Risk & Recall

Friday, September 22nd, 2017

With the increasing complexity relating to the movement and regulations of food and beverage products across the world, manufacturers have to implement measures to safeguard themselves and the insurance industry has responded accordingly. By Ben Sharp, product recall underwriter, XL Catlin

Food safety is more of a concern than ever before for governments, food companies and consumers. As global supply chains become more complex, with more product recalls happening as a result, governments are under pressure to tighten regulations.

Consumers and the media are also becoming increasingly aware of the issues related to food safety so we are seeing the emergence of a new and more challenging risk landscape that is constantly evolving.

This means that managing the risks is getting more difficult for companies and when such risks materialise, the result can be financially devastating. Multiple high profile food safety incidents in recent years have put the issue firmly in the headlines so businesses are also faced with an increasing danger of reputational damage.

The explosion of social media and digital news sources has increased the likelihood of reputational risk for companies involved in product recall incidents, especially those that manage the situation poorly. Worryingly, social media ‘reporting’ is often based on speculation and can often precede any evidence of threats to human health when dragging food companies into such an issue.

The insurance industry understands these risks and the need to evolve products to meet the needs of food industry clients. No company can completely eradicate the possibility of a product safety issue, but getting to grips with the risks is the best way for a business to protect itself.

Insurance industry leaders in product recall are working in partnership with their food sector clients to ensure that risks are better understood and that the client has appropriate systems in place to help mitigate them.

Regulatory Risk

Feed My Starving Children FMSC

As global regulatory standards increase and product safety rules are tightened, food companies will need greater supply chain reliability. However, the increasingly global nature of production and the current financial pressure on suppliers is causing various challenges.

Supply chains for the food industry are now harder to monitor and are exposed to more potential hazard points: contaminants, spoilage, delays, disruptions, hygiene issues, and third-party participants.

Cross-border supply chains, decentralised food production, outsourcing/offshoring of packaging, foreign sourcing and outsourced logistics operations that move and store food-related goods can increase risk exposure.

With increasing financial pressure on the food chain, it is expected that cases of food fraud, which have caused serious food safety scares in recent years, will only increase. Companies who produce or distribute products particularly susceptible to food fraud, such as edible oils, may find some insurers’ rates to be higher to reflect the increased risks.

In any case, food companies across the board can expect that recall insurers will increasingly seek insight and knowledge on how their clients in the food sector manage their supply chains.

To keep pace, insurers need an increasingly international outlook and those with global expertise and knowledge are much better placed to offer considered cover. Insurance companies need an understanding of the changing product safety laws across the globe, as well as product recall regulations and procedures.

China, for example, recently implemented revisions to its Food Safety Law in an effort to unify its food safety standards, while creating a national monitoring and evaluation system. These new policies are giving governments in many parts of the world more power to intervene and order product recalls and withdrawals.

Unlike in Europe, regulation in the ASEAN is not harmonised on food safety although a lot of work is being done across borders to change this. The result is that food businesses in the region will see their compliance load grow and the complexity of any product recall multiply.

In response, insurance companies are tailoring their products to ensure that policies are developed to address the product recall risks caused by regulatory changes and help companies ensure compliance as well as an understanding of their regulatory requirements in countries where they are selling products.

However, food companies may increasingly find cover and limits adjusted lower for government recalls in high risk environments. Insurers are also a key player in the promotion of food safety standards, and some offer favourable rates to food industry clients who are graded top tier for safety.

Trusted Relationships

Trusted Relationships

The insurance industry is increasingly working with clients to ensure risk management systems are in place. Not only does this partnership between insurers and clients give companies greater peace of mind in terms of risk transfer and financial security, it also delivers the right solution and the impetus for a better understanding of risk.

It is important that insurers offer clients products that not only provide coverage but also crisis response programmes to meet the increasing operational, regulatory and reputational risks faced by the food industry.

In the wake of a food safety crisis, product recall insurance can provide valuable coverage as companies can face significant costs when recalling their product. General insurers offer product liability insurance which sometimes offers a small sublimit for product recall expenses, however, coverage can often be very restricted.

With the emerging risks at hand, food companies should look for an insurer whose offering provides a more comprehensive level of cover designed specifically for the food industry to protect clients who experience a recall and product contamination event.

Such policies should cover losses that can be caused by accidental as well as malicious contaminations and also product extortion demands. The best policies will go beyond covering the costs associated with recalling products to provide cover for loss of gross profit, costs of restoring plant and machinery to resume operations and expenses in helping to rehabilitate sales after a contamination event.

Some insurers will go a step further, allowing clients to allocate a proportion of their premium for pre-incident risk-analysis and crisis-response services.

Top insurers will provide clients access to a network of crisis management specialists as part of their product recall coverage. They should offer risk management guidance in areas such as food-safety and operational risk; regulatory compliance; supply chain management and product tampering and security.

These measures are an example of how an insurance company, working with a client, can assist in effective product recalls to protect consumers and help to protect a client’s reputation during a crisis.

For food companies, preventing food safety problems also relies on managing other key stakeholder relationships. The increasing number of recalls caused by the supply chain demonstrates that companies cannot simply rely on a certificate of analysis, supplier specifications or a company’s credentials.

One of the most critical risk mitigators is developing long-term sustainable relationships with trusted suppliers like ingredient vendors, packaging providers, distributors and other key partnerships. It is important for companies to undertake regular site visits to their manufacturers or suppliers, and commission third party audits to maintain reliability and transparency.

From outsourcing services to the supply of ingredients, tracing a food problem back to its source is complicated by multi-tiered supply networks and divergent standards for food quality and safety.

It is important to have a good documentation process throughout the supply chain, especially for companies yet to implement basic traceability principles. This will assist in driving accountability and help to ensure quality, safety and consistency.

Communication Is Key

Communication Is Key

The consumer today is more exposed to media and aware of food safety issues than ever before. News about a safety incident in one country can spread globally in minutes, impacting a company’s brand and reputation.

Social media adds an entirely new challenge by instantly highlighting even the smallest, most containable issues. Food companies must address this by becoming better equipped to respond quickly and effectively in a crisis scenario.

The insurance industry is increasingly recognising the correlation between the effectiveness of a company’s crisis communications and the impact of a product recall incident on its business.

Having strong crisis communications plans in place can make a significant difference in the resilience of a company during a product recall incident and its ability to recover. The most innovative of insurance companies have therefore begun to include crisis communications support as part of their product recall insurance offering.

Companies should look for an insurer which offers clients pre-incident services as part of their coverage such as crisis communications training, including mock recall and crisis simulations and managing social media in a crisis. Some insurers are also beginning to offer crisis communications counsel and support during an incident, also as part of product recall coverage.

With food safety set to remain a challenge in coming years, particularly given the emerging issues related to food fraud, no company can be completely protected from such incidents. The best approach is to work with your insurer to thoroughly understand the emerging risks your company could face and to ensure you have the right risk mitigation strategies in place to protect against and minimise them.