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Chinese dragon giving EU upset stomach

20 September 2010

EU businesses involved with importing or selling food and beverage products from China are walking, often blindly, into a potential legal and media storm, according to Aon, risk manager and insurance broker

While the EU has some of the strictest food safety laws in the world, and China itself has been making fast progress in making food safety a real priority, the EU has just reported 345 safety alerts of food and beverage products originating from China in 2009 in a recently published report, The Rapid Alert System for Food and Feed, Annual Report 2009.

This represents an improved number over 2008, when the EU reported 500 safety alerts of products originated from China, however it remains by far the largest number in comparison to all other countries worldwide.

While China has recently introduced a food safety act, similar to regulations seen in the EU, traditionally, quality management systems, food standards and hygiene levels have not been of comparable levels to those of EU manufacturers.

However, domestic contamination scandals in China over recent years, including the melamine case in 2008 which left six infants dead, a water supply contamination in South China and the recent report of carcinogens being found in 42 tons of Camellia oil in the Hunan region are likely to place renewed government focus on improving food safety standards.

For companies doing business with Chinese food suppliers, whether they are foreign or Chinese themselves, it is vital to:

have supplied produce undergo a strict quality management process and have firms not only agree to food safety standards but monitor their implementation;

have suppliers agree to, and monitor food safety standards such as HACCP procedures, the internationally recognised food safety system;

establish a recall plan in case a recall does have to be instituted;

consider taking out an insurance programme for the risk of product contamination;

develop a system to trace back ingredients of the supplied foods;

create a crisis management plan in order to minimise the financial and reputational damage a recall can inflict on a company.

Christof Bentele, global MD of Aon's product recall team, said: "Many EU firms see the advantages of importing from China, and indeed there are many, however the physical and regulatory distance between the EU and China make the risk of doing so higher than buying from a firm within the EU.

"Forgetting the reputational and financial impact of a recall for a minute, the potential human cost of contaminated food or beverages should be enough to make any firm realise that pre-incident crisis planning and the enhancement of quality management procedures should be an absolute top priority. For everyone involved in food production, distribution and sales, prevention really is better than cure.

"However, businesses cannot put blind faith in firms operating under a different social and regulatory framework to ensure they have the same emphasis on safety as they do. It is extremely prudent, for both Chinese firms and businesses in the EU importing Chinese goods, to take out an insurance programme for the risk of product contamination.

The insurance market in this area is growing and premium rates are getting more reasonable, however insurers will always look at the level of quality management and plans and procedures in place.

"Many businesses believe that because they have liability insurance they are covered from a financial perspective, however it is important to note that contaminated products insurance is very different to liability insurance. Liability insurance only covers firms for third party liability, whereas contaminated products insurance covers for the first party loss including the costs of undertaking a recall."

Typical, but often overlooked costs involved with a recall include:
· governmental recall
· destruction and redistribution costs
· loss of profits
· brand rehabilitation
· crisis consultants
· and covers both accidental and malicious product contamination


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