Rethinking semiconductor supply chains in Europe

Loose Connections: Rethinking semiconductor supply chains’ is the second report in Lloyd’s Futureset ‘Rethinking supply chains’ series. The report highlights the supply chain challenges currently faced by the semiconductor industry and makes recommendations as to how the insurance industry can more effectively collaborate with semiconductor firms to drive forward product innovation and better support the industry. In this article, Lloyd’s Europe Head of Strategic Intelligence discusses what this means for businesses and insurers in Europe.

David Franco
Head of Strategic Intelligence, Innovation Lead, Lloyd's Europe

A time of massive change

For everyone, at every level, the last three years have been a time of enormous change. A period of disruption, dislocation, change, and opportunity is currently affecting society, businesses, and individuals. Examples include Brexit, Covid-19, heightened geopolitical tensions, the war in Ukraine, and inflation. 

Before the pandemic and the Ukraine conflict, the world was frequently referred to as VUCA (Volatile, Uncertain, Complex, and Ambiguous). However, commentators and business leaders had already begun to discuss a BANI (Brittle, Anxious, Non-Linear, Incomprehensible), RUPT (Rapid, Unpredictable, Paradoxical, Tangled), or TUNA (Turbulent, Uncertain, Novel, Ambiguous) world. 

It is debatable which of these we are now, but we should probably add the word Systemic to the list, if by systemic we mean an event with first, second, and third-line effects capable of bringing an entire industry or economy to its knees, as well as new and emerging risks linked to climate, digital, cyber, and geopolitical developments. 

Lloyd’s Futureset: building societal resilience through research, insight and education

Against this backdrop, Lloyd’s Futureset devotes significant time to research, scenario analysis, and brainstorming solutions for these types of systemic and new risks. Customers of Lloyd’s – corporations as well as public bodies, SMEs, and individuals – are experiencing unprecedented levels of disruption, and they require insight and solutions from their insurers more than ever.  

Lloyd’s Futureset investigates the global landscape and generates research and insights into the risks that keep risk managers awake at night. We collaborated closely with Aon in 2022 to assess the interconnected risks of the Ukraine conflict on insureds and insurers, outlining the most likely war scenarios and the corresponding impacts on climate, food, energy, supply chain, and other areas directly relevant to societies and our customers.

Insurers do not have a crystal ball, but we can look to anticipate upcoming shocks through rigorous scenario analysis, planning, modelling and stress testing. 

Rethinking our semiconductor supply chains

The Ukraine report identified supply chain as a major area of disruption. Futureset  partnered with WTW to launch the Rethinking Supply Chains report series and, following a successful deep-dive into global food supply chains, our attention then turned to the supply chain challenges currently faced by the semiconductor industry.

onsider your phone, the electric vehicle and solar panels required to meet net zero targets, or essential medical technology. All of these rely on semiconductors,  but the global supply chain’s stability  is now more precarious than ever due to environmental, geopolitical, economic and technological developments. 

As the semiconductor industry has grown in size, volume, and complexity, so have supply chain risks, particularly driven by heightened geopolitical tensions and rising national interests. 

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. Importantly, this includes improving exposure visibility and digitising supplier data, which allows insurers to build a more detailed picture of an exposure. 

Entirely eliminating potential supply chain risks will never be possible for the sector, but with  abundant data to fuel modelling, and emerging and innovative insurance solutions becoming available, the ability to analyse outcomes and the opportunity to mitigate impacts is growing. 

Semiconductor businesses are not alone in these investments. Governments and regional blocs are actively rolling out new multi-billion-dollar policies and legislative packages to strengthen and onshore semiconductor activities, in what they see as a national security imperative. In Europe this includes the EU Chips Acts, worth €43bn EUR in public and private investments.  

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. 

Insurers can help improve resilience in semiconductor supply chains

In particular, our research highlights three key findings to increase awareness, availability, and uptake of supply chain insurance in the semiconductor industry:  

  • There is room to explore closer co-operation between semiconductor businesses and insurers;
  • Semiconductor businesses expect insurers to develop innovative products to meet a growing demand – from wording improvements through to cover for disruption caused by key bottlenecks and support for the construction of new fabrication sites such as the “megafab” production plant for high-end chips that Intel is planning to build in Germany.
  • Accessing supply chain real-time data and analytics models is imperative to semiconductor firms and buyers of semiconductor technology.
  • Insurers have a unique opportunity to partner with an industry invested in understanding   its supply chain risks, learn from their risk management actions and join their mapping and modelling efforts. 

    This is a two-way partnership; insurers can encourage the semiconductor industry to continue building resilience into their supply chain, while the semiconductor companies can give insurers data and information to help them gain the comfort needed around aggregations and understanding downside exposure to provide innovative risk transfer solutions. 

    The world is undergoing serious and far-reaching tectonic shifts, and customers will want their insurers to help them navigate these challenging times. Lloyd’s Europe will continue to work closely with our local distribution partners and end customers to explore these issue and ideate and develop new solutions.