Mass Toy Recalls – a Manufacturers’ Nightmare

Although this year’s presents have long been opened, those who supply them have concerns that just won’t go away. “In the run-up to Christmas, there can have been few more worrying issues for toy manufacturers than the prospect of having to recall an entire line, especially if it is one of their more popular brands,” concludes an article on the Lloyd’s web site (www.lloyds.com).

2007 will go down as the year of product recalls, after a record number of them took place. As a result Lloyd’s notes that “leading industry participants” are reconsidering the potential impact of such an occurrence.

Some high profile cases include the recall of Barbie accessories by Mattel, due to the presence of lead in paint used by the Chinese factories that produce some of the parts and the removal of Bindeez – beads covered in a special substance which allows them to stick together – from the market by Character Options due to drug-like effects resulting from the ingestion of the beads’ sticky coating – an integral feature of their design.

The Toy Retailers Association, an industry trade group, explained that while the ingestion of “a minute amount” of lead represents a negligible increase over that taken in by young people on a daily basis, the risks to Mattel as a brand may be more significant. Even though Mattel first “raised the issue in the public domain,” said Lloyd’s, the organization observed that the damage to the brand’s reputation could already have occurred – a warning echoed by the Association of Insurance and Risk Managers (AIRMIC).”

Following changes to EU legislation earlier in the year, Ed Mitchell, Senior Underwriter at XL Insurance, told the delegates at AIRMIC’s annual conference of the tightened regulatory climate faced by many suppliers, including those in the food and drink industry. “In today’s world companies live or die by their brands and if a recall is handled badly, the reputation can suffer and sales can plummet – it is important that companies think about their crisis management long before disaster strikes,” he explained.

Mitchell’s comments followed a case earlier in the year which saw candy manufacturer Cadbury’s forced to withdraw a number of its Easter eggs from stores after failing to adequately label them as potentially containing nuts.

With such cases making the headlines, the impact of a large-scale product recall on any sector of the industry – both in terms of immediate financial risk and in damage to a brand previously held in public esteem – is consistently highlighted.

Mitchell suggested that both buyers and brokers should scrutinize their exposure and determine whether any action should be taken in order to put in place adequate coverage to minimize their risk.

In terms of coverage, many companies may be “unsure of their needs,” said Lloyd’s, indicating that a “conventional insurance policy might not be suitable. AIRMIC suggests that ‘the Lloyd’s market tends to concentrate on more specialized or unusual risks,’ which may prove ideal for more specific requirements.”

Aon is one of the brokers that provide specialized coverage, which addresses damage concerns pertaining to a brand that may be sustained by a high-profile product recall or contamination. “Such incidents are increasingly common and, when they occur, attract media attention that can have a disastrous impact on the product or brand name,” Aon explained. “Companies can incur significant costs recalling and replacing the damaged product and through lost sales – as well as regaining the public’s confidence.”

Scrutiny of risk exposure could be especially advisable in light of proposals from the European Commission (EC) that legislation should be tightened further in order to prevent a repeat of the toy recalls seen in recent weeks.

In a recent stocktaking of consumer product safety controls, particularly focusing on those relating to toys, the EC stated that the existing legislative framework is adequate, if fully enforced.

But the EC added that “this is being reinforced by legislation in the pipeline on the New Approach and Toys Directive”, indicating that manufacturers could be facing increased regulation in the future.

Source: Lloyd’s