Food contamination risk still high in China

Chinese products were involved in 345 safety alerts, said ‘The Rapid Alert System for Food and Feed, Annual Report 2009’. That number was down from the previous year’s figure of 500, but was still nearly 25% 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.

Progress been made
“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,” Christof Bentele, global managing director of Aon’s product recall team, tells lloyds.com. “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.   

To minimise the risk of problems occurring Bentele recommends developing long-lasting relationships with Chinese food firms, to encourage them to develop the same hygiene and safety standards as those in North America and Europe. Instead of taking their word for it, companies should regularly monitor their Chinese suppliers to make sure they are complying with those principles. “That might involve quite a big investment but that cost is far outweighed by the possible implications of a contaminated food incident that harms consumers,” Bentele says.

It is worth making Chinese suppliers sign up to the “Hazard Analysis Critical Control Point” (HACCP) rules, Bentele adds. 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.
Companies should also have a crisis management plan in place, to help minimise the potential damage from being involved in a food scare. “These plans shouldn’t just work at your facilities but also those of your key suppliers. We recommend they include working with Chinese suppliers,” Bentele says.

Crippling cost of food scares
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.

Unlike 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 says.
Product contamination insurance has seen huge growth over the past four years, David Burke, product contamination class underwriter for the Catlin Syndicate 2003, tells lloyds.com. “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.”

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 concludes.

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