Lloyd’s Warns of Contamination Hazards from Chinese Food Imports

November 3, 2010

“China was the source of most contaminated or unsafe foodstuffs that came into Europe in 2009, according to a European Union report,” as cited in an article on the Lloyd’s of London web site, which highlights the “potential hazards” for food and beverage companies of doing business with Chinese firms.

‘The Rapid Alert System for Food and Feed, Annual Report 2009 concluded that “Chinese products were involved in 345 safety alerts. That number was down from the previous year’s figure of 500, but was still nearly 25 percent more than Turkey, in second place. The data shows that China, although making great strides in improving its food safety in recent years, still lags behind Europe and North America.”

Christof Bentele, global managing director of Aon’s product recall team, told Lloyd’s that “China has worked hard to raise its standards, but its procedures and quality management standards are still not to the level which we would consider best practice in the European Union or the US. This is more of a problem in the food and beverage industry than in other sectors, because the repercussions can be so severe from a safety perspective.”

The 2008 milk scandal, when dairy companies illegally added melamine to milk powder causing the death of six babies and 300,000 others to fall ill, still casts a pall over the Chinese food industry. Fonterra, the New Zealand milk cooperative that invested heavily in Sanlu, the Chinese company at the centre of the scandal, lost NZ$200 million (US$151 million) as a result of the episode.

Bentele recommended a number of steps and precautions, which firms, who import food products from China, should employ. These include having close contact and supervisions with Chinese suppliers, developing safety standards and tests, and monitoring compliance with them, and, in case these precautions fail, having a “crisis management” plan in place.

“It is worth making Chinese suppliers sign up to the ‘Hazard Analysis Critical Control Point’ (HACCP) rules,” he added. The internationally recognised system for food safety management focuses on identifying the critical points in a process where problems could arise and putting steps in place to prevent things going wrong.

Lloyd’s also pointed out that the “cost of a food scare can be crippling to a firm. Taking its products off supermarket shelves can cost millions of pounds but the resulting damage to a company’s brand name can hit sales and depress a company’s value for years. As a result many food companies are turning to food contamination insurance to protect themselves.”

The coverage provides more than ordinary liability insurance, which only covers claims from third parties. Contamination policies will address the main financial risks to food companies’ own businesses from a recall. It includes reimbursing the cost of recalling a product, compensation for lost profits and the expenses resulting from trying to rehabilitate a company’s brand name.

“We consider this to be one of the most important insurance policies for a food and beverage business. It’s just as important as product liability,” Bentele stated.

As a result of some of the past incidents this type of product contamination insurance “has seen huge growth over the past four years,” according to David Burke, product contamination class underwriter for the Catlin Syndicate 2003. “Both large and small manufacturers are realising that product contamination – and the combination of brand damage and the subsequent financial loss – is a risk that they need to address,” he explained.

This niche insurance market, with total capacity that Bentele puts at around $300 million, has evolved quickly, both in terms of the amount as well as the terms of coverage now on offer. “As a result, many companies have come to the conclusion that it is appropriate to remove the risk of exposure to product contamination from their balance sheet by insuring it,” Burke concluded.

Source: Lloyd’s of London

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