Fixing the Food Chain

Global supply chains necessitate more stringent food-safety rules from the FDA.
By: | September 15, 2013 • 7 min read

Earlier this year, the U.S. Department of Justice indicted four former officials of the Peanut Corp. of America (PCA) and accused them of knowingly selling Salmonella-contaminated peanut products that killed nine people and sickened more than 700 in 2009.

It took about a year and a half to track down the 1,800 tainted products, sold under more than 250 brands and manufactured by hundreds of PCA’s customers ranging from small, family-owned businesses to global, multibillion-dollar food companies.

Most of the time, the distribution of contaminated fresh and processed foods is not deliberate, but the ripple effect, nonetheless, is huge — and hugely expensive.

The cost of foodborne illnesses in the United States is $152 billion a year, according to research by Robert L. Scharff for the Produce Safety Project at Georgetown University.


That figure includes medical costs, quality-of-life losses and costs to insurers that pay medical expenses. It does not include the costs of recalls or damage to reputations and the resulting loss of income.

According to the Centers for Disease Control and Prevention, about 48 million Americans suffer — and 3,000 die — every year from domestically acquired foodborne illnesses. The young and elderly are more vulnerable.

“If you watch the news, you see the news, the sports, the weather and the recalls. I don’t think there is a day that goes by that you don’t see a recall on the news,” said Bernie Steves, managing director in Crisis Management for Aon Risk Solutions.

In fact, Steves said, in the fourth quarter of 2012, there were six recalls every single day, according to the Food & Drug Administration. The number of recalls in Q4 2012 was 33 percent higher than the previous quarter.

Food Safety Laws

Two years after the Food Safety Modernization Act (FSMA) was signed into law, companies are still waiting on many regulations to be finalized that will strengthen food safety processes and procedures.

Most companies have two divergent reactions to the proposed rules, said John T. Hoffman, a senior research fellow at the National Center for Food Protection and Defense at the University of Minnesota.

“They are afraid of the new regulations and of how much they will cost,” he said. “And then they will say, ‘It’s about time they fixed some of these things.’ Both of them are correct. Neither is wrong.”

Reaching consensus on FSMA rules has been a lengthy process, leading two consumer groups to sue the FDA in August 2012 after it failed to meet statutory deadlines. In May, the FDA told a California federal judge that it still needed more time.

In July, the FDA finally issued the last set of its proposed regulations, most of which will impact small- and medium-size organizations. Large companies often institute practices even more stringent than those proposed by the FDA, experts said.

The increasing globalization of the food chain adds to the difficulty.

About 85 percent of seafood and 60 percent of fresh produce now come into the United States from overseas, Steves said. Nearly 45 percent of the imported foods causing outbreaks came from Asia.


Among the FDA’s rules, which have been issued on an interim basis:

* Ensure. Companies must ensure imported foods are subject to the same safety standards as required for foods produced in the United States.

* Trace. Food companies must be able trace back, in close to real time, each element of their food supply chain, as well as trace forward each of their products to customers.

* Recall. Food companies must have recall plans in the event of an outbreak.

* Monitor. Food companies must implement a monitoring system to verify their protective controls are effective.

* Verify. Importers must implement a verification program to ensure their foreign suppliers’ protective controls are effective.

In May, the FDA finalized a regulation that all food and animal food importers must report if any products proposed to be brought into the United States have been blocked by any other country.

The FSMA also gave the FDA the power to close down facilities due to unsafe processes. It did that for the first time in November 2012, when it shuttered Sunland Inc., another peanut processor involved in a Salmonella outbreak.

There were no criminal allegations, but 42 people in 20 states were sickened, and the recall expanded to more than 200 different products and about 40 different manufacturers and retail outlets. The company just resumed operations in May.

It took about three months of reported illnesses before the situation was recognized and product recalls began. That seems to be the timespan needed to take action in many food recalls.

On June 3, Townsend Farms in Oregon issued a recall of frozen berries that had been sold by Costco and other carriers of the Harris Teeter product brand. The first case of hepatitis A caused by those berries was reported on March 16, according to the CDC.

As of June 12, 97 people in eight states had contracted the contagious liver disease, which is more common in countries with unsafe water supplies.

Fresh vs. Processed

Back in the day, said Ian Harrison, a partner at Lockton UK and world practice leader for Product Recall, carriers would price the risk of commodity crops lower than processed foods because of the shorter supply chain.

That is no longer the case, and the difference is not just that fresh produce is now imported globally.

Fresh produce has been linked to the largest number of outbreaks, causing about one-quarter of all foodborne illnesses, according to Scharff’s research, which was published in 2010.

“There are a lot of quality control steps in a ready [to eat] meal,” he said. “Underwriters are doing a lot more segmentation of risk, which, to me, indicates the market is becoming a lot more sophisticated.”

But the longer supply chains for processed foods can turn into a “chain of uncertainty,” Harrison said. “It’s easy to say you know who your suppliers are, but it’s more difficult to show your suppliers and their subcontractors are following your rules and your contractual requirements,” he said.

The FDA’s proposed traceability requirements are already having an impact, he said.

Companies are better auditing their suppliers, and some are considering shortening their supply chains or only using contractors in jurisdictions with more stringent food safety laws. Some are also retooling processes, so that if one plant or source is shut down, the company has options to allow production to continue, he said.

In the European Union, where the horsemeat supply-chain scandal affected products in 14 countries, some retailers are demanding manufacturers only source products from inside the EU, Harrison said. The source of the horsemeat was eventually traced to a Romanian slaughterhouse.

More Capacity

The cost of product recall insurance has seen a “quite significant price drop” over the past five years, as new carriers have entered the market. In London, Harrison said, the number of carriers five years ago was about five. Now, there are 15.

But prices are about to change, Harrison said, as there has been “significant claim activity coming through the market, which will have an impact on the price for the next two or three years.”

He also said he has seen a “significant increase in limits purchased this year,” because some companies felt they were underinsured.

More than three-quarters (78 percent) of larger companies buy some sort of specialty insurance to address this exposure, said Aon’s Steves, using statistics from the Grocery Manufacturers Association.


Unfortunately, he said, coverage purchased by small- and mid-size companies, while trending up, is not yet at that level, and those companies probably need the coverage more.

That’s because they have fewer financial resources, are not as well prepared to respond to an incident and may not have the product range that allows them to absorb the losses while still bringing in some revenue, Steves said.

Policy coverage is triggered by the potential of bodily injury, whether accidental or deliberate. About 80 percent of cases are accidents, said Harrison. The remaining 20 percent involve willful tampering.

Mislabeling, which is the basis for more recalls than any other reason, can also trigger coverage, Steves said, provided the bodily injury component is satisfied. Endorsements are also available for government-requested recalls.

Coverage includes paying for the logistical demands of the recall, including the value of the product that can’t be reused. One of the “most important and least appreciated” aspects of the coverage, Steves said, is crisis consulting coverage to help the company mitigate the long-term impact of the event.

It is impact to the brand that causes the greatest losses.

Policies will cover loss of income for the 12 months following the incident, based on past history and anticipated gross profit margin, as well as the cost of “rehabilitation” of the brand, such as advertising or couponing.

Recently, policies have been expanded to third-party recall liability coverage, such as for a manufacturer or packer who does private label work.

“Insurance is a great financial safety net, but it needs to be coupled with pre-incident planning and the ability to respond to the crisis,’ Steves said.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]