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Supermarkets blamed for ‘astronomical’ fees as the cost of product recalls rockets – eclipsing even the horsemeat scandal and fuelled by Twitter frenzy
THE cost of product recalls is soaring as retailers ruthlessly punish the offending suppliers – and news of goods gone bad spreads like wildfire across social media.
Insurers are seeing a surge in payouts to food manufacturers for products taken off the shelves, with the number of investigations by the Food Standards Agency higher than it was two years ago during the notorious horsemeat scandal.
Insurance insiders say the current level of claims is unprecedented.
Globally insurers have received claims worth almost £40million for the first six months of this year alone, according to the world’s largest privately owned brokerage firm Lockton.
Almost all the claims go through the London insurance market, the Kansas-based firm said, adding that it was seeing increases in food claims in particular, with some individual cases running into millions of pounds.
Over the past decade more suppliers have taken out insurance to cover product recalls as the cost of each incident has grown.
Debbie Day, managing partner for Lockton’s Birmingham office, said: ‘Supply chains are increasing in complexity and risk in the search for lower prices. There is also huge pressure on retailers in the UK.’
Last year, the FSA investigated 1,645 incidents in the UK – up on 1,562 incidents in 2013 at the height of the horsemeat scandal.
Reasons for recalls vary in severity from contamination to mislabelling on packaging. The agency’s data suggests the number of recalls due to allergens has increased in recent years.
Claims for environmental contamination – where extraneous products are inadvertently introduced into food or drink – are down.
However, incidents involving microbiological contamination, such as the accidental introduction of bacteria, yeast, or mould, have almost doubled since 2006 – with 309 cases last year.
All the big supermarkets have been affected. Last week, Sainsbury’s had to recall its own-brand Basics Unsweetened UHT Soya Drink because in a number of cases it had curdled.
The week before, Morrisons recalled its Savers Cooked Ham due to detection of listeria. Tesco recalled its own-brand bran flakes in the same week because some packs contained pieces of plastic.
Insurers are reporting hugely increased demand for cover against product recalls, as suppliers fear the spiralling costs of an incident.
The increased use of social media, such as Twitter, has also played a part. Experts say that consumers are now quicker to pick up on news of faulty products – and quicker to share that information with friends via their mobile phones.
Insurers have covered the risk of product recalls for decades, but the scope of cover has expanded significantly over the past decade.
Where insurance once covered only the costs of locating, withdrawing and destroying a contaminated product, Lloyd’s underwriters now insure a much wider range of risks, said Andrew Robinson, a product recall expert at loss adjuster Cunningham Lindsey.
‘There is cover for the value of the contaminated product itself, replacing the suppliers’ loss of profits, and cover for the brand too,’ he said. But what is adding to the spiralling cost of claims are the charges supermarkets levy on suppliers.
Generally, the supplier will repay any consumers affected. But supermarkets are passing on charges for their loss of profits, an audit charge for investigating suppliers’ premises and administration fees too.
Robinson said: ‘Retailer charges can be considerable. They are supposed to be an attempt by retailers to measure what it costs them to deal with a recall. But they are often exaggerated and sometimes astronomical, without a great deal of supporting evidence and substance.’
Christof Bentele, head of crisis management at underwriter Allianz’s Global Corporate and Specialty arm, said that growing public awareness about product safety and regu- latory rules was driving an increase in claims – and the market as a whole.
‘There is more public discussion about recalls than ever. Customers get more concerned,’ he said.
‘There is more information from the media and government, with a public alert system in the European Union capturing information and making it public online where anyone can access it.’
The FSA also issues product alerts on its website.
Globalisation means that supermarket products increasingly have a much more complicated supply chain than in the past.
‘When the supply chain grows you have more critical points of failure,’ Bentele said. And with more products being exported to more countries he said recall costs are ‘much, much higher’. The complexities of the supply chain mean it is more difficult to determine who is responsible, leading to more complex, costly claims.
Product recall insurance is not limited to food producers. Car makers often require the companies that supply them parts to have it. And toy manufacturers and suppliers of technological goods are increasingly taking out the insurance.
But it is food and beverage suppliers who are among the biggest users of the cover.
Many, if not most, product recalls pass customers by, with big scandals like the horsemeat issue the only ones making headlines.
But with costs rising, and the cover growing, the insurance industry is starting to pay them all very close attention.