Rush to cover product recall

Pharma & auto component manufacturers rush for insurance cover against product recall.

The European Union (EU) has forced 61 Indian companies to recall food products that were exported to the EU, on the ground that the products were contaminated.

As a result, Indian pharmaceutical, automobile components and food manufacturers are rushing to take insurance cover against product recall, according to Aon Global Insurance Services Executive Vice-President (corporate broking) Andrew Clarke. He declined to reveal names, but said interest in such insurance policies had increased over the past year.

"There is an increasing awareness among Indian manufacturers of the liabilities they face, especially when exporting to the US, the EU and Australia, which are increasingly litigious," Clarke added.

India was not alone on the list of manufacturers that the EU has issued notices to on grounds that their food products were contaminated "" China topped the chart with as many as 147 EU notifications. India ranked ninth on the EU list.

But with exports booming, Indian products sold overseas are increasingly being exposed to the threat of product recall. This could cost a company millions of dollars.

"In the automobile industry, the cost can be as high as $250 million for recalling one's product, considering transportation charges, advertising costs, storage facilities, the need to inform distributors and so on," Clarke said.

This is because the average time taken for recall is 250 days, and the daily cost of recalling an automobile model is about $1 million. Should an Indian company supplying auto parts be held responsible, part of the cost can be passed on to component manufacturers.

Still, the liabilities can be awesome. According to Clarke, when 6.5 million tyres were recalled from the market, it almost put Bridgestone out of business.

In September, Toyota recalled 646,000 vehicles, of which 470,000 were outside Japan. Similarly, Honda and Hyundai were forced to recall their vehicles sold in over 40 countries.

Product recall risk cover helps protect the Indian company's balance sheet and brand against such liabilities, notes Praveen Vashishta, CEO and managing director of Howden India, the insurance broking entity.

Under the risk cover, insurance companies take care of the cost of recalling defective or potentially defective products. They also cover the expenses of hiring a public relations company to assist with damage limitation, Howden officials said.

Still, the cost of such cover is very high and is determined by the turnover of the company, the country to which the product is being exported and the type of product manufactured, Clarke said. "Auto component manufacturers would pay a higher premium than an entity making TV parts," he added.

Products have been recalled even in India. Cadbury India was forced to recall some of its chocolates after worms were detected in them.

Food products are often recalled after being infected with bacteria which cause infections like Hepathitis A and botulism, and when glass splinters are found in them.

In some cases, colour additives have been found in spices, leading to cases of poisoning, according to Aon officials. For instance, Baracuda steaks were infected with Vibrio cholerae. Many frozen fish products have also found to be infected.