Historically, companies have used benchmarking in their assessments, but that approach is limited in the Product Recall space by two things: 1) Each client is different and unique because of a wide range of factors, including sourcing, technology, and the demographics of the customers; and 2) The lack of any credible public information regarding loss history.

Benchmarking only tells a company where it stands against its competitors, he says: “It tells you where you are near your peers, but your peers [often] underestimate their exposure, and you may be inclined to do the same.”

And while the FDA website does have Product Recall statistics broken down by product type, manufacturer and reason for the recall, it doesn't list what the actual cost was for the company involved.

“Every product recall has a negative connotation to it, so the company may not disclose the financial impact they suffered,” Alexandru says. “You know the frequency, but you have no idea how severe it is.”

Often however, having a product recall is not a sign of poor manufacturing processes or lack of quality control: “It's just one of those things that just happen,” he says, the same way a fire can break out even when a company has all the proper protections and fire codes in place.

Food-product recalls or contaminations, for example, are often caused by ingredients from third-party suppliers—which are in many cases beyond the manufacturer's control.

“You do sample testing, but you can't test 100 percent of any ingredient or you will have nothing to manufacture with,” Alexandru says.

AIG's Crisis Management team relies on its three product-risk consultants: a food safety specialist, who is typically involved in incidents caused by accidental contamination; a security specialist, typically involved in incidents caused by malicious tampering and product extortion cases; and a public relations specialist that helps clients manage the reputational aspect of the incident.

“We have been looking and trying to understand various factors that influence the likelihood and severity of a loss,” Alexandru says. “We're trying to develop a methodology to evaluate that exposure ahead of time.”

The risk analysis of a company, he says, should always begin at the manufacturing level—which starts with the plant to identify the worst that could happen.

“We believe in a bottom-up approach, as opposed to saying, 'Some of our peers do this, so we should be doing the same,'” Alexandru says. “Developing a methodology to estimate the recall exposure would be revolutionary for this space.”

A product recall is typically triggered by either malicious tampering or accidental contamination. Malicious product-tampering would involve a third party who contaminates, or threatens to contaminate product: disgruntled employees trying to harm the company, or someone who wants to extort the company for money. Accidental contamination usually comes from the introduction of a contaminated ingredient or pieces of glass or other foreign substances into the product during the manufacturing process.

“Sometimes you have multiple recalls triggered by the same source, especially if contamination comes from an ingredient, like sugar or oil or spices. A contamination of one ton of such ingredients could result in contamination of 1,000 tons of finished product,” Alexandru notes. “All of a sudden you can have a contamination at an ingredient manufacturer turn into a recall of 20 to 30 companies at one time.”

Pre-incident and post-incident—or crisis response—components help clients avoid a contamination; prepare for the event of a recall; and enable clients to react when a contamination happens, he says.

AIG's incident-response procedures include a 24-hour hotline with direct access to a worldwide panel of crisis-management consultants. While most brokers and carriers today do have a crisis management team on call, it wasn't always so for the sector. But it has long been a priority for AIG, says Alexandru.

“Ever since I can remember, being in this line more than a decade, we always added this feature to this product,” he adds. “We really believe in helping our clients make a very good, informed decision. In a crisis situation, you don't have the luxury of time.”