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Product recalls are the largest driver of liability claims says Allianz Global.

Byline: Patricia L. Harman, PropertyCasualty360.com

Remember the exploding cell phone batteries last year in the Samsung Galaxy Note 7 that airlines wouldn't allow on their planes? Or the faulty Takata airbags that impacted at least 19 auto manufacturers and more than 60 million vehicles in 2015? And the more than 30 million GM vehicles that were recalled because of faulty ignition switches in 2014?

These three product recalls alone cost an estimated $34 billion according to a new study from Allianz Global Corporate & Specialty (AGCS), the Allianz carrier that focuses on corporate and specialty business.

The analysis by AGCS, Product Recall: Managing The Impact of the New Risk Landscape, found that "defective product-related risk is the single largest driver of liability claims" with losses from product recalls being the greatest contributor to the cost. Recalls cause both financial and safety risks, and losses have cost insurers more than $2 billion over the last five years. They undermine the public's trust of a product, interrupt sales and business development, and increase the risk of litigation.

Christof Bentele, head of global crisis management at AGCS said in a press release that "product recalls have risen steadily in the past decade," citing "tougher regulation and harsher penalties, the rise of large multinational corporations and complex global supply chains, growing consumer awareness" and even the rise in social media as some of the contributing factors to the increase in recalls.

Who has the most recalls?

AGCS examined 367 claims from 28 countries affecting 12 different industry sectors to determine which business specialties garnered the most claims. The top sectors affected by recalls based on the value of their insurance claims were:

Automotive/industrial supplier - 71%

Food & beverage - 16%

IT/electronics - 3%

Retail - 3%

Manufacturing/packaging - 3%

Medical - 2%

Transportation/logistics - 1%

Domestic appliances - <1%

Chemical - <1%

Engineering/construction - <1%

The auto industry by far has the highest value claims, accounting for 70% of the cost of recalls, and illustrating how interconnected and complex these claims are because the same parts (think airbags and electronics) are used by multiple manufacturers in their vehicles.

"We see an increasing number of recalls with higher units in the automotive industry," said Carsten Krieglstein, regional head of liability, Central and Eastern Europe for AGCS. "This is driven by factors such as more complex engineering, reduced product testing times, outsourcing of R&D and increasing cost pressures."

He adds that "the technological shift in the automotive industry towards electric and autonomous mobility will create further recall risks."

Issues in the food and beverage industry are more related to food allergens that may not be identified on packaging or contaminants such as listeria, salmonella or foreign particles like glass or metal.

The numbers and impact to industries changes slightly when examining the number of actual claims by industry.

Automotive/industrial supplier - 42%

Food & beverage - 18%

Domestic appliances - 10%

Retail - 7%

Medical - 6%

IT/electronics - 5%

Manufacturing/packaging - 5%

Chemical - 3%

Transportation/logistics - 2%

Engineering/construction - 1%

The automotive and food and beverage industries are responsible for approximately 60% of the claims AGCS saw in their research.

Trends in product recalls

AGCS estimates the average cost of a significant recall can exceed $12 million. For example, Bloomberg reported that recalls involving airbags in 60 to 70 million vehicles could cost an estimated $25 billion. AGCS says the number of recalls are increasing for multiple reasons:

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An increase in regulations affecting product safety.

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Increasing consolidation and complexity in supply chains.

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Improvements in product testing.

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Increase in the recognition of pathogens.

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Pressure to increase profit margins.

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Increase in the use of social media & consumer awareness of safety issues.

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Pressures from original equipment manufacturers and retailers.

As manufacturing becomes more globalized, the risk for defective products or parts rises. (Photo: Shutterstock)

Experts from AGCS also identified key drivers that will impact product recalls in the future:

1. The "ripple effect"

The increasingly complex and global supply chains mean that millions of customers around the globe can be affected by a single product recall. It may also impact numerous manufacturers, since a component may be used in a wide variety of products (e.g., batteries).

2. Tougher regulations increase the number of recalls

"There is now much more attention on how companies deal with defective or contaminated products, how responsive they are and how resilient their product safety systems are," explains Bentele.

3. Unrecognized toxins, allergens and contaminants

Food can be recalled for a variety of reasons. (Photo: Shutterstock)

Mislabeling ingredients or failure to identify them because they are allergens are frequent causes of food recalls. However, products made in foreign countries have increasingly been found to contain toxins such as lead, arsenic and cadmium, leading to recalls of toothpaste, toys and children's jewelry.

4. Increase in food fraud

As economic pressures mount, this is leading to more risks from human error, the use of cheaper suppliers or even personnel cuts with more experienced workers replaced by newer workers who may be unfamiliar with some of the dangers. Mixing inferior products can have disastrous results, such as in China in 2008, when powdered milk was tainted with melamine and had to be recalled.

"Food fraud has become a major issue that has resulted in large recalls, reputational damage and major losses," said Bentele.

5. Non-safety related recalls

To protect their reputations, some companies are recalling products when it is determined that they were made by child labor or do not meet certain consumer expectations. Some recalls can have a longer "tail," meaning the exposures for manufacturers and insurers could last longer than anticipated, since food could be purchased and stored for an extended period of time or an item kept for months or years before it is used. Coverage will depend on the policy in place and when the incident occurred.

Social media gives unhappy customers an immediate and wide-ranging platform on which to share their displeasure, regardless of whether their facts are correct or not. (Photo: Shutterstock)

6. The impact of social media

The rise of social media has given unhappy customers an option to voice their displeasure immediately when a product doesn't perform as expected or poses a danger, and the information (whether it is true or not) can travel at lightning speeds around the globe. By the same token, manufacturers and businesses can use their access to educate consumers and address concerns. The danger arises when companies are innocent, but get caught up in the furor.

"Social media is a real game-changer," said Stewart Eaton, head of product recall, regional unit London, for AGCS in the report. "An erroneous post or tweet can cause reputational damage and directly impact the size of a recall. Social media adds a whole new dimension to product recall losses, meaning companies need to react much faster."

7. Recalls for products from Asia and China increase

The US-China Economic and Security Review Commission said that approximately 23% of the products in the U.S. are manufactured in China, but account for 51% of the product safety recalls. In the European Union, that figure is 62%.

"There is a clear link between product recall claims and the shift in manufacturing to Asia and China," explained Bentele. "Product quality management levels in Asia are improving, but they are not yet up with the levels seen in the U.S. and Europe."

8. Cyber recall risks

Like many industries, manufacturing is just beginning to see the impact of cyber risks on their technology. As it becomes more automated, the dangers from a cyber event increase. Examples include syringes that had an incorrect dosage of medication and pacemakers that required a security patch.

"Cyber is currently an underestimated risk for product recall," added Bentele. "We have already seen incidents of recalls for cyber security vulnerabilities in products like cars and cameras. Concern about automation and machine learning is also likely to be accompanied by an increase in product risk."

Recalls will continue to become more complex as technology changes and supply chains span the globe. Autonomous cars and 3D printing are just two new areas where manufacturers could see an increase in liability and recalls.

"How will insurance policies interact, including product liability, recall and cyber?" asked Bentele. "As yet, there are no definite answers."
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Title Annotation:Departments
Publication:Claims
Date:Jan 1, 2018
Words:1374
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