Product recall insurance for goods manufactured in China: How businesses can successfully navigate through product recalls and mitigate corporate risk

A major risk factor for every company conducting international business relations are product recalls. This is especially true for firms that handle merchandise manufactured in China, as goods originating from China face a comparably high risk of product recalls. Unfortunately, the assumption that a product liability insurance covers a potential product recall, is a common misconception. Thus, firms must take out a separate insurance to cover costs resulting from potential product recalls. In brief, having a product recall insurance for goods manufactured in China shouldn’t miss on a company’s risk-management strategy.

Close to 40 % of global product recalls concern products manufactured in China

According to data from the OECD Global portal on product recalls, 972 products from Chinese manufacturers were recalled in the first three quarters of 2021. This implies that 4 out of 10 recalled products worldwide were manufactured in China.

Source: OECD, designed by daxue consulting, Origin of recalled products (Top 10 countries)

Product recalls vary substantially among industries. Among the 972 goods recalled in China between January and September 2021, 176 were related to toys and games. Besides, electronics showed a comparably high likelihood of being recalled (120 recalls). A case study of deep fryers that were shipped from China to Belgium and recalled after noncompliance with the EU regulation regarding electrical products can be found here.

The differences among industries are key to understand for foreign distributors, as this helps to decide about whether to take out a product recall insurance for products manufactured in China or not. For example, a distributor handling electrical supplies will face a substantially higher risk of a product recall than a footwear retailer.

Source: OECD, designed by daxue consulting, Number of product recalls of Chinese goods by industry

Why smart businesses take out a product recall insurance for goods manufactured in China

Unfortunately, many firms underestimate to potentially hazardous consequences  a large product recall can have. To begin with, recalling a product imposes exorbitant costs, which could trigger corporate bankruptcy if not insured against. Besides, the reputational damage for the distributing company might be substantial. It will most probably take years to rebuild customer loyalty and brand image. Getting sales back to the original level after a product recall is a fierce challenge for all companies. Consequently, it is a good idea for foreign firms to add a product recall insurance for goods manufactured in China to their insurance portfolio.

Finding a suitable product recall insurance

The global product recall market has remained relatively stable over the last years. However, a market analysis report by AON published in 2021 states that the median rate of product recall insurance policies has increased by 3.22% in 2020 YOY.

Finding a product recall insurance for goods manufactured in China in the recently dynamic market as a foreign firm can seem like a daunting task. However, most insurance brokers offer product recall insurance as an option. In case a company has already established a longstanding relationship with a major insurance carrier, negotiating a competitively priced product recall coverage should not constitute a major obstacle. In fact, too many businesses are just unaware of product recall insurances as to mitigate corporate risk. In this respect, campaigns such as the OECD’s Global awareness campaign on product recalls has enhanced businesses’ understanding of the market.

Key take-aways

• A product recall insurance for products manufactured in China is important as products originating from China show a high likelihood of being recalled when compared globally.
• Products in the segments Toys & Games, Electrical Supplies and Personal Accessories show the highest likelihood of being recalled.
• In many cases the manufacturer has no recall cover. This implies that the distributor will be held liable of potential recall expenses. Therefore, any distributor should pay attention to their insurance portfolio, and consider adding a product recall insurance.
• To ensure that recalled products do not hamper a company’s performance and mitigate corporate risk, firms are well-advised to consider taking out a product recall insurance for goods manufactured in China.

To manage your business risks so you can optimize your growth, insure your business today, please contact ARMS.

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