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Overview

Across the globe, the number and magnitude of product recalls has increased significantly in recent years. According to the Australian Competition and Consumer Commission (ACCC), Australia’s primary national regulator for product recalls, there were 538 consumer level recalls in Australia in 2013, up from 480 in 2012 and 448 in 2011. This represents an average of over 10 recalls per week. “Food and Groceries” represented 9% of all recalls (46 recalls in 2013) but 12% in 2012 (58 recalls ). These statistics represent only publicly announced consumer-level recalls. There are many more trade level recalls and withdrawals that do not become public knowledge.

Although they are more widely reported, a product recall is only one of the potential consequences of a product contamination. Affected companies report the volume of recalled products, but rarely disclose the real cost of contamination incidents. In addition to recall costs, product contaminations can cost food and beverage manufacturers millions in regulatory compliance, lost profit, decontamination, prolonged manufacturing delays and more. Ingredient contamination can be particularly costly, and with today’s global supply chains, can impact even those who do not think they are at risk.

The long-term brand damage to an entire product category, if tarnished, can impact earnings over a longer period of time. Government agencies monitor product contaminations and can force companies to take corrective action ranging from product recall, extended product recall, or suspension of production.  

At AIG, we believe the more you understand about your potential risk exposure, the more informed decision you can make about how to protect your customers, your supply chain, and your bottom line.

Knowing your risk starts with knowing your exposure. AIG’s free and confidential service, the NOVISM Product Recall Cost Estimator, boils it down to one number.

As the inventors of Contaminated Product Insurance with over 25 years’ experience, AIG has the expertise to help you better understand your risk, manage exposures, and make decisions to prevent future contaminations and recalls from occurring.

Learn more about the NOVI Recall Cost Estimator by clicking the video below:

Why it's important

The more you understand about your potential risk exposure, the more informed decisions you can make about how to protect your customers, your supply chain, and your bottom line.

Food contamination threatens public safety. According to a 2007 Harris Interactive poll1, 55% of consumers said they would temporarily switch brands following a recall incident and 21% would avoid purchasing any brand made by the manufacturer because of health and safety concerns.  Moreover, four out of five respondents indicated general concerns over recent food safety recall incidents.

Product recalls are expensive. For large companies that have faced a recall in the past five years, 77% of respondents to a recent Grocery Manufacturers’ Association poll2 estimate the financial impact to be up to $30 million USD; 23% reported even higher costs.

The potential long-term damage to a brand can eclipse the short-term cost of recalling products. An Australian study on consumer loyalty – a key element of brand reputation, found that 73% of consumers remain loyal to a brand if a complaint is handled effectively.2

A mismanaged recall can become a crisis that affects a company’s reputation as well as having a significant financial cost. A 2004 study by the University of Melbourne3  of corporate crises indicates that the average cost of a crisis is around $10m with 25% costing over $100m. A quarter of companies that have a crisis won’t survive.

As global supply chains continue to grow in complexity, so do risk exposures.  Although Australian food exports have grown, food imports to Australia in 2011-12 grew to $11.3 billion, a nearly 9% increase over 2010-11. Imports from China have nearly doubled in the last 10 years and now represent over 7% of all imported food product.4

1Analysis of consumer level recalls posted on recalls.gov.au site
2Consumer sentiment, emotions and advocacy now, Consumer Directions, Society of Consumer Affairs Professionals (SOCAP Australia), September, 2009.
3Coleman, The Frequency and Cost of Corporate Crises, Journal of Contingencies and Crisis Management, Vol 12, Number 1, March 2004.
4Australian Department of Agriculture, Australian Food Statistics, 2011-12.

What is NOVI?

NOVI estimates the financial impact of a product recall caused by an accidental product contamination. We help you better understand your risk, so you can make better decisions to protect your customers, your supply chain, and your bottom line.

Your confidential NOVI Estimate is the largest probable loss arising from an accidental product contamination that occurs during production at the plant level, assuming failures of critical control points in the sourcing or manufacturing of the company’s product. In insurance terms, the NOVI Estimate is also known as a Probable Maximum Recall Loss. It includes the value of contaminated products, recall expenses, destruction costs and lost profit associated with the contaminated products. 


AIG’s methodology is based on an extensive analysis of thousands of recall incidents, insight from over 25 years of interaction with food and beverage manufacturers worldwide, and input from leading food safety consulting companies.

AIG's goal is for NOVI to provide a confidential, objective and accurate reading of the product recall risk, allowing companies to:

  • Better understand potential recall exposure;
  • Determine the split between the amount of product recall exposure retained on the balance sheet vs. the risk transferred via insurance;
  • Better manage third party volumes or contractual indemnity provisions, by measuring the recall risk at the supplier or contract manufacturer level.

 

How does it work?

The NOVI Estimate is a data point, based on over 25 years’ experience, to help food and beverage manufacturers distributors, and importers to make more informed decisions about their risk.

Any food and beverage company can access NOVI. Third party requests on behalf of such companies are not eligible.

Please use the following steps:

  1. Select the “Request a Questionnaire" tab

  2. Enter the appropriate contact, company and plant location information (for up to three different plant locations). Submit your information for review. For each plant you have the option to select the language in which plant specific information will be collected (see next step – NOVI Questionnaire).

    Within approximately three business days, you will receive a NOVI Questionnaire via e-mail containing a confidential questionnaire. The questionnaire is distributed as a PDF form and has a unique identifier for your company and plant. If you registered more than one plant, you will receive one e-mail and questionnaire per each plant.

  3. Complete the NOVI Questionnaire.  Please have the following information accessible to help you complete the process:
    • Annual revenue for the manufacturing plant
    • Number of operating days
    • For the three products that generate the highest sales
          o  Annual revenue
          o  Average "cost of goods manufactured"' and "cost of goods sold"
          o  Number of production lines
    • Insurance broker contact details if you chose to have the final result sent directly to your broker.

      All fields are required unless marked otherwise. Selecting a blue help icon will reveal further details on how to complete specific fields. The form can be saved by the user until completed.

  4. Upon completion, please forward your responses on the NOVI Questionnaire by selecting the “submit” button located at the end of the form.  In approximately three days, your personalized NOVI Estimate and a questionnaire summary will be emailed back to you. If you chose the insurance broker distribution option, a copy of this will be sent directly to your broker.

NOVI Product Recall Cost Estimator Limitations

The NOVI estimate does not consider an increase in loss caused by:

  1. Regulatory action demanding an extended recall or production suspension; or
  2. Loss of public confidence in a product, brand or company, including any costs to mitigate such loss; or 
  3. Extended interruption of production caused by decontamination or equipment repair; or
  4. Loss of contract or license to manufacture a product; or
  5. Intentional acts including malicious acts.

AIG's Solution

AIG’s Contaminated Product Insurance (CPI) is designed to protect companies against the financial loss caused by a product contamination, whether accidental or malicious. Please find below an outline of CPI describing the insured perils, coverage and services embedded in the policy.  This is only a summary for general guidance and scope, terms and conditions are subject to policy provisions. Coverage may vary by territory.

For more information regarding AIG’s Contaminated Product Insurance please contact your insurance broker.

For information on AIG’s product recall and contaminated product solutions please visit the Contaminated Products Insurance page.

 

 

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