Risks include geopolitical tensions, earthquakes, and extreme weather, but risk transfer solutions remain thin on the ground
Lloyd’s and WTW have published a report on the risks to semiconductor supply chains - an industry estimated to have a market value of nearly $600 billion and supporting a $2.2 trillion electronics sector that in turn drives almost $90trn of global GDP.
Semiconductors are the chips that enable the electronics industry and are found in vehicles, mobile phones, medical technology and even power the clean energy solutions being used to enable a sustainable future, such as solar and wind farms.
Due to the complex and global nature of the sector, it is subject to a multitude of risks including geopolitical tensions, earthquakes, and extreme weather, with manufacturing plants predominately located in East Asia.
Rebekah Clement, director of Sustainability, Lloyd’s said: “The semiconductor industry is acting now to respond to global demand and spark technological innovation. While the sector is mature in its approach to risk management, there are always unforeseen events that can impact production.
“The insurance industry has a critical role in partnering with semiconductor businesses to help them build resilience to manage the supply of mission critical products and to keep our digitally connected world turning.”
Demand for risk transfer
The report finds that the sector is most concerned by the medium-term risk landscape, which is where significant scope exists for increased collaboration between the industry and their insurers to address protection gaps.
Eighty-one percent of those polled in WTW’s Global Supply Chain Survey said a lack of insurance solutions was among the greatest challenges in the medium term, sending a clear signal to insurers that the industry requires partnership to transfer risk.
As the broker previously noted, companies are redesigning supply chains to make them more robust, but BI insurance protection remains a “wafer-thin patchwork”.
Those interviewed also highlighted eight key supply chain risk drivers:
- economic pressures,
- supply and demand changes,
- talent and labor,
- raw materials and components,
- packaging and transport,
- regulatory/geopolitical/political risks, and
- climate change and sustainability.
These risk drivers matched those of the food and drink industry, which favoured end-to-end supply chain coverage.
In contrast, the semiconductor industry recognised large financial exposures in their supply chains which traditional risk transfer cannot currently meet, and so favoured risk transfer at key moments in their chain.
Supply chain risk in a digitised world
By adopting a customer centric view of risk, the semiconductor industry could act as an example of a resilient, digitalised supply chain in a connected world – with data and tailored insurance solutions used to supplement businesses’ retained risk.
Hugo Wegbrans, Global head of Broking at WTW said: “Global supply chain complexity continues to increase, whilst transformative technologies powered by semiconductors are driving rapid change and progress in many areas.
”Like many other businesses, Semiconductor companies are aware of their supply chain vulnerability and are actively working to increase their resilience.
”For the gaps, they are looking to the insurance industry to partner. At the moment, insurances cover only small parts of the supply-chain risks. The solutions provided by our industry provides only a wafer-thin patchwork of protection.
”Semiconductor businesses need to explore different ways to manage the significant financial exposures to achieve true resilience. Traditional risk transfer will only be one component of achieving that.”
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