Kicking the tyres
Product recall in the automotive industry

By Manzhi Zheng, Senior Underwriter Casualty, Asia Pacific, Swiss Re Corporate Solutions

In part 2 of this two part series, we investigate the automotive industry and how public pressure, regulation and compliance are pushing up the number of recall campaigns. In this environment, scrutiny will only become greater.

Organisations always think their products are safe. It’s a natural reactive attitude, especially when you have insurance as a safety net. But claims payouts are not going to help your organisation’s reputation or future sales. Insurance is more than a safety net – it should also be seen as a risk management tool to help prevent product recalls in the first place.

The number of automotive product recalls is increasing: 2014 was a record-breaking year. This is partly due to a more litigious society, and partly due to the increasingly complex designs of our vehicles, with robotics and automation being introduced. There are already cars on the road with advanced driver assistance systems (ADAS), helping to prevent collisions by keeping the vehicle in its lane and automatically breaking in an emergency.

By 2020, approximately 260 million connected cars will be on the roads worldwide, with demand being driven by consumers in search of smarter and smarter vehicles. This push for technological innovation in turn increases competition as manufacturers charge to be first on the market, putting pressure on procurement times.

Growing competitiveness also means that production costs are being driven down and cheaper alternatives are being sought. In the long run this can lead to mistakes, oversights, corner cutting and ultimately faulty goods.

This leaves the automotive industry vulnerable on two fronts – the design phase and the manufacturing phase.

Issue 1 – design defects

Design defects can be more far reaching that manufacturing defects. Parts can be sold on to multiple companies spreading and scattering the problem. It’s not an issue you can deal with straightaway. The length of the procurement process means that it takes time before design flaws come to light, sometimes years down the line.

Case study

Takata Corporation had been making safety devices for the automotive industry for two decades before a problem became apparent. It was discovered that a chemical, ammonium nitrate, used to inflate safety air bags was unstable, deploying the bag with too much force, scattering metal debris. The problem has been linked to at least four deaths and more than 30 injuries in the US alone. After a US investigation around eight million cars made by 10 organisations had to be recalled. Takata was the only air bag manufacturer to use this chemical.

This was not the first time Takata had faced a recall scandal. In 1995, 8.3 million vehicles had to be recalled with a seatbelt flaw. The button on the seatbelt latch was prone to cracking, jamming the lock mechanism and trapping the driver or passenger. This affected Honda, Nissan, Chrysler, Mitsubishi, GM, Mazda, Suzuki, Subaru and Isuzu. The estimated cost was USD 1 billion, making it one of the most expensive product recall events in automotive history.

This case study demonstrates the economic losses that can be sustained as a result of a recall and this is largely impacted by the global reach, brand and geographic spread of a company, rather than its size.

Issue 2 - manufacturing

Globalisation, increased regulation and out-sourcing to emerging countries has lead to litigation issues on an international scale. For example, a company does not have to have assets in the United States, but if they are providing parts, products and services, litigation can still come from the US.

For example, a company providing parts, products and services to the US can still face litigation from the US regardless of whether or not they have assets there.

In March 2014, Toyota had to pay USD 1.2 billion in the US for allegedly concealing unintended acceleration issues that had a big impact on public safety. This has lead to organisations bending over backwards to prove they are responsible players, put public safety on a pedestal and recalling cars for every issue, serious or not.

Recalls costs are mounting. There are financial losses such as a dip in sales, first and third party costs, removal and recovery costs, redesign, replacement and repair costs, and the list goes on. Then there are the reputational damage costs. These issues can impact an organisation’s balance sheet so acutely that it finds it hard to recover for some time. 

Case studies

Toyota was hit by two recalls in 2009 and 2010, affecting nine million vehicles. Manufacturing flaws lead to problems with the accelerator. Floor mats would either become stuck underneath the pedal, jamming it, or the pedal would just stick, leaving the driver out of control. More than 60 cases were reported, including one death, leading Toyota to recall cars in order to investigate and resolve the accelerator setup. Estimated costs are as high as USD 5 billion.

Ford has faced several large costly product recalls. The most expensive was in 1980 when 21 million vehicles were recalled leading to a repair bill of more around US$ 1.7 billion. A faulty safety catch in the automatic gearbox caused the gears to slip from park to reverse without warning. This caused more than 6,000 accidents, including 98 deaths.


According to research company IHS, the number of vehicles manufactured annually will reach 105 million by 2020.

It’s a costly business. In 2014, GM recalled more cars in the US, due to ignition and cabling issues, than it sold in the preceding year[1]. Legislation and controls are adding to the increased number of product recalls, with public safety being paramount. While there is a difference between safety issues, which must be complied with by law, and quality issues, the automotive industry seems to be erring on the side of caution. A trend in recalling vehicles with minor blips appears to be an attempt at brand protection, and proof that manufacturers take regulatory compliance seriously.

Academics have analysed whether or not major recalls have a major impact on a company’s reputation, using the US automobile industry as an example[2]. They found that severe recalls decrease the market share a manufacturer with a low reputation by 1.6%, whereas the market share of a manufacturer with a higher reputation declines by 2.9%. This indicates that more successful manufacturers have more to lose due to the higher consumer expectations, in terms of product quality, that is placed on them.


As all risk managers know, prevention and risk management is are vital to managing recalls. The supply chain and its processes should be transparent, with all contractors understanding their role in the supply chain. Audit schedules should carry stiff penalty clauses to ensure compliance. Traceability and testing of products is important at all stage, and compliance with retailers, customers, insurance and regulatory requirements should be part of this. There are three key steps:

  • Constantly gather data and evidence - Document your risk assessments and product testing;
  • Communicate effectively – document processes and traceability procedures, inform at all levels including your supply chain;
  • Consistency – review and reassess.

Preparation: In anticipation of a problem, disaster recovery has to be a transparent process as well. Well-tested procedures means time is not wasted and damage is limited. A recall action plan should be practised and staff trained where necessary. The three key steps are:

  • Training – ensure staff know their role if a product recall is required;
  • Review- Assess product warranties, safety procedures, defect monitoring processes, compliance, regulatory issues and crisis management plans. 
  • Practice – ensure crisis plans are rigorously tested.

Protection: In the event of a product retrieval incident your insurance framework should be designed to protect you, whether it’s product recall insurance, product liability insurance or property insurance. Specialist organisations work with insurers to consult and train in areas such as safety and auditing, as well as support in crisis management, product recall, product liability and business continuity planning. Three steps to consider:

  • Reaction – avoid reacting slowing to a safety issue;
  • Involvement – Contact your insurer for support and advice as soon as possible;
  • Action – put your practiced crisis plan into action.

For more information on product recall solutions from Swiss Re Corporate Solutions, please contact Manzhi Zheng, Senior Underwriter Casualty, Asia Pacific, Swiss Re Corporate Solutions at

If you’d like to read part 1 of our product recall article, on the subject of food and beverage, please click here.

[2] Rhee, M. and Haunschild, P.R. (2006), “The liability of a good reputation: a study of product recalls in the US automobile industry”, Organization Science


Swiss Re's Casualty teams translate global expertise and local knowledge into tailor-made solutions for clients across the globe. Our portfolio is well positioned for future growth, backed by a highly...

Read the whole story

Demand for cyber insurance on...

Following several high-profile cyber security breaches over recent years, a growing number of corporations perceive cyber as a high risk. Swiss Re therefore expects the demand for cyber insurance to rise....

Read the whole story