Trends in the food industry and what they mean for insurance
Insurers provide the food industry with coverage against product liability and product recall. It is crucial the insurance industry remains informed and updated on the changing risk profile of the food we consume.
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In 2016, millions of chocolate bars were recalled in 55, mostly European countries, because plastic parts were found in them. A year earlier Nestlé India had to recall its Maggi brand instant noodles from the Indian market, when levels of lead above the permitted limits were found. Nestlé estimated the value of the products on the market and on stock in its factories to be at INR 3.2 bn (USD 47 million). In Germany in 2011, an E. coli outbreak traced to fenugreek sprouts infected 3 950 and left 53 dead. And in China in 2008, more than 300 000 injuries and 6 infant deaths were recorded after milk was tainted with urea and melamine.
This is just a snapshot of food contaminations that made headlines around the world in recent years. They stand as examples of what can go wrong if food is not safe to eat. Other cases not mentioned above include salmonella or listeria contamination, pesticide residues or improper labelling of allergens.
Apart from these frequently occurring acute and short-term risks, the insurance industry also monitors long-term risks associated with food. These longer term risks include functional food, chemicals and nanomaterials used in food packaging, sugar and genetically modified organisms (GMOs), all of which may have long-tail effects. A single product ingredient used in food has the potential to generate a very large accumulation loss if becomes proven that it causes a chronic disease. A case in point is bisphenol-A, a chemical widely used for many years in making hard, clear plastic and commonly found in food and drink containers and also baby bottles. The additive is now partially banned after it was discovered that it has harmful effects on humans.
Unsafe food poses major economic risks, especially in a globalised world. The aforementioned 2011 E. coli outbreak in Germany reportedly cost farmers and industries USD 1.3 billion in losses and USD 236 million in emergency aid payments to 22 EU member states, according to the WHO.
If unsafe food is detected, human harm can often be avoided by recalling the produce from the shelves or homes of consumers. Such product recalls can be costly for all the companies involved in the supply chain. When one includes the reputational cost and loss of profit, such recalls can easily reach the double-digit million-dollar range. A 2011 survey by the Grocery Manufacturers Association (GMA) in the US found that every second recall cost more than USD 10 million with some exceeding USD 100 million.
Insurance as part of a company’s enterprise risk management can help lessen the financial impact and allow it to recover faster from catastrophic food safety events. Insurance can provide cover for recall cost and by providing professional crisis and claims management services.
Swiss Re has been tracking the developments in the food risk landscape since 2001. In order to stay at the forefront in understanding the food and beverage industry, Swiss Re continuously monitors food consumption patterns, regulatory changes and trends in litigation. Here we will summarise the most important findings of our ongoing monitoring.
Changes in eating behaviour
Meat Consumption: Opposing trends have manifested in the EU and US compared to China
Meat and poultry products are inherently risky from a product liability and recall point of view. Improper production hygiene or inadequate cooling during transportation can rapidly lead to bacterial contamination that can be potentially dangerous if improperly cooked and consumed. Moreover, animals are frequently contaminated with the bacteria prior to entering the production plant.
While global meat consumption continues to rise, the consumption of red meat per capita in the US and the EU had been declining for almost a decade. Red meat consumption has been increasingly tied to adverse health effects. In 2015, the International Agency for Research on Cancer (IARC) classified processed meat as a group 1 carcinogen, the class with the highest risk for causing cancer. Together with the greater environmental impact of particularly cattle, more consumers are choosing poultry or non-meat alternatives. Plant-based proteins may have a reduced pathogen risk; however, frequently novel meat-substitute products may be associated with longer term health issues.
In contrast, higher incomes in China have been driving the consumption of animal products. The daily calorie intake in pork has more than tripled over three decades. Increased pork consumption has pushed prices up, and now accounts for around a quarter of China's inflation rate. As agriculture moves from small family-based farms to larger factory-like meat farms, liability exposure also rises, given the larger batch sizes.
Convenience food: Consumption is increasing worldwide
Like red meat, convenience food is also seen as a high recall risk. The risk is typically multiplied because of multiple ingredients within convenience food, all carrying their own risk profiles. Large numbers of ingredients further multiplies the chances of improper labelling and identifying the root cause of a contamination is especially cumbersome given the many food suppliers involved.
The ready meals market in Europe has grown more than 14% in the past five years and is estimated to grow another 12% by 2016. The food and drink market research company Food for Thought (FFT) values the European ready meals market at EUR 30.5 billion in 2013, increasing to EUR 40.85 billion by 2016. The report showed that the ready meals sector in 2013 was dominated by Germany, the UK and France in terms of overall expenditure – accounting for 60% of the total market.
Convenience food has historically not had a good nutritional reputation. Convenience food producers have sought to rectify this in recent years by creating healthier, fresher dishes. However, these healthier convenience options have, as a rule, a more limited shelf-life than their more heavily processed counterparts. This reduced shelf-life exposes producers and retailers to a higher risk of food degrading while in transit or on the shop shelf. Proper expiration labelling of these products will become ever more important and distributors will need to be more diligent in keeping and managing inventory.
Functional foods: Consumption rises driven by health motivation, perceived diet effectiveness of products, and knowledge about nutrition
Functional foods are a broad family of emerging foodstuffs, such as vitamin D-enhanced mushrooms, yoghurt that contains live microorganisms (probiotics) or omega-3 fatty acids enriched eggs, whose health claims leave them operating in the grey area between pharmaceuticals and food. Breakfast cereal Cheerios has a claim on the packet that eating one bowl of Cheerios per day "may help to reduce the risk of heart diseases".
In addition to health consciousness and perceived diet effectiveness of these products, the increasing costs of healthcare have prompted governments, researchers, health professionals and the food industry increase the supply of functional foods. Experts believe that the functional foods market in the US will continue to grow at about 6% per year until 2020.
However, adverse health effects could potentially be caused by adding too much or too little of a certain vitamin, mineral. This could lead to product liability and recall claims. Furthermore, through highlighting health benefits on labels, food manufacturers are increasingly exposed to wrongful labelling suits. In 2015, for example, 7% of all EU Rapid Alert System for Food and Feed notifications came from dietetic foods, food supplements and fortified foods.
Organic food: Heightened nutrition and health awareness has helped increase organic food consumption
Organic food is currently the fastest growing sector of the food industry and has significantly outpaced the growth rate of the overall food market. From 2014 to 2015, US organic food sales increased 11% to USD 43.3 billion.
In the EU, land given over to organic produce is growing in almost all regions except for Southern Europe. Furthermore, in the majority of European countries, the monetary value generated by the organic food market increased between 2011 and 2014 with the highest sales in Germany and France.
Large food companies are acquiring smaller organic food companies in order to gain market share in this booming segment. Organic demand is breaking out of specific age segments and is spreading across whole populations.
Consumers often consider organic food healthier than other products. Over 40% of consumers in the US are avoiding or reducing GMOs in their diet, and eating more organic food as it is often considered GMO-free. Environmental and sustainability concerns have further facilitated organic food's popularity in the US and EU. In China, a rising middle and upper class, with growing scepticism towards domestic food standards, has led to an increase in organic food consumption.
According to a report from Stericycle, a company that helps business handle recalls, there has been a sharp jump in the number of recalls of organic food. Organic food products accounted for 7% of all food units recalled over 2015, compared with 2% percent of those recalled in 2014. Whether the rise is due to an increase in overall sales or whether this is an actual increase in recall rates is yet unknown. The effects of an increase in organic production on future recall patterns are uncertain. Organic food should face less recalls as a result of exceeding threshold values for limited use or banned pesticides and fertilisers.
However, organic food is not automatically less risky than its conventional counterpart. One study reported a twofold higher probability of salmonella contamination in vegetables from Asian vendors claiming to use organic farming practices compared with samples from conventional farmers. A potential explanation could be the use of manure as fertiliser. Manure carries a higher risk of bacterial infection if the food is not properly processed.
The USA, EU and China have taken significant action to improve or develop comprehensive food safety systems. Institutional bodies supervising food regulations gained authority and regulatory standards have been raised. Furthermore, there has been a shift from reactive regulation to risk prevention and mitigation.
Anticipating regulatory changes is key for insurance. Changing regulations can have a significant impact on claims. Such changes can include altering the legal status of a particular ingredient or product; or the transition phase to new regulatory standards which can cause ambiguity. Key regulatory changes currently being monitored by insurers include:
United States of America
Several proposed rules by FDA are currently open to the public for comments. These rules relate to small changes with regards to imports, food additives and processes. However, since the Food Safety Modernization Act was passed only recently, it is unlikely there will be drastic changes to the regulation.
There had been concerns that the use of free trade agreements, particularly the now abandoned Trans-Pacific Partnership (TPP), could allow the entry into the US of foodstuffs subject to lesser regulatory requirements. The administration of former President Obama always maintained that other countries would be forced to raise their standards to those of the US. The withdrawal of the US from the TTP in January 2017 under President Trump reduces this danger.
The other side of the coin from regulation is litigation; and the US has the strongest litigation culture in the world. In recent years a common target has been product labelling. Since 2012, there have been more than 200 class action law suits against food and beverage companies regarding allegedly deceptive labelling. Although many of these lawsuits were dismissed, settlements have ranged from USD 15,000 to USD 9 million. In addition to false labelling, plaintiffs have claimed that products have caused diabetes, obesity and other diseases. Despite increasing rates of obesity, courts still seem to favour the notion of personal responsibility as most of these lawsuits have been unsuccessful.
The insurance industry must be wary of future litigation trends. For example, as pathogen detection and bacterial DNA technology improves, it will become easier to establish the link between illness and an individual firm, which could lead to an increased appetite for litigation. On the other hand this might also lead to faster claims resolution due to a swift identification of contaminated ingredients back to the individual suppliers.
Currently, the EU is conducting a "fitness check", that is a comprehensive policy evaluation, on the General Food Law Regulation. Its focus is on the regulation's effectiveness, efficiency, coherence, relevance, and its added value to the EU.The report, presenting the results of the fitness check, was announced for the first half of 2016. However, at the time of writing, it had not yet been published.
Furthermore, the EU is negotiating a free trade agreement with the USA, the Transatlantic Trade and Investment Partnership (TTIP). Under industry-specific regulation, the TTIP contains a chapter on "sanitary and phytosanitary measures (SPS)", ie on barriers to trade in food and agricultural products. Whether the TTIP now takes effect is uncertain, with criticism of the accord from both sides of the Atlantic and both sides of the political spectrum. Just as the US fears importing lower food standards from across the Pacific, the Europeans fear the same from the other side of the Atlantic. Moreover, the Trump administration is not in favour of multilateral deals.
Revisions to the New Food Safety Law were only implemented on 1 October 2015 and will therefore play a crucial role for the development of China's food safety landscape over the next few years. Currently, there are no new changes to regulation in the pipeline.
The China Insurance Regulatory Commission (CIRC) attaches great importance to the promotion of food safety liability insurance products to improve the food safety landscape in China. In fact, more than 30 different food related insurance products have been developed by insurers in China. However, there is not sufficient support from the government to put a compulsory insurance programme in place. The government fears that the costs of such a compulsory insurance programme would be turned over to the consumer.
Food and beverage industry has processes and risk management in place in order to understand and reduce food safety risk. Insurance may help a company to transfer some of the residual risks. Product recalls in the food industry and their potential reputational damage can have a catastrophic impact on the balance sheet of a company. Worse, people may come to harm by consuming contaminated food and claim for compensation for the bodily injury suffered. Large-scale product recall actions and product liability claims as well as lost trust and reputation have pushed some businesses out of the market.
Having long experience in delivering risk transfer solutions to the food industry, insurers are professional partners for food companies. They have the know-how to evaluate the insured firm's food safety risk management processes and its food-related product recall and product liability exposure to develop appropriate tailored risk transfer solutions. The right insurance solutions for a given firm will be determined by the risk exposure of that company and the level of protection needed.
A variety of insurance products are available to food producers, each addressing specific needs. There is product recall/contaminated product insurance to cover the costs of recalling accidentally or maliciously contaminated food from the market, to recoup the loss of profit and compensate for expenses to regain former market share. Where compensation is needed for legal liability to consumers for bodily injuries, there is product liability insurance. The terms and conditions as well as the insurance limits will vary according to the individual risk assessment and risk acceptance of the insured company.
As well as post-facto risk coverage solutions, insurance companies help producers improve their safety systems by sharing the know-how they have gained in auditing risk management systems worldwide.
3. www.nytimes.com/2015/08/21/business/recalls-of-organic-food-on-the-rise-report-says.html?_r=0 - The Organic Trade Association, however, took issue with Stericycle’s accounting of recalls, saying its own quick analysis of recall data from the F.D.A. and the Agriculture Department shows the problem is less severe, with organic products accounting for 4.9 percent of recalls, in line with the percentage of organic food sold out of total retail sales of food.
Senior Risk Engineer Casualty, Swiss Reinsurance Company
Roland Friedli joined Swiss Re's Risk Engineering Services in 2006. He is responsible for Casualty risks and exposure assessment (General Liability and Professional Indemnity coverage) related to construction companies and projects. In his role he supports underwriting decision-making and portfolio steering in industries such as tech, transportation, utilities, mining, as well as environmental pollution. He is also Swiss Re's media relation expert for Nanotechnolgy.
Before joining Swiss Re, Roland worked as project manager in various engineering companies in Switzerland and in the US. There he was responsible for geotechnical investigations, risk assessment of natural hazards as well as for the investigation and the remediation of contaminated sites. For several years he had been a teacher at the University of Applied Sciences for civil engineers in Zurich. In Swiss Re’s Internal Environmental Management Roland Friedli was responsible for the energy efficiency and CO2 reporting of Swiss Re’s operations and infrastructure.
Roland Friedli holds a Masters Degree in Environmental Sciences and a degree in Higher Education for Physics and for Environmental Science from the Swiss Federal Institute of Technology in Zurich, Switzerland.
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