Navigating Semiconductor Risk in a Connected World

In our increasingly connected world, semiconductors drive the technology that links us. These microchips power smartphones, life-saving medical devices, and advances in artificial intelligence and machine learning. Semiconductor chips are the building blocks of the network infrastructure that provides faster, more reliable Internet connectivity.

As a result, demand for semiconductors is only increasing. Market research by McKinsey suggests the industry’s aggregate annual growth could average between 6% and 8% a year up to 2030. In an effort to be part of that growth, the UK government unveiled a National Semiconductor Strategy in 2023 – a £1 billion plan to support the sector over the next decade.

But as semiconductors unlock unprecedented technological potential, they also bring significant risks and dependencies.

Semiconductors are indispensable to innovation, so any disruption to the semiconductor supply chain reverberates across many industries simultaneously. This calls for businesses to understand and proactively manage the evolving risks associated with the technology.

Craig Mounser, Practice leader for Med Tech & Life Science at Travelers Europe

Supply chain & trade risk

As the global economy relies on semiconductors for everything from daily conveniences to complex industrial operations, it becomes more vulnerable to risk. The semiconductor supply chain is complicated and fragmented. It involves raw material extraction, fabrication, assembly, testing, and distribution – often across multiple countries.

Problems large and small – geopolitical tension, a natural disaster, a local disruption – can all ripple through the entire chain. This can lead to significant production delays and financial losses across a wide range of industries when something goes wrong.

As demand skyrockets for the capabilities that semiconductors provide, supply chains are under even greater stress. It’s critical for businesses to understand how to navigate disruptions effectively amid semiconductor shortages.

Operational & cybersecurity risk to key sectors

Growing reliance on semiconductors means businesses across a range of sectors must also grapple with the technological, operational, and cyber risks tied to these critical components. Here are the key sectors affected by the risks:

• IT: The complexity of semiconductor design and the integration of third-party components increase the sector’s exposure to cyber threats. The explosive proliferation of AI chips has increased vulnerabilities for software developers. Malicious actors can exploit vulnerabilities in hardware to gain unauthorised access to systems. This can lead to data breaches or operational shutdowns.
• Electronics manufacturing: Production defects or substandard components can lead to costly recalls and reputational damage. Having stringent quality assurance processes can help minimise these risks. Manufacturers can also maintain strong lines of communication with component suppliers to ensure compliance with quality standards.
• Life sciences: These companies, which rely on semiconductors for critical medical equipment, face challenges that impact human lives. Equipment malfunctions due to semiconductor defects can compromise patient safety and lead to significant legal liabilities. To protect against such outcomes, it’s important for life sciences companies to adopt risk management practices that involve rigorous testing and validation protocols.
• Telecom: This industry, which is expanding rapidly to meet the demands of high-speed connectivity, also faces the dual challenges of security and reliability. As networks grow more complex, ensuring the integrity of semiconductor components is vital to prevent service outages and cyber breaches.

Strategies to mitigate market risks and build resilience

The risks of semiconductor reliance are significant – but they are not insurmountable. Strategic foresight and diligent risk management can make businesses more resilient. In the process, they may turn challenges into competitive advantages. Businesses can take steps like these:

• Maintain a diverse network of suppliers.
• Consider onshore manufacturers to help simplify and shorten the supply chain and minimise import risks.
• Use technology to anticipate and manage semiconductor pricing and supply fluctuations.
  Improve supply chain management – with blockchain for enhanced traceability or artificial
• intelligence for demand forecasting – to make it possible to respond swiftly to emerging threats.
• Maintain an inventory buffer to mitigate the immediate impacts of semiconductor shortages.
• Allow for design adjustments and flexibility to avoid overreliance on specific components.

Cross-functional risk management strategy is important too. Risk management teams can collaborate with supply chain managers, IT security professionals, and quality assurance specialists to develop comprehensive mitigation processes. Risk assessments, scenario planning, and cybersecurity investment can all protect an organisation against disruptions. The right mix of insurance – like cover for supply chain disruption and product liability – can complement those efforts by protecting against specialised risks.

Finding advantages in the semiconductor landscape

Semiconductors can unleash a vast number of opportunities for businesses. The organisations that anticipate and manage their exposures – using both proactive risk management and insurance protections – get a competitive advantage.

High-tech manufacturers, life sciences leaders, telecom providers and electronics developers all stand to gain by adopting thoughtful risk management strategies around semiconductors. Their unique exposures call for a comprehensive plan that accounts for risks within their control and those outside of it.

Craig Mounser, Practice leader for Med Tech & Life Science at Travelers Europe

As part of the plan, businesses can improve their supply chain resilience, minimise cybersecurity threats, and practice operational excellence. Insurance can serve as an additional safety net in case something goes wrong. Organisations that take these steps can best harness the potential of semiconductor technology and, at the same time, secure the future of their business.

The information provided is for general informational purposes only. It does not, and it is not intended to, provide legal, technical, or other professional advice, nor does it amend, or otherwise affect, the provisions or coverages of any insurance policy issued by Travelers. Travelers does not warrant that adherence to, or compliance with, any recommendations, best practices, checklists, or guidelines will result in a particular outcome. Furthermore, laws, regulations, standards, guidance and codes may change from time to time, and you should always refer to the most current requirements and take specific advice when dealing with specific situations. In no event will Travelers be liable in tort, contract or otherwise to anyone who has access to or uses this information.