Product-related risk is one of the biggest perils facing businesses today, with recall exposures having increased significantly over the past decade. And it is the automotive sector that is most impacted by product recalls, followed by the food and beverage sector and then IT/electronics, said Allianz Global Corporate & Specialty (AGCS) in a recent report, based on analysis of claims.
AGCS’ “Product Recall: Managing The Impact of the New Risk Landscape” analysed 367 insurance industry product recall claims from 28 countries across 12 industry sectors between 2012 and the first half of 2017.
It found that overall defective product or work is the major cause of recall claims, followed by product contamination. The average cost of a significant incident is in excess of US$12 million, with the costs from the largest events far exceeding this total. Over 50% of losses arise from 10 incidents.
Automotive recalls most expensive and large-scale due to “ripple effect”
Automotive recalls accounted for over 70% of the value of all losses analysed, and the technological shift in the automotive industry towards electric and autonomous mobility will create further recall risks.
One large global recall highlighted from this sector was the case of defective airbags from Japanese company Takata, resulting in some 60 to 70 million units across at least 19 manufacturers being recalled worldwide, with costs estimated at close to US$25 billion.
Food and beverage is the second most impacted sector, accounting for 16% of analysed losses with the average cost of a significant product recall claim almost US$9.5 million. Undeclared allergens (including mislabelling incidents) and pathogens are a major issue, as is contamination from glass, plastic and metal parts. Malicious tampering and even extortion incidents pose an increasing threat, as well as the growth of “food fraud”, which has become a major issue, resulting in reputational damage and major losses.
New technologies could prevent, yet increase risks
The report also highlights the impact of new technologies. Advances in product testing such as genome-sequencing technology will make it easier for regulators and manufacturers to trace contaminated products in future, potentially saving lives, but also potentially spiking litigation activity, as liable parties can be more easily identified.
Cyber recalls may become an increasing reality. Hackers could change or contaminate a product by controlling machinery in automated production plants.
Innovative but untested technologies (eg artificial intelligence and nanotechnology) and social media could also transform recall risk, with an erroneous post potentially causing reputational damage. Recalls for ethical and reputational, rather than safety reasons are also on the rise, such as in cases where child or slave labour has been used in the supply chain or where food such as halal or vegan has been mislabelled or counterfeited.
Asia a significant origin of recalls
Asia continues to account for a disproportionate number of recalls in the US and Europe, due to historically weaker quality controls in some countries, said AGCS. Chinese manufactured products accounted for over three times as many recall cases in the US as US-made products, largely due to the increasing volume of manufacturing activity shifting to Asia.
At the same time, increasing safety regulation and consumer awareness is ensuring recall activity is also rising across Asia. Of the eight largest recalls that cost more than a billion dollars in recent times, three incidents originate from Asia, specifically Japan and South Korea, reflecting the eastward shift in manufacturing and supply chains. A