Market Overview

Product Recall Risks Grow as Technology Drives New Triggers, Warns Allianz

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  • Defective product risk is an increasing peril for companies, causing
    significant financial damage, says Allianz Global Corporate &
    Specialty (AGCS) report.
  • Average cost of significant recall is $12 million. "Ripple effect"
    events can cost billions.
  • Automotive industry most impacted, followed by food and beverage
    sector.
  • Tougher regulation, global supply chains, materials from fewer
    suppliers and consumer awareness are contributing to a rise in recalls.
  • Emerging triggers include recalls for ethical reasons, cyber recalls
    from security vulnerabilities or hackers manipulating products, and
    social media.

Product-related risk is one of the biggest perils facing businesses
today, with recall exposures increasing significantly over the past
decade, bringing the potential for larger and more complex losses than
ever before, warns insurer Allianz
Global Corporate & Specialty
(AGCS) in a new report.

This press release features multimedia. View the full release here:
http://www.businesswire.com/news/home/20171205005180/en/

Top Product Recall Events (Graphic: Business Wire)

Top Product Recall Events (Graphic: Business Wire)

Product
Recall: Managing The Impact of the New Risk Landscape
analyzes 367
insurance industry product recall claims from 28 countries across 12
industry sectors between 2012 and the first half of 2017. Overall
defective product or work is the major cause of recall claims, followed
by product contamination. The average cost of a significant1
incident is in excess of $12 million, with the costs from the largest
events far exceeding this total. Over 50% of losses arise from 10
incidents. The IT/electronics sector is the third most affected industry
after automotive and food and beverage, according to the claims analysis.

"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 multi-national corporations and
complex global supply chains, growing consumer awareness, impact of
economic pressures in research and development (R&D) as well as
production and even growth of social media are just some of the
contributing factors behind this."

Defective products not only pose a serious safety risk to the public but
can also cause significant financial damage to the companies
responsible. Defective product/work-related incidents have caused
insured losses in excess of $2 billion over the past five years, making
them the largest generator of liability losses, according to analysis2
of insurance industry claims by AGCS. Recall claims are a major
contributor to this total, alongside product liability claims.

Automotive recalls most expensive and large-scale due to "ripple
effect"

Automotive recalls account for over 70% of the value of all losses
analyzed, which is unsurprising given recent record levels of activity
in both the US and Europe3. "We see an increasing number of
recalls with higher units in the automotive industry," says Carsten
Krieglstein, Regional Head of Liability, Central & Eastern Europe, AGCS.
"This is driven by factors such as more complex engineering, reduced
product testing times, outsourcing of R&D and increasing cost pressures.
The technological shift in the automotive industry towards electric and
autonomous mobility will create further recall risks."

One of the largest recalls to hit the auto industry to date, involving
defective airbags, is expected to result in some 60 to 70 million units
across at least 19 manufacturers being recalled worldwide. Costs have
been estimated at close to $25 billion4.

Food and beverage is the second most impacted sector, accounting
for 16% of analyzed losses with the average cost of a significant
product recall claim almost $9.5 million. Undeclared allergens
(including mislabeling 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.

Technology to prevent and drive future recall risks

The report also identifies emerging recall triggers that will drive
future risks and claims, largely stemming from 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. "Cyber is currently an underestimated risk," says 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.

Pre-event crisis management as part of corporate DNA

Pre-event planning and preparation can have a big impact on the size of
a recall and the financial and reputational damage sustained. As part of
a holistic risk management program, specialized product recall insurance
can help businesses recover faster by covering the costs of a recall,
including business interruption. It also provides access to crisis
management services, and consultants, which can test a company's
procedures and offer global support in areas such as regulatory liaison,
communications, product traceability and tampering investigations as
well as genome sequencing and DNA testing to understand a product
contamination.

About Allianz Global Corporate & Specialty

Allianz Global Corporate & Specialty (AGCS) is the Allianz Group's
dedicated carrier for corporate and specialty insurance business. AGCS
provides insurance and risk consultancy across the whole spectrum of
specialty, alternative risk transfer and corporate business: Marine,
Aviation (incl. Space), Energy, Engineering, Entertainment, Financial
Lines (incl. D&O), Liability, Mid-Corporate and Property insurance
(incl. International Insurance Programs).

Worldwide, AGCS operates in 32 countries with own units and in over 210
countries and territories through the Allianz Group network and
partners. In 2016, it employed around 5,000 people and provided
insurance solutions to more than three quarters of the Fortune Global
500 companies, writing a total of €7.6 billion gross premium worldwide
annually.

AGCS SE is rated AA by Standard & Poor's and A+ by A.M. Best (2017).

For more information please visit www.agcs.allianz.com
or follow us on Twitter @AGCS_Insurance,
LinkedIn
and Google+.

Cautionary
Note Regarding Forward-Looking Statements


________________________
1 Significant event refers to
product recall claims equal to or greater than €5m.
2 AGCS
Global Claims Review: Liability In Focus
. Based on analysis of
100,073 liability insurance claims.
3 A record 53.2
million vehicles returned in 2016 in the US according to the National
Highway Traffic Safety Administration. In Europe, automotive recalls
jumped 76% year-on-year in 2016, the highest since the EU's rapid alert
system (RAPEX) began, according to Stericycle Expert Solutions.
4
Bloomberg, March 30, 2016. "Takata puts worst-case airbag recall costs
at $24bn".

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