Product recalls growing in size and number, warns AGCS

Exposure to product recalls has increased significantly during the past decade, bringing the potential for larger and more complex losses. This is the stark warning from a new report published by Allianz Global Corporate & Specialty (AGCS). The study, Product Recall: Managing The Impact of the New Risk Landscape, says that a combination of tougher regulation, global supply chains, increased consumer awareness and a more concentrated network of suppliers has contributed to a rise in recalls. Furthermore, a disproportionate number of recalls have taken place in Asia. Chinese-manufactured products accounted for more than three times as many recall cases in the US, and three of the largest recalls in recent memory involved manufacturers from South Korea and Japan. AGCS ascribes this spike to the fact that more manufacturing has shifted to Asia, where there are historically weaker quality controls in some countries. At the same time, safety regulation and consumer awareness are both increasing across Asia, leading to more recalls. “Product recalls have risen steadily in the past decade. We are seeing record levels of recall activity in size and cost today,” says Christof Bentele, head of global crisis management at AGCS. “Tougher regulation and harsher penalties, the rise of large multinational corporations and complex global supply chains, growing consumer awareness, impact of economic pressures in research and development (R&D) and production, and even growth of social media, are just some of the contributing factors behind this,” he adds. More and more Asian companies realise that buying product recall insurance makes sense, even when they only operate domestically, says Mr Bentele. “It is hard for any company to survive in a market with a bad or faulty product. This is as true for across Asia as anywhere.” The report studied 367 insurance claims resulting from product recalls from 28 countries and 12 industry sectors, and found that defective work or products is the primary cause of recalls; the automotive industry is the most susceptible to product recalls, followed by the food and beverage sector; and the average cost of a significant incident is in excess of $12m. The report also looked at the role of technology and the likelihood it will lead to more recalls. Advances in product testing such as genome-sequencing technology will make it easier for regulators and manufacturers to trace contaminated products in future. While this advance will save lives, it will also spark more litigation as the liable parties can be more easily identified. Meanwhile, the growing use of the internet of things in the manufacturing process has created more cyber risk, with hackers potentially able to contaminate a product by controlling machinery in an automated production plant. “Cyber is currently an underestimated risk,” says Mr 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.” There has also been a rise in so-called ethical recalls, says AGCS, where a product is recalled on the grounds of reputation rather than safety – the use of slave labour in a supply chain for example, or where vegan or halal food has been mislabelled. Given the rising risk of recalls, AGCS is urging corporates to factor potential recalls into their crisis management plans and to consider the purchase of specialised recall insurance.

Product recalls growing in size and number, warns AGCS

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