Why Manufacturers Cannot Underestimate the Cost of a Recall Event

The latest recall by Nissan of hundreds of thousands of vehicles in North America in June to resolve a latch problem that may allow the hood to fly open while the cars are moving comes on top of three previous recalls for the same issue as well as numerous others, including one in 2019 to fix a brake fluid leak which could cause vehicles to catch fire.

Whilst a significant event for Nissan, it is just one example of product recalls that occur in the manufacturing industry globally on a daily basis — the true impacts of which can often be underestimated by the manufacturer with potentially devastating consequences.

No manufacturer can afford to ignore their product recall exposure, but this is particularly true in the small and medium-sized enterprises (SMEs) space where competition is high, profit margins are squeezed and customers can easily find an alternative supplier.

It is important for brokers to ensure product recall options are presented as part of a full risk transfer proposal, and the main thing to consider when thinking about a manufacturing client’s exposure to a product recall event is the true cost of a product withdrawal.

There are many costs involved when a product safety issue is discovered, the most obvious being that to recall the product itself — what is needed to remove it from circulation, the costs to store and (if necessary) destroy that product and notify stakeholders. However, when a recall incident does occur, it sets off a chain of events and the true cost goes much further than many manufacturers think.

It’s likely that a significant amount of rectification needs to be done.

The manufacturing location may need a complete a clean down to be fit for use, and machinery may need to be repaired. The product may need to be remade and potentially redesigned. Staff may need to work overtime — all of which comes at a cost. Then there’s the business interruption that the manufacturer will undoubtedly suffer: production lines may have been stopped, interrupting sales, credits may have been issued to key customers, and contracts may have been canceled.

Whilst the first party costs of a product recall often go ignored and uninsured, the most underestimated cost is the impact that a recall can have on the reputation of the business. The most challenging and expensive part of a recall is often keeping the business operational while facing intense public scrutiny.

A recall incident can stick in the mind of a consumer, potentially driving them to competitor products over quality concerns for a significant period of time. Where competition is high and profit margins are tight, the impact this could have on the survival of a business is significant in the SME manufacturing space. Customers might start looking elsewhere for their next purchase.

Manufacturing clients may believe that a recall event will be covered by their more traditional insurance policies, such as general liability or products liability, so it’s really important that brokers review what — if any cover — these afford.

Some may include an element of recall insurance, but coverage may be misleading. The business may be protected from third-party costs, but first party costs are generally not covered — or the cover is extremely limited. Recall sub-limits are usually small and can often leave companies underinsured. Triggering these sub-limits can also be difficult as the wordings are narrow.

Only stand-alone product recall insurance provides the necessary first party indemnification to protect cash flow should the worst happen and allow a business to continue trading.

Presenting this as part of a full risk transfer proposal is an important part of the conversation that brokers should be having with all of their manufacturing clients. Without this cover in place, these businesses could find themselves with mounting costs as they deal with the fallout of a product withdrawal, with declining sales and public perception stacking the odds against them.

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