Safely growing, processing and distributing food is the staple of a global economy. Yet companies face a growing number of dangers – from undeclared allergens to malicious tampering to even cyber-attacks – that require their increasing attention. How can businesses stay ahead? How can insurance help?
Towards a safe food supply
While natural perils can impact food growing and distribution – up to 80% of Puerto Rico’s agricultural output was destroyed during Hurricane Maria in 2017, for example – there are other concerns for business, such as regulation, food contaminants, genetic engineering, “food fraud”, terrorism and cyber-attack, that equally challenge the food supply.
“With natural catastrophes, businesses have to be resilient,” says Christof Bentele, Head of Global Crisis Management at AGCS. “That is a business risk and companies should have alternative responses. But other issues aren’t as easily mitigated when it comes to food safety.”
A decade ago, a supply chain stretched to three or four steps vertically. Today, it is not uncommon to have 10 steps from the farm to the final product. The more complex the chain, the more difficult it is to manage.
Economic pressures continue across many sectors, stressing more companies and supply chains and exposing companies to human error or even criminal activity. For example, "food fraud" – the intentional substitution or addition of a substance in a product to increase its value or reduce production costs – can severely impact a business’ product liability exposure.
"Food fraud" cases are increasing and costly – around $40bn a year, it is estimated – as a few cursory examples demonstrate. In 2017, Italian authorities arrested eight people with the San Daniele company suspected of commercial fraud and counterfeiting of one of the world’s highest-quality ham products, Prosciutto di Parma, which resulted in the seizure of 13,000 hams with an estimated value of €1.3mn. In China, scientists determined that 58% of the popular Xue Yu (cod) fillet products sold under 30 different brands were not cod but other species, after China tightened its labeling guidelines.
Such tampering is big business. Even organized crime groups have joined the fray, cutting cheaper ingredients into food or selling inferior products as genuine. At the same time, some businesses can be tempted to commit fraud by the need to boost profits. Notable incidents include the infant formula scandal in China where milk powder was deliberately adulterated with melamine. US food class actions for all categories, which include mislabeling, slack fill (weight is less than labeled), false claims of being "all natural". "healthy" and other claims, etc., increased to 145 in 2017, from 130 in 2016. The number of cases filed per year has increased since 2008—and the 2017 filings were about 53% higher than five years ago. There were almost two cases filed per week in 2017, an all-time record.
In 2009, the Peanut Corporation of America shelled out $1bn for salmonella exposure – resulting in nine deaths and the recall of 3,900 products, still one of the largest food recalls in US history. Last year, global producer Newly Weds Foods admitted that breadcrumbs supplied to a number of food companies contained an undeclared allergen – milk – resulting in a total of 3.7 million pounds of recalled product. Also, in 2017, insecticide found in Dutch eggs triggered a massive recall of egg products in 16 European countries, and as far afield as China, costing the family farm supplier over $38mn.
Such product recalls are more complex than ever, can burn through a company’s bottom line and seriously damage their reputation. The food and drink industry is the second most affected by product recalls – behind automotive – according to AGCS analysis of insurance claims.
According to the US Economic Research Service (ERS), food recalls increased on average by 20 events per year from 2004 to 2013, due to complex supply systems, technological improvements, increased regulatory oversight and enforcement and new laws. During the period, recalls increased across food categories (grain, animal products and prepared foods), across all three US Food & Drug Administration (FDA) severity classes (from class I “severe” to class III “least serious”) and were more frequent in high population areas.
Particularly problematic were recalls of ingredients, such as peanut butter and pistachios, which impacted dozens of retail products like cookies, candy bars and ice cream. There was a significant increase in the number of recalls due to undeclared allergens, accounting for 32% of all US food recall events from 2005 to 2017, probably due to tougher labeling standards requiring all eight major food allergens (wheat, eggs, peanuts, milk, tree nuts, soybeans, fish, and crustacean shellfish) to be indicated on a product’s label.
Food-producing companies are challenged to ensure product safety – especially produce growers. Despite this, recalls have increased, including most vegetables. Annual product recalls by the US Department of Agriculture rose 83% from 2012 through 2017. In response to such trends, the United Fresh Produce Association (UFPA) and Western US growers have created Western Growers Shield, a first-of-its-kind insurance program specifically designed to protect food companies from recall liability.
EMERGING FOOD DANGERS
Climate change can be considered a potential threat to food quality. Food- borne illnesses can directly impact the food supply due to natural phenomena like flooding or increased temperatures.
“Obviously, climate change has a direct effect on the food and beverage industries, although probably not food safety,” says Bentele. “E. coli and other food-borne illnesses can be exacerbated by flooding, excessive mold or other events and could lead to widespread contamination. This is where the business risk would be.”
Climate change poses a major agricultural challenge due to the complex role in society that agriculture plays. This trend is expected to continue as agricultural products will become vulnerable to direct impacts (e.g. changes in crop and livestock development and yield) and indirect impacts (e.g. increasing pressures from pests and pathogens) resulting from changing climate conditions and extreme weather.
Genetically modified organisms(GMOs)
(GMOs) – organisms in which genetic material has been altered in a non-naturally-occurring way – allow selected genetic components (e.g. resistance to insects) to be transferred from one organism to another or between non-related species. GMO products are banned in much of Europe, although they are widespread in the US and Asia. In the US, 93% of soybeans and 88% of corn are genetically-engineered.
“There is no scientific proof from an insurance perspective that GMO products are unsafe to digest,” says Bentele. As supply chains grow, however, GMO and non-GMO regional boundaries can be compromised, causing widespread exposure. GMO grain, for example, can blow across borders and be difficult to control.
Unlike conventional foods, specific systems have been set up for the rigorous evaluation of GMO foods relative to human health and the environment. Hence, there is a significant difference in the evaluation process prior to marketing for conventional and GMO foods. In future, GMO could be a major food safety issue to include plants with improved disease or drought resistance, crops with increased nutrient levels and fish species with enhanced growth characteristics.
Since 2010, public and private food and beverage entities have worked with authorities to reduce sector risk in three key areas: avian influenza response; food contamination training; and, most importantly, cyber-security assessment and risk management. In June, 2017, a Tasmanian Cadbury confectionery factory halted production when its parent company, Mondelēz, was impacted by the Petya cyber-attack that cost the company $140mn losses in Q2 2017, alone.
Manufacturing plants are now mostly automated – which introduces cyber risk. Hackers could theoretically change or contaminate a product at the point of manufacture by controlling machinery or changing processes; or cyber terrorists could hold a company hostage by contaminating (or threatening to contaminate) its products.
“Cyber is an underestimated risk for product recall,” says Bentele. “We’ve seen recalls for cyber security vulnerabilities in products like cars and cameras, so food is a natural target.”
Insuring food safety and security
Demand for product recall insurance has increased over the past decade with greater awareness of the potential for reputational damage and significant financial loss. According to AGCS, take-up has been highest in the food and beverage sector. Overall, product recalls impact the food and beverage sector in value and number of dedicated claims second only to the automotive industry, accounting for 16% and 18% respectively. The average value of a food and beverage product recall claim is $9.2mn (€7.92mn).
“In the event of a recall, it’s best that companies work with specialized consultants to make sure the public is safe,” says Bentele. “And that they take action immediately. The longer the product stays on the market, the greater the risk of losing reputation and trust.”
AGCS estimates that 70% of recall plans are inadequate. Product recall insurance provides access to crisis management consultants who work with customers to shore up these plans before a crisis and run mock scenarios to put the plan through its paces. A full recall simulation can test social and traditional media, customers and other stakeholders.
Recalls are costly, says Bentele: first, to recall and destroy the product and, then, to put a new product back on the shelf, not to mention losses due to consumers not buying the product, which is the main risk of contaminated products aside from the possibility of seriously harming or killing someone. It is very difficult to rebuild trust. There should be a communication plan in place to let customers know about the problem, tell them how to avoid it and notify them when the problem is fixed.
 Food Dive, Delicious or deceptive? Food fraud’s economic and safety costs, January 25, 2017
 National Post, Food fraud hits one of Italy’s most famous products, raising question about effectiveness of gourmet labels, June 26, 2017
 New Food, Almost 60 percent of popular Chinese cod fillet mislabeled, January 8, 2017
 Perkins Cole, Food Litigation 2017: Year in Review, February 2018
 AGCS, Product Recall: Managing the impact of the new risk landscape, 2017
 US Economic Research Service (ERS), Trends in food recalls 2004 – 2013, April 2018
 USDA, Summary of Recall Cases in Calendar Year 2017, 2018
 Food Safety News, Recall insurance can benefit consumers by helping businesses, October 23, 2017
 FDA, Consumer info about food from genetically-engineered plants, January 2018
 FDA, Food and agriculture sector-specific plan, 2015
 CSO Online, Petya attack caused $140m hit of Cadbury parent Mondelēz’s Q2 revenues, August 3, 2017