Navigating New Aggravation Risks in 2024

The last quarter alone was an active season for product recalls in the US

From April to June, 254.56 million units of products were recalled in the automotive, consumer goods, food and beverage, pharmaceutical and medical device industries. That’s more than double the volume of withdrawals from the previous quarter (129.61 million units), according to data from Sedgwick’s quarterly withdrawal index report.

With recalls occurring at an above-average rate as a result of tight regulatory scrutiny, claims and insurance professionals should remain vigilant, not only for recalls themselves, but also for the reimbursement effects they have may have on damage adjustments.

The following are major trending product recall threats:

Recall Fraud

Companies like to make it as easy as possible for consumers to learn about a recall event and follow safety instructions, whether that means returns, repairs or safe disposal of a recalled product.

But a process that’s easy for consumers to follow is a process that’s just as easy for scammers to exploit.

With the digital tools and AI-assisted processes available today, fraudulent product recall practices remain a headwind that companies and their claims experts should keep a close eye on. Recall fraud tactics have become even bolder in recent years, with bad actors taking advantage of systems that are meant to help consumers, creating fraudulent products or receipts, and turning consumer protection into a payday.

As such, managing recall risk will require sophisticated approaches to counter fraud: advanced fraud detection technology, digital security or better verification systems during recalls, anti-counterfeiting features of the physical product that make it harder for fraudsters to replicate, or other measures.

For insurance professionals, the question is whether fraud is happening during a withdrawal and whether policyholders are paying more than they should be for withdrawal claims. The answer starts with knowing the risk exposures that come with fraudulent activity and educating policyholders about the new threats to their policy.

Secondary markets

Ideally, organizations and their manufacturing partners take preventive measures to identify potential hazards and maintain safety standards long before products reach consumers. This is particularly important in high-risk product categories, which are currently under increased regulatory scrutiny.

Recalls are the next step in protecting consumers and removing dangerous products and materials from the market, but aftermarket risks put wrinkles in the recall process.

Even before the Internet, secondary markets such as thrift stores, garage sales, and auction houses influenced product recalls. Today, the prevalence of online secondary markets combined with younger generations’ interest in sustainability through second-hand sales makes product recalls even more complicated.

This issue is hot on the minds of regulators. The past few years have seen an increase in consumer legislation, such as the STURDY Act and Reese’s Law, reflecting regulators’ desire to codify safety measures.

Even after a recall is closed, companies must monitor online platforms and secondary markets to ensure recalled products are not in circulation. While part of the responsibility lies with the technology platforms that create secondary markets, and part of the responsibility lies with the consumer, the risks in this area remain a big problem for brands and their claims team if they are not dealt with quickly.

Data Breaches

Cybersecurity remains a major risk threat for all organizations, but a data breach can add to liability for organizations navigating a product recall as well.

The collection, storage and security of consumer data is already a difficult area to navigate. Many organizations are reluctant to collect consumer data because the number of data breaches per year generally exceeds the number of recalls. On the other hand, as a result of the new regulations, consumers are more aware of how their data is stored and used by the companies that collect their information.

During a recall, consumer data is essential for notifying consumers who have purchased or registered a recalled product. However, this notification step could become completely compromised in the event of a data breach, either before or during a recall.

A data breach could also feed into fraudulent activity: Threat actors, armed with stolen product or consumer data, could fraudulently claim cashback rewards or contact consumers with false recalls. These types of risks lead to greater losses for both companies and consumers.

Insurance companies and professionals must strike the right balance between risk and reward when it comes to collecting and retaining consumer data. Going forward, expect these risks to continue and leaders’ decisions to change to counter these headwinds.

Risk management leads to easier recall processes

Product recalls today are no longer just about the recall itself; recalls encompass additional secondary and tertiary risks compounded by our digital world.

The increase in regulatory changes in the withdrawal sector indicates a clear trend towards more proactive and preventive regulatory measures. The message from the top is clear: companies must stay ahead of risks and regulatory developments.

Insurance leaders should advise their executive partners to consider building dedicated compliance teams to stay abreast of regulatory developments, engage with regulators, quickly adapt to new requirements and integrate technology that facilitates rapid response to emerging risks. Finally, overcoming the combined risks helps claims adjusters and recall specialists handle the liability and payment processes if a recall occurs.

Harvey is Senior Vice President, Client Services, Sedgwick Brand Protection.