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Growing number of product recalls in the automotive industry
Growing number of product recalls in the automotive industry
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    The number of recalls has risen sharply over the last few years, with other industrial sectors also increasingly affected. In tandem with this, there is a steady growth in demand for recall covers.

    Recalls in the automotive industry

    It is primarily suppliers who are affected when a recall is announced in the automotive industry. If a problem arises that gives rise to fears of personal injury or property damage, it is seldom the manufacturers who have to pay for the damage. Instead, it is the companies who supply brakes, vehicle lights, tyres, ignition switches or airbags. For this reason, for some time now, demand has been growing for policies aimed at cushioning the costs resulting from a recall action by a manufacturer.

    The fact that carmakers insist on their suppliers, and the suppliers in turn on their subcontractors, providing evidence that they have product recall insurance, is also promoting a steady increase in demand. What is known as product recall cover can often ensure the very survival of suppliers and subcontractors when they are faced with high recourse claims. In a risk assessment by the insurer, the first step is to determine how many vehicles the specific component is installed in, how high the cost of an information campaign will be, the number of owners who will bring their vehicles to the workshop, the cost required for any disassembly and reinstallation of the defective part, as well as for its disposal, and whether the company meets the required quality standards.

    Depending on the size of the company concerned, the sums insured are generally between €1m and €50m. To meet all eventualities, there should be recall plans or standardised procedures, specifying in detail how internal processes should operate during a recall action. There should also be clear provisions on who should be brought in, when and how, as well as on what actions need to be taken. Recall plans and procedures of this kind should be tested at regular intervals to review their effectiveness.

    Suppliers are normally protected with product recall cover

    A recent example of a recall by an automotive supplier is Takata, an international company that is a specialist for occupant protection. The company's airbags are installed in millions of vehicles worldwide, produced by more than two dozen different manufacturers. In June 2015, Toyota once again responded to quality defects from its supplier, and expanded its recall of Takata airbags. Other carmakers followed suit.

    As a general rule, it is the car manufacturer who announces a vehicle recall because of concerns about a loss of reputation or hazards in the use of its vehicles. The authority responsible can also declare a vehicle recall, which must then be organised by the carmaker. In 2014, according to information from the National Highway Traffic Administration (NHTA), the US market experienced 900 vehicle recalls, the highest figure in the last ten years. 70 million car owners were subsequently contacted by manufacturers. In the same year, 1.9 million cars in Germany were affected by 127 recall actions, according to figures from the Center of Automotive Management. 

    Recalls occur in many different industries

    Example from the food industry: In this sector, individual raw materials or additives are often processed in many different finished products. A recall can therefore have massive consequences if a raw material or additive that is widely used is affected by quality defects. For example, a contaminated batch of herbs that are used by various manufacturers in a wide range of products can result in an enormous number of end products being subject to recall. Stricter regulation and controls on the part of supervisory authorities, as part of efforts to improve consumer protection, are leading to an increased number of recalls.

    Last but not least, information on quality defects and the possible risks posed by products is spread very rapidly on the internet and in social media. Manufacturers can be forced, virtually overnight, to check the quality and health safety of their product. In such a situation, the reputation of the company may suffer long-term damage if it fails to respond, or does not respond appropriately. It is therefore essential to have a professional crisis management in place, including crisis communication that is customised to the particular requirements. In a worst case scenario, products may have to be withdrawn from the market in their currently available form.


    Munich Re Experts
    Matthias Bächlin
    Matthias Bächlin
    is industrial engineer and consultant in the Corporate Risk Consulting Unit at Munich Re.