Reputational risks for the food & agri sector

26 June 2017

By the time you read this sentence, people around the world will have sent over 12 million emails and 30,000 Tweets. Following a product recall, your company could become the subject of these digital communications. How the business responds could either transform it, in the weeks and months ahead, or kill it stone dead in seconds.

Risks and potential implications

There are two broad risk categories to think about when it comes to product recall. The first covers issues that arise in your own manufacturing and production processes. The second includes problems that come out of your supply chain and any direct or indirect dealings with third parties. 

Risks in the first category are very much in your control and you can mitigate them significantly by implementing robust operational procedures.

It is much harder, however, to deal with the second category, as you cannot exert the same direct control over these issues.

This was recently shown by the poultry scandal in Brazil where a federal investigation uncovered packaging units selling sub-standard and rotten meat. Only 21 units were found to be at fault, but the scandal affected thousands of other meat packers and producers.

Countries including China, Chile and Egypt placed immediate bans on all meat imports from Brazil, although these restrictions have since been scaled back to cover only the 21 units involved.

Reports found there was a 22% drop in the weekly average exports of pork and poultry following the scandal, and thousands of customers worldwide saw their supplies disrupted.

The global level of publicity also created suspicion around meat and poultry products from Brazil, as well as from other completely unrelated countries.

news travel fast and in one second

Crisis management

No matter where a problem originates, it is very important, wherever possible, to control the conversation that takes place around it.

You have to say the right thing, to the right people, at the right time. Effective communications identify and explain the issue clearly, outline the investigation that is being conducted into its causes, and detail how a solution is being implemented. 

Having alternative supply and production capabilities will also ensure you can maintain output while the issue is ongoing. 

All of this activity should be covered by a crisis management plan and only by making sure it is detailed and well-rehearsed will it deliver the benefits you need it to. 

Insurance and captives

Product contamination insurance will provide cover for rehabilitation costs, adverse publicity, and business interruption losses from the contamination event. It will also provide access to PR and crisis management expertise. The cover provided under the policy and crisis support offered go a long way to helping a company protect or restore its reputation. 

However a standard recall policy is only triggered by a clear threat of bodily injury or property damage if the insured product is consumed or used. Unfortunately there are instances of reputation damaging events where traditional recall policies are not responsive; the horsemeat scandal being the most notable recent example. 

A few insurers have tried to fill the gap. Some pure crisis management solutions are available, and a couple of attempts at revenue protection following an insured being named in a negative news story, but these do not meet the requirements of the majority of our food clients and there is more the insurance industry could do to create effective policies for businesses in this sector.

To help develop these policies, we are working with a number of larger companies to develop captive insurance solutions for pure reputation risks. By writing these policies within our clients’ captives, we can road test wordings and create a loss history. This will then help us go out to the wider market and encourage underwriters to accept these risks for a reasonable premium. 

Finally it should be stressed that a contamination is not necessarily a disaster. Many businesses have shown that they can actually benefit from a product recall event by acting quickly and effectively to reassure their customers. But a bungled response to a product recall will soon be global news and potentially destroy a business’s reputation. 

If you prepare for the worst, you are more likely to produce the best outcomes in adversity.

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For further information, please contact Simon Lusher, Head of Food & Agri on +44 (0)20 7459 5550