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Why knowing your product recall risk starts with knowing your exposure

Date Article was Published 10.15.2014
Topic Product Releases

Why knowing your product recall risk starts with knowing your exposure

Maintaining food safety standards and managing recall risk are two increasingly pressing issues for New Zealand companies. As international supply chains continue to expand in complexity, companies are exposed to greater risk, increasing the likelihood of a contamination. Indeed, the number and magnitude of product recalls around the world has increased significantly in recent years, and New Zealand is not immune. There is now an average of five recall incidents in the food and beverage industry reported every month in Australasia with 2-3 of those in occurring in New Zealand.*

This increase, combined with a broader reach of media and social media, has led to much greater awareness of recall events and a greater potential risk to company reputations as a result. Regulation is also catching up – the new Food Act 2014 gives the government more power to intervene in product recall and food safety incidents, potentially taking away the ability for the affected company to control the situation.

But while product recalls are becoming larger and more frequent, most food and beverage companies are unaware of the magnitude of their recall risk. A big part of this problem has been the lack of reliable data and a credible methodology to estimate the financial impact of a product contamination. While product contaminations occur frequently, companies rarely disclose the real cost of contamination incidents, so benchmarking in the past has been very limited. This issue is not specific to New Zealand, and affects food and beverage companies worldwide.

In response to this problem, AIG created NOVI, a free and confidential service that enables businesses to better understand their product recall risk exposure by estimating the probable maximum loss from a recall event. When designing NOVI, AIG drew from more than 25 years of insight and information gained from working with food and beverage manufacturers worldwide – including extensive analysis of thousands of recall incidents – as well as input from world-leading food safety consulting companies.  The result is a proprietary methodology that uses more than 80 data points and considers the value of the contaminated products, recall expenses, destruction costs and lost profit associated with the contaminated products. NOVI’s contribution to the food and beverage industry has been recognised with a highly commended prize in the 2014 NZ Innovators Awards.

By knowing their “worst case scenario”, companies can focus the development of their safety programmes and procedures, and ultimately make more informed decisions on how to protect their balance sheet, their supply chains, and their customers.  NOVI helps companies to identify their areas of risk and the associated cost, providing insight into where companies can mitigate or even eliminate some areas of exposure.

AIG’s Casualty Manager, Ron Curin, says:

“We can liken the use of NOVI to taking your blood pressure. If you take your blood pressure and find that it is high, you may go to the doctor and be given medicine. But you may also change your lifestyle by eating differently and doing things differently in general.” In this way, NOVI is a true risk management tool – by providing an estimate of the financial exposure resulting from the product recall, NOVI can enable companies to find a solution to the issue before they face it. The solution will vary from company to company and will be multi-faceted.”

A comprehensive product recall insurance policy will be part of this solution for most companies, Mr Curin says, and NOVI also allows companies to determine how much of a company’s exposure is retained on the balance sheet versus the risk transferred via insurance, and whether this needs to be rebalanced.

“With a better understanding of their product recall exposure, companies can have increased confidence in discussing their insurance requirements with their broker. Similarly, insurance brokers and risk managers are able to better advise their food and beverage clients on appropriate insurance solutions, knowing that they understand the financial exposure at risk.”

Since its launch in April 2014, NOVI’s New Zealand website has received visits from more than 360 New Zealand companies looking to learn their financial exposure in the event of a product recall caused by an accidental product contamination. Worldwide, more than 244,000 companies have used NOVI to help manage their product recall risk.

Food and beverage companies should contact their broker for more information on insurance solutions for recall risks. For more information on NOVI, visit www.aig.co.nz/NOVI.


*
As at October 2014. NZ and Australian product recall data is based on AIG analysis of data collected from the New Zealand Ministry of Primary Industries and the Australian Competition and Consumer Commission and does not include trade recalls or withdrawals.