stable financial strength ratings and a global network in over 200 countries and territories. In 2018, AGCS generated a total of €8.2 billion gross premium worldwide.