AIG tackles true cost of product recalls

It will also increase its CPI (Contaminated Product Insurance) coverage limits for F&B producers to $35m in response to the growing financial impact and frequency of product being pulled from shelves.

On average, 30 class I and II recalls occur every week​ in the US and 22 in Europe, according to data from the US Department of Agriculture (USDA) and the European Union Rapid Alert System for Food and Feed (RASFF).

Government intervention​

Expenses arising from product contamination calling for a public alert​ include replacement and destruction costs, lost profit from plant shutdowns, government intervention, and brand damage.

“Most manufacturers assume they can recover damages from a supplier when contaminated ingredients are found. That's not always the case​,” said Nicky Alexandru, VP, Crisis Management, Global Casualty, AIG Property Casualty.

Salmonella recalls​

“For example, a small candy company received large amounts of a salmonella-contaminated ingredient, which was used across a wide range of products​.

“The finished products did not test positive for salmonella. Upon notification from the supplier, the government imposed a wide precautionary recall​.

“The total cost of the incident (recall costs, contaminated product and loss of sales) approached 20% of the annual sales of the company. There was no recourse as the supplier declared bankruptcy after facing multiple claims. The company was forced to declare bankruptcy​.”

He told FoodProductionDaily, NOVI estimates the cost of a probable maximum recall loss by using more than 80 data points, methodology based on the company’s 25 years’ experience providing contaminated product insurance, analysis of thousands of recall incidents, and input from food safety consultant, NSF International. 

Third party exposure​

It is free to use​ and available in six languages and 11 countries: US, UK, Germany, Austria, Belgium, Canada, Denmark, Italy, Netherlands, Spain, and Switzerland. 

“NOVI took two years to develop. It took time to build, and we wanted to get it right​,” said Alexandru.

“It can also evaluate third party exposure. For example, a retailer can ask their private label contract manufacturers to run the model and share the result​.

 “The feedback we’ve got is very positive. Companies are generally aware they have a product recall risk, but have not been able to quantify it – until now​.

Sweeping powers​

“Most companies do not publicize the cost of a recall so the application of benchmarking or industry survey is very limited. Nothing replaces a customized, confidential estimate of one’s own financial risk​.”

Alexandru said there were two major trends in the industry right now; supply chains are becoming increasingly global and more complex. Second, governments and regulators are taking a more active role in food safety.

“In the US, the 2011 Food Safety Modernization Act was the first major piece of legislation addressing food safety in 70 years​,” he added.

Horse meat scandal​

“It gave sweeping new powers to the federal government to escalate and enforce a recall if public safety is at risk, and the regulators don’t feel that the company responsible is doing enough​.”

“The effects of the horsemeat scandal in the UK and across Europe are still playing out, as is the salmonella-chicken outbreak in the US. We expect that, as regulations are written to support the Food Safety and Modernization Act in the US, there will be more requirements imposed on manufacturers and importers​,” he said.