Reliance on Semiconductors Makes Addressing Supply Chain Risk Critical

The world's transition to a digital economy relies on a resilient semiconductor industry, yet disruptions over the past 2 years have highlighted weaknesses in the semiconductor supply chain, a new report notes.

The Lloyd's Futureset report, Loose Connections: Rethinking Semiconductor Supply Chains, notes that the $596 billion global semiconductor industry supports a $2.2 trillion electronics sector, which further drives $89 trillion of global gross domestic product.

"As the semiconductor industry has grown in size, volume, and complexity, the associated risks to business supply chains have also increased," the March 16, 2023, report says. "Anyone looking to buy a new car in 2021 and 2022 would have felt the impact of disruption to semiconductor supply chains, with pandemic-induced manufacturing and logistics challenges creating a gap between chip supply and demand."

The Lloyd's report, developed in cooperation with Willis Towers Watson (WTW), is the second in a series of three reports exploring supply chain risks.

Lloyd's said that its review of the semiconductor industry found significant room for collaboration between the industry and its insurers to address protection gaps. That was particularly true around the medium-term risks that pose the greatest challenge to the semiconductor industry, Lloyd's said.

The report also notes that the examination of semiconductor supply chains highlighted large financial exposures across those supply chains that make end-to-end insurance solutions less effective.

Among the factors contributing to semiconductor supply chain risks is the fact that producing a typical chip requires raw materials and components from suppliers around the world. "No single country has end-to-end dominance over the production and supply segments that result in finished semiconductor chips, with different key countries each leading separate market segments that rely on one another," the Lloyd's report says.

Lloyd's notes that as is the case in all supply chains, there are costs associated with relying on a global trading system. Geopolitical developments can suddenly threaten supply chains that previously functioned effectively. Weather events such as floods or droughts can cause disruptions, as can talent shortages or disasters such as fires that damage the production facilities of major suppliers along the supply chain.

"Given the complex landscape they operate in, semiconductor suppliers take risk seriously: investing heavily to ensure they have robust contingencies in place as well as embracing technology to support operational efficiencies," the Lloyd's report says. "Importantly, this includes gaining better visibility of exposures and digitizing supplier data, which helps insurers build a more detailed picture of an exposure."

While the sector will never be able to eliminate supply chain risks entirely, the availability of more and more data for modeling along with emerging and innovative insurance solutions provide growing opportunities to analyze outcomes and mitigate impacts, the report says.

Semiconductor businesses are not operating on their own in seeking to reduce supply chain risks, according to the report. Seeing semiconductor supply as a national security imperative, governments and regional blocs are deploying multi-billion-dollar policies and legislative packages to strengthen onshore semiconductor activities, the report says. Those efforts include the US CHIPS and Science Act and the European Union's European Chips Act, worth $106 billion and €43 billion in public and private investments, respectively.

"These investments will need protection, and global insurance markets are responding to new construction projects—relationships that are valued by the semiconductor industry, who are keen to understand where insurers can support supply chain innovation," Lloyd's said.

Lloyd's notes that in WTW's recent Global Insurance Supply Chain Survey, 88 percent of semiconductor companies indicated that they saw insurance for supply chain risks as either mission critical or necessary, with 64 percent saying that they had supply chain risks covered by specific insurance.

Over the next 3 to 5 years, 81 percent saw a lack of access to insurance solutions as one of the greatest challenges to addressing their risks. "This is a clear signal to the insurance industry that their support in boosting resilience is both wanted and needed," Lloyd's said.

The Lloyd's report suggests three key findings related to increasing awareness, availability, and the uptake of supply chain insurance in the semiconductor industry.

First is exploring closer synergies between semiconductor businesses and insurers, Lloyd's said. "There is a strong awareness of risk across the semiconductor industry, with businesses investing in risk management practices or actively partnering with third parties to provide new data sources in the face of ongoing global change," the report says. "There is also recognition that they can do more, and interest in working with insurers to act on this."

There's a recognition across the semiconductor industry that its risks aren't static, Lloyd's said, while at least half the companies WTW surveyed are confident they can manage the root causes of supply chain risks while 7 in 10 believe they have at least some influence over the quality of supply chain risk management.

Lloyd's next suggested that the insurance industry develop innovative products to address growing demand for supply chain risk coverages.

"Some parametric solutions already exist for semiconductor supply risks, however there is significant scope for insurers and brokers to further support the semiconductor industry by sharing examples of where risks match solutions, and the role of risk transfer in supporting resilience," the report says. "This can help all stakeholders become better protected against the risks."

Finally, Lloyd's cites the importance of access to real-time supply chain data and analytics models in addressing supply chain risks in the semiconductor industry.

"Availability of quality, timely, and usable data across supply chains has always been a challenge for both businesses and insurers," the Lloyd's report says. "For the semiconductor industry, that challenge still exists—but as businesses look to understand their supply chains in greater detail and invest in risk management and business continuity efforts, the outlook becomes more promising."