Swiss Re: Product recall insurance

June 20 2017

Well respected manufacturers across Asia Pacific have been confronted with increased product recalls in recent years. Multi-billion dollar recalls involving Samsung, Toyota, Takata and Maggi Noodles, which have been highly publicised, highlight the short- and long-term financial and market capitalisation consequences to these firms. However, many manufacturers operate without recall insurance, missing out on expert consulting advice, flexible coverages and financial balance sheet protection. For example, the recent Samsung Galaxy Note 7 recall is estimated to have cost at least $5.3 billion according to some reports, yet the company is reported to have had no product recall insurance.

What is recall insurance?

Product recall insurance policies cover the expenses associated with recalling a product from the market. Typical costs would include, but are not limited to, notifying consumers, shipping costs, testing/checking, costs of disposal and the costs of replacing faulty products. In addition, recall policies will typically include provision for crisis management consultancy services, which will help corporates to prepare and better manage a recall incident and minimise potential brand damage. Such policies protect corporations from claims arising from actual or alleged defective products that can cause imminent danger of bodily injury or property damage.

Recall exposure across the supply chain

One problematic area that has been more prevalent recently, is where a company (the supplier) manufacturers a component that is incorporated into someone else’s product. If the manufacturer of the final product needs to initiate a recall because of a manufacturing error of the supplied component, the part supplier could be charged for the recall costs incurred by the end manufacturer. Such expenses would only be covered if product recall insurance had been purchased by the supplier.

For example, a packaging company discovered that there was an unintended reaction between the food and the can, leading to the food being spoilt. As a result, the canned food was recalled and the packaging manufacturer was sued for nearly US$8 million. The third-party recall costs were not covered under the product liability policy purchased by the packaging manufacturer, and the component supplier was driven into bankruptcy following litigation of this recall incident.

Top concerns of a product recall incident

From conversations with manufacturing clients, Swiss Re Corporate Solutions understands that the top concerns for boards of directors during a recall incident include:

  1. Reputation risk to brand equity
  2. Business interruption: loss of earnings and supply chain disruption
  3. Cost of disposal, replacement and reimbursement
  4. Legal costs
  5. Regulatory fines and penalties

Four key points in managing a product recall incident

Prepare a recall plan

  • Develop a comprehensive recall plan that documents how to respond to consumers, manage the incident, who should announce the recall, channels of communication, the process for contacting consumers and the use of mass media as well as social media.
  • Once the plan has been prepared, all relevant parties should become fully knowledgeable about the plan through training sessions and regular rehearsals. Cooperation with component suppliers is also necessary during stress testing.

Tracking the products

  • Manufacturers should ensure they can quickly and accurately identify the location of products, by using barcodes or batch numbers for example. Products that could pose similar or related risks should also be identified. This is also important for minimising the impact of a recall.
  • Develop product documentation to promptly identify the location of the products. This may reduce the potential event of bodily injury and/or property damage.
  • As a future precaution, it is advisable to keep samples of finished products from each batch order in case testing is required.

Response preparation

  • Prompt response to a recall is essential and can help reduce future incidents. After reaching a quick decision, the manufacturer should suggest the necessary countermeasures and make every attempt to reduce the risk.
  • Manufacturers should also ensure they are in a prepared state at all times and ready to respond to a potential recall incident.

Communication rules

  • Manufacturers should appoint an executive as the person in charge of communications channels, and centralise this system so as to eliminate as much as possible any unauthorised comments about the recall. Spokespeople should be media trained and practice their responses during stress testing.
  • Manufacturers should pay special attention to social media channels and how to effectively use these platforms to communicate quickly with consumers. This may involve setting up a rapid response hotline.

In summary

Product recall insurance coverage has gained more popularity in recent years as a result of an increased number of reported recall cases across different sectors and geographies. In order to get the most appropriate recall insurance covers, you need to work with professional insurance brokers and insurers who take the time to understand your business and risks, have a long history of helping companies protect themselves against product recalls and managing crises, and who can recommend the best solutions and coverage. The worst-case scenario for a risk manager or insurance professional is reporting to the board that a product recall is not covered or will be inadequately compensated.

Product recall myths and misconceptions

Although the investment in product recall insurance is gathering momentum across the world, there are many misconceptions that corporations have about recall and contamination policies. We explore some of the more common myths here:

Is recall coverage generally included in my product liability insurance?

Typically, product recall expenses cover will not be included in a product liability policy. Although very limited extensions can be added to policies, generally product liability insurance covers actual bodily injury and property damage. However, such limited recall extensions or endorsements will offer a narrow coverage compared to a specific stand-alone product recall insurance programme. For example, crisis management services are not offered and several cost elements such as business interruption, for example, will not be compensated.

Whereas product recall insurance reimburses necessary recall expenses and costs incurred due to an imminent or potential bodily injury and property damage.

Contaminated products insurance coverage will also typically provide access to crisis management specialists who can help assist a corporation to be better prepared for a future recall and provide expertise in areas such as recall planning, communication training and more.

Is buying recall insurance coverage always simply optional?

Product recall insurance may be specifically required in a contract between a manufacturer of final products and suppliers of raw ingredients or component parts.

Also in cases where the company has no mandatory obligation to buy such insurance, the purchase of recall insurance is generally an appropriate decision as it can also offer a competitive advantage for small to mid-sized business to demonstrate that they have evaluated their recall exposure with respective financial protection in place.

Is crisis management a necessary element?

Yes, crisis management is a vital component of product recall insurance and can support clients in their efforts to regain consumer trust and restore brand image after the recall. Many product recall insurance policies will provide easy access to professional crisis consultants, who will be able to help to define the appropriate strategy and approach for product recall preparedness, including:

  • Evaluate the exposure and where the crisis could occur
  • Building a communication infrastructure
  • Defining a comprehensive plan to manage media interaction
  • Establish a plan to manage internal and external stakeholders as well as to support the client in its efforts to minimise reputation damage

What is the appropriate insurance limit for recall coverage?

A recall can be extremely complex and there is no straight forward approach to calculate the severity of such a recall incident and finally to determine the appropriate insurance limit. Professional risk and insurance advisers will be able to help clients to evaluate their individual recall exposure, work through a number of scenarios and examples from past recalls and to support them in the decision to purchase an appropriate insurance limit.

Can a recall happen to every company?

Every organisation has the potential to experience a product recall. The media is littered with stories of product recalls, some of which have challenged the viability of companies. Statistics show that the number of recalls has risen in recent years as a result of many reasons, including globalisation, technology, platform standardisation and more complex supply chains.

As a consequence, it is paramount to invest in the best quality assurance and recall preparedness. However, it is also a matter of fact that such efforts might reduce the probability of a recall incident happening, but it will not give the company the respective guarantee that no recall incident will occur. But it is also true that companies with effective recall preparedness in place will better emerge from a recall.

For further information about product recall insurance please contact Manzhi Zheng, Senior Underwriter at Swiss Re Corporate Solutions, on +65 6428 1857 or at [email protected]

 

 

 

 

 

 

 

 

 

 

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