Claims rise shows growing product recall risks

Defective product risk is an increasing peril for companies, causing significant financial damage, says Allianz Global Corporate & Specialty (AGCS) report.

Tougher regulation, global supply chains, materials from fewer suppliers and consumer awareness are contributing to a rise in recalls.

AGCS claims analysis show that average cost of significant recall is $12 million. “Ripple effect” events can cost billions.

Automotive industry most impacted, followed by food and beverage sector.

Emerging triggers include recalls for ethical reasons, cyber recalls from security vulnerabilities or hackers manipulating products, and social media.

According to a statement from Allianze, a faulty pedal causes a car to inadvertently accelerate. An outbreak of contaminated peanuts results in a 25 percent industry-wide reduction in sales. Each of these incidents triggered major product recalls, resulting in billion dollar losses. Product-related risk is one of the biggest perils facing businesses today, with recall exposures having increased 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. It highlights the automotive industry as being the most impacted by product recalls, followed by the food and beverage sector, based on analysis of insurance claims.

“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) and 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 analysis of insurance industry claims by AGCS. Recall claims are a major contributor to this total, alongside product liability claims.

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