Recall can be catastrophic in ‘complicated web-like network’

Speaking to StrategicRISK just a few weeks after moving from London to Singapore, Sharp (pictured) said contractual requirements were becoming more common for Asia-based companies that exported their products overseas.

“Companies nowadays are faced with increasing onerous contractual requirements to have adequate recall coverage in place,” he said.

“We constantly see large manufacturers and retailers passing their costs back down the supply chain to their suppliers.”

Supply chains were becoming more complex as companies sourced ingredients from further afield in order to achieve cost savings, Sharp added.

“Through this globalisation process, the supply chain has evolved into a very complicated web-like network further complicated by the use of multiple intermediaries used in product sourcing,” he told SR.

“This has brought about increasingly difficult challenges for companies and regulators in tracing the source of contaminations when things go wrong.”

Sharp started his career at Arthur J. Gallagher (UK) working for more than five years as a broker in the global casualty team focusing on product recall.

He joined XL in April 2012, and his transfer to Singapore is part of the insurer’s strategy to cater for the growing demand for product recall insurance in the Asia-Pacific region, especially in the food and beverage industry.

Both the amount and severity of product recalls are on the rise, Sharp points out.

“This is due to a number of factors, but key drivers of this sprawl are a tightening of food safety regulations around the world, greater scientific ability to connect illness outbreaks with specific products, and economic pressure in a global supply chain that is more complex and interconnected than ever before,” he said.

More and more companies were recognising the catastrophic nature of a product recall, Sharp said.

“The intention of a recall policy is not to cover the day-to-day glitches that can be experienced on a production line, but to cover the significant recall costs which, if uninsured, could result in significant financial impact to the company,” he explained.

Sharp believes that when buying cover, companies needed to know exactly what they were getting.

Beyond simple risk transfer, insurers should be offering a raft of supporting capabilities such as access to media specialist, regulatory experts, legal advisors, customer call handling agencies and security consultants, he said.

Many companies still relied on the product recall extension under their product liability policy, Sharp added.

“This can still leave a business with significant uninsured costs after suffering a recall, such as access to pre- and post-incident crisis consultant services, loss of revenues and product rehabilitation costs,” he said.

“Today there is increased insurance capacity from specialist ‘recall’ insurers, so many companies are looking to increase their policy limits and move to a stand-alone product recall policy.”

Mock recall simulations

Beyond insurance, Sharp said planning and preparation were key to surviving a recall event.

“We would always encourage companies to frequently undertake mock recall simulations,” he said.

“Not only could a recall simulation help identify any gaps in their recall plans, but also highlight the significant challenges and costs associated with a recall.”

The financial consequences of a recall could go far beyond retrieving products, and often companies were unaware of the extent of these costs to the business, Sharp said.

“The company may be faced with expensive consultants’ costs in determining the cause and potential impact of the problem, expensive emergency laboratory testing or other specialist consultants required to help manage the situation,” he explained.

“A company can also face significant business interruption costs from facility closures, cancellation of supply contracts and increased costs to outsource manufacturing of products as a result of an incident.”

Damage to corporate reputation presented one of the largest risks and the cost of lost consumer and customer confidence could be the most damaging cost that a company faced, Sharp said.

“A company can spend substantial costs on rehabilitating their brand in order to achieve the market share they enjoyed prior to a recalled event,” he added.

Sharp believes that the pressure is really on for manufacturers to better manage recalls.

“Quickly getting the affected product off the shelves and replacing it is just one part of managing a recall in the right way,” he said.

“Communicating with customers is critical. And today social media plays a huge role.

“Engaging with customers via these channels is extremely important if a company wants to retain brand loyalty and protect its reputation.”