Product Recall Trends: Navigating New Compounding Risks in 2024

The past quarter alone has been an active season for product recalls in the U.S.

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

With recalls happening at an above-average rate in the wake of strict regulatory scrutiny, claims and insurance professionals should continue to be vigilant, not only for recalls themselves but the ripple effects recalls can have on claims adjustments.

Following are important trending product recall threats:

Recall Fraud

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

But a process that is easy for consumers to follow is a process that is equally easy for scammers to exploit.

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

As such, recall risk management will require sophisticated approaches to thwart fraud: advanced fraud detection technology, better digital security or verification systems during recalls, tamper-proof features to the physical product that make it hard for fraudsters to replicate, or other measures.

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

Secondary Markets

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

Recalls are the next step to protecting consumers and removing hazardous products and materials from the market, but risks from secondary markets put wrinkles in the recall process.

Even before the internet, secondary markets like thrift stores, garage sales and auction houses influenced product recalls. Today, the prevalence of online secondary markets in combination with younger generations’ trending interest in sustainability through secondhand sales makes product recalls even more complicated.

This issue is hot on the mind of regulators. The past several years has seen an increase in consumer legislation such as the STURDY Act and Reese’s Law, which reflects regulators’ desire to codify safety measures.

Even after a recall is closed, companies still must monitor online platforms and secondary markets to make sure recalled products aren’t in circulation. Though some onus falls on the tech platforms that create secondary markets, and some onus falls on the consumer, risks in this area remain a big problem for brands and their claims team if not handled swiftly.

Data Breaches

Cybersecurity remains a top risk threat for all organizations, but a data breach can compound liability for organizations that are also navigating a product recall.

Consumer data collection, storage and security is already a tricky 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 side, as a result of new regulations, consumers are more aware of how their data is stored and used by companies that collect their information.

During a recall, consumer data is critical for notifying consumers who have purchased or registered a recalled product. However, that outreach step could become entirely compromised in the event of a data breach, either before or during a recall.

A data breach could also feed back into fraudulent activity: threat actors, armed with stolen product or consumer data, could fraudulently claim recall rewards or contact consumers with fake recall. These types of risks lead to greater losses for companies and consumers alike.

Companies and insurance professionals must find the right balance of risk and reward when it comes to collecting and holding consumer data. In the future, expect these risks to continue and leaders’ decisions to shift to steer against this particular headwind.

Risk Management Leads to Smoother 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 recall 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 forming dedicated compliance teams to stay on top of regulatory developments, engage with regulators, adapt swiftly to new requirements, and integrate technology that facilitates rapid response to emerging risks. Ultimately, getting ahead of compounding risks helps the claims adjusters and recall specialists that handle liability and payout processes, should a recall happen.

Harvey is senior vice president, client services, Sedgwick brand protection.