Every year thousands of consumer products, foods and medicines are recalled across the EU. In the current climate it is more important than ever for any consumer-facing company to drive down the cost of associated risks.

The latest annual report of the European Commission’s rapid alert system for non-food consumer products posing a potential risk to health or safety (RAPEX) reported a 16 per cent increase in the number of products notified in 2008 compared to the previous year, to 1,866 products. 1,545 of these posed a serious risk to health or safety. Three product groups accounted for 53 per cent of all products notified, toys (32 per cent of all Article 22 notifications), electrical appliances (11 per cent) and motor vehicles (ten per cent). Since notifications had been growing at a far steeper rate in previous years, the rate of growth is actually levelling off. Fifty nine per cent of serious risk notifications involved compulsory orders by national authorities and 48 per cent voluntary actions by businesses.

The figures for UK notifications show a far higher proportion of voluntary actions (about 85 per cent). The EU’s rapid alert system for food and feed (RASSF) reported a total of 3,099 original notifications in 2008, 549 of which represented serious risks. This is a slight decrease over the previous year.

“Risk assessment and proper record keeping enable the risk to be properly identified and the scope of the recall or corrective action kept within a narrow confine,” advises John Leadley, head of dispute resolution and of the product liability group for solicitors Baker McKenzie.

“You’re trying to police the component manufacturers, and relying on your distributors and retailers to keep good records. The household names that we act for are dependent on suppliers from the Far East, China, Korea, and no matter how many audits they do, no matter how many safeguards they write into their contracts, mistakes are made,” he adds.

Anthony Toole, senior loss adjuster for special risks for Crawford & Company, adds: “If you can say, we’re certain that only cars manufactured in that week could be affected, then you’re fairly safe in recalling that very limited number, and the costs involved might not be much. If you can’t tie that period down, and it becomes cars produced over six months or a year, that has a huge impact on what might be involved.”

Attempting to limit exposure by transferring risk to suppliers or distributors, imposing relevant contractual obligations or requiring suitable insurance cover carries its own risks. This will only succeed where these obligations are likely to be fulfilled or can realistically be enforced.

“We had a company that imported washing machines from China. Everything was agreed contractually and by samples. The first ship left
China, came over, docked, offloaded, two more ships were by then on their way, when they found that the washing machines were full of dents. There was insurance cover for the first shipment, but not for the second and third. That has been quite a common problem with goods coming from that part of the world,” says Toole.

Lines of communication should be established swiftly. As Leadley puts it, “Regulators all across the globe need to be told very early in the evolution of a problem what the problem is. The US authorities recently fined Toyota US$16.4 million for late notification.” Leadley understands why companies want to wait as long as possible, to avoid losing control of the issue. “That is why it is important that when you go to a regulator you really have something proper to say. Risk assessment is both the trigger for notifying and goes to the substance of what you communicate.

Having the systems in place to ensure you can do that is paramount.” Toole adds: “Always work closely with your customers, giving them assistance, but not giving in to every demand. Involve any third party such as suppliers, so that they have a chance to comment upon whatever action is being taken.”

SHIFTING RISK

The product recall market is still relatively young, having been introduced in the nineties following high-profile stories coming out of the Tylenol and Perrier recalls. Ian Harrison, executive director at Lockton in London, explains: “The market here in London has developed probably half a dozen products aiming at specific industry areas, trying to cover all economic exposures arising from a triggered event, which is a contamination or a dangerous product recall. This is designed to cover a company’s own costs associated with a big product recall, not just the pure recall expenses, but also the economic damage that may be suffered to the brand.”

Ed Mitchell, global recall manager at XL Insurance: “We specialise in product contamination insurance for food and drink companies, cover for everything from the cost of recalling the product to replacing a product, to loss of gross profits and rehabilitating their sales. It’s very comprehensive.” Nevertheless, it is important to know what risks are covered. Leadley comments: “Take carcinogens. The chances are that most policies would not respond, because the trigger point is an imminent threat to human health and safety, defined as something like injury within about six months of using a product. The adverse effect of carcinogens may not manifest themselves for many years, so policies may not respond.”

“For a long time the insurance industry has developed not just a promise to pay, but has generally applied consultants to help the insured manage a crisis”, says Harrison. This certainly applies to product recall. XL’s Mitchell: “Helping companies on loss control is critical in helping them manage recall events and save reputation. We stress-test our clients’ recall plans through to their crisis management systems, as far as wheeling in the TV cameras and the journalists to ask difficult questions.”

“A client recently attended a workshop where we ran a crisis simulation assuming the discovery of an allergen contamination problem, and a few months later they actually had that problem. So it really does bring value."

XL works with consulting company Razor, part of PR firm College Hill, and are aligned with food research association Campden & Chorleywood. “Once our consultants have done the loss control, we provide a 24/7 crisis response service.”

Heightened regulatory demands, raised consumer awareness and the globalisation of communications all point to a likely increase in product recalls. “The [insurance] market has grown very quickly”, says Harrison, “because of the number of incidents, and the realisation that it is a major risk factor. There are quite a lot of new insurers coming into the market. It’s still very much a niche market, which means our pricing doesn’t go up and down in the market cycles.”

The real question is whether companies will successfully manage to reduce the cost of recalls by implementing necessary changes.

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