The claims costs connected to the recent half billion egg recall will be unprecedented and include liabilities such as business interruption and reputation damage. During the next 15 months, the U.S. Food and Drug Administration will inspect the 600 largest egg production facilities, in response to the recall. From pet food to tomatoes, the frequency and severity of food recalls are increasing, prompting greater awareness among food system, agribusiness and beverage companies to insure against such events.
Aon Risk Solutions, the global risk management business of Aon, recently released its 2010 Food System, Agribusiness and Beverage report, which highlighted the need for food system, agribusiness and beverage companies to reduce volatility in revenue, stabilize earnings and control pre-loss and post-loss risk exposures in today’s global marketplace. The report findings will enable organizations to benchmark their risk management and risk financing practices against those of their peers.
“An accidental or malicious food contamination crisis can have a devastating impact on a company’s reputation, profitability, customer loyalty, and employee retention,” said Richard L. Shanks, national managing director of Aon Risk Solutions’ Food System, Agribusiness and Beverage practice.. “As recalls become more frequent, organizations must continually assess their risk exposures and develop extensive risk strategies to ensure that they are prepared for unexpected events.”
According to the report, top risks faced by the industry include:
- Supply system disruption
- Food safety and defense
- Reputation risk and brand damage
- Regulatory changes
Many consumer-facing organizations overlook the impact suppliers may have on their public reputations. Recent financial security risk assessments conducted by Aon’s Food System, Agribusiness and Beverage practice indicate that many suppliers’ insurance programs will not respond effectively to significant contamination events. In addition, the vast majority of ingredient suppliers and importers have no coverage for their legal liabilities should a customer suffer a business interruption or reputation loss caused by a contaminated ingredient.
Most companies have coverage for bodily injuries associated with a contaminated food, but the majority do not have coverage for the resulting loss of revenue caused by loss of consumer trust, damage to brand name or additional expenses associated with product contamination and recall.
Basic strategies to improve an organization’s chances of recovery from a major contamination or recall incident include:
- Pre-incident Planning: The first step in managing the risk of food contamination incidents is proper advance planning. Every company should have a well-documented and practiced product recall or retrieval plan, with a clear chain of command and communication. No amount of insurance can replace customer confidence lost due to poor planning and/or execution of a crisis or recall.
- Crisis Management Planning: An appropriate crisis program goes beyond the pre-incident plan to coordinate all activities associated with a crisis. Team members may include the chief executive officer, general counsel, risk manager and representatives from security, marketing, public relations, quality control, human resources, distribution and manufacturing.
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