Defective product recalls an increasing financial risk for companies: Allianz

DEFECTIVE product or work-related incidents have caused insured losses in excess of US$2 billion over the past five years, making them the largest generator of liability losses, insurer Allianz Global Corporate & Specialty (AGCS) said in a report released on Tuesday.

This means that defective products not only "pose a serious safety threat to the public, but can also cause significant financial damage to the companies responsible", AGCS said.

In particular, with manufacturing activity shifting to Asia, "Asia continues to account for a disproportionate number of recalls in the US and Europe, due to historically weaker quality controls in some countries", AGCS said.

In the US, Chinese manufactured products accounted for over three times as many recall cases as US-made products. Citing Samsung's recall of its Galaxy Note 7 phones and Takata's defective airbags, the report also noted that three out of the eight largest recalls costing more than a billion dollars in recent times originated in Asia, specifically Japan and South Korea.

Concurrently, a rise in recalls may be attributed to tougher regulation, more complex global supply chains, growing consumer awareness and materials being provided from fewer suppliers.

According to AGCS, the average cost of a significant recall stands at US$12 million, with "ripple effect" events costing up to billions. Based on its research, the car industry has been most impacted by product recalls, followed by the food and beverage sector.

In the case of Japanese manufacturer Takata, 60 to 70 million units across at least 19 manufacturers were being recalled globally, amounting to an estimated cost of US$25 billion, which led to Takata's bankruptcy this year.

"Given the use of many common components, a single recall can impact a whole industry," AGCS said.

Additionally, the report also identified emerging recall triggers that will drive future risks and claims, largely stemming from new technologies. These include: cyber recalls from security vulnerabilities or hackers manipulating products, social media and recalls for ethical reasons.

Allianz suggests that pre-event preparation can have a huge impact on the size of a recall and the financial and reputational damage sustained. It added that specialised product recall insurance can help businesses recover faster by covering the costs of a recall, including business interruption.

Said head of global crisis management at AGCS, Christof Bentele: "There is now much more attention on how companies deal with defective or contaminated products, how responsive they are and how resilient their safety systems are. More than ever consumers are also part of the agenda and are driving company behaviour by making their choices subject to how companies deal with crises."

"A company that embraces crisis management, and makes it part of its DNA, is far less likely to suffer a major incidence," he added.