Asia’s high-tech production industry is huge, sophisticated and growing but carries a myriad of risks, from devastating earthquakes to highway robbery.

Even the most casual observer of the high-tech production industry will be aware of its rapid growth in Asia. China, South Korea, Japan and Taiwan are all major players in this sector, and the markets for semiconductors and mobile phones are massive and growing across the Asia-Pacific region.

The most sophisticated and valuable components of the high-tech production industry are semiconductors and microchips. These are closely followed in value by screens for mobile devices and televisions (known collectively as ‘display’). These are all highly valuable components, as opposed to finished products, with transit patterns that are categorised as Business 2 Business (B2B). Operational devices such as mobile phones and tablets are generally packed with less value per container or truck than semiconductors, microchips and displays. Their transit patterns are usually categorised as Business 2 Consumer (B2C), which means that they often travel further and, as finished products, are tempting targets for theft. Then there are less valuable electronics, such as network equipment, components and computers.

The Asian, and in particular north Asian, semiconductor industry has a remarkable capacity to learn the lessons from the past

Guillaume Parard

The factories that produce semiconductors, microchips and displays are extremely sophisticated, multi-billion-dollar facilities, making them highly attractive to insurers. Furthermore, as CUO APAC Non-Marine for AXA Corporate Solutions Guillaume Parard points out, Asia is home to some of the world’s best-in-class manufacturing facilities from a risk quality and management perspective, such as those located in Taiwan Science Park, Hsinchu. “The Asian, and in particular north Asian, semiconductor industry has a remarkable capacity to learn the lessons from the past, to incorporate those learnings into their new facilities, and to improve the older assets to the extent possible,” Parard says. “The outstanding scale of existing assets base and annually constructed facilities extensions in Taiwan, for example, coupled with the natural catastrophes exposure, forces the market to constantly review and adjust exposure, and ensure that the transfer of risk remains priced at an adequate level.”

Vice CEO and Group Chief Operations Officer at AXA MATRIX Risk Consultants Krishnan Venkatraman agrees, pointing out that the industry’s sophistication has increased remarkably in the past two decades. “There has been a tremendous amount of improvement in terms on construction, especially focussing on fire risk and smoke contamination, which is a big issue,” Venkatraman explains. “Also, in dealing with natural catastrophes, which in Taiwan for example is more to do with earthquakes. These manufacturing process are extremely sensitive to any vibrations and aftershocks, as you’re dealing with precision electronics. Last year’s losses in the earthquake were much lower than they would have been 10 years ago, and this is to the credit to the industry and the facilities in Taiwan, which have done a tremendous amount of work in this area.”

Natural catastrophe risk is not high-tech specific, of course, but it can hit this sector particularly hard due to values of up to US$150 million at one warehouse or logistics centre. This can be exacerbated if an event such as a flood or earthquake hits a region with an accumulation of storage facilities. South Asia Partner, Strategic Risk Consulting at Willis Towers Watson, James Wong says it is critical to have a clear understanding of the vulnerabilities “not only of your facilities but also your key suppliers and logistic processes”. “The first step is to have a dashboard highlighting the aggregation for each significant peril in your region and the value at risk,” Wong explains. “This will assist in assessing the risk for setting up new locations and supplier arrangements, business continuity planning, as well as assessing the reasonability of insurance sub-limits.”

Singapore-based managing director of strategic risk solutions at JLT Specialty Philip Ondaatje says that while the tech sector in Asia is relatively well spread-out in terms of manufacturing locations, the exposure of extremely large value plants to natural catastrophe zones is “somewhat daunting”. “In particular, mega facilities in Taiwan and Japan pose a significant loss exposure to underwriters given the frequency of nat cat perils that affect these countries,” he points out. “Whilst not necessarily insured to full value, the precise calibrations and contamination free areas required of these plants make even the smallest earthquake or flood a hundreds of millions (or billions) dollar loss potential.”

Keeping track of these values can also be a challenge as they vary over time due to just-in-time production and supply of retailers. As Head of Marine Cargo Underwriting South Asia and Pacific at AXA Corporate Solutions Luca Ronsisvalle points out: “This cargo is never sitting static, it keeps moving and continues to flow so you have to be aware at any one time what is your exposure. By giving information, we must understand how much each location contains in dollar value. It can be 50, 60, 100 million dollars at any one time. So, when you have an insured with a high static exposure in an affected country, it is definitely a concern.”

They will have insider information from a logistics partner and will hijack the truck with assault rifles


Pierre Martelly

Semiconductors and mobile phones are often produced in regions where natural catastrophe is the main hazard, more often than not in coastal areas. “This is where most companies have distribution facilities or the first touching point in the country because it’s close to the port and infrastructure,” Ronsisvalle explains. Taiwan, for example, is a modern country in terms of quality of infrastructure and property, but is a high risk in terms of earthquake. “So you can have a semiconductor company all over the country and if it is hit by a huge earthquake, the potential loss is very high – both property and stock,” Ronsisvalle says.

Chief Executive Officer at AXA Corporate Solutions Assurance Hong Kong branch and Marine Practice Leader at AXA Asia, Pierre Martelly, agrees. “There is a huge concentration in Taiwan that is divided in three main areas, and we believe that a major nat cat could wipe out the whole north or centre or south of Taiwan,” he says. “It’s challenging from an accumulation viewpoint and for the balance sheets of insurance companies.” Of course, catastrophic risks “extend beyond forces of Mother Nature”, as Chief Broking Officer (Industry Specialties) and Head of Complex Property, Asia, Aon, Jiunn Woei Lee points out. “Other key concerns where we have seen large claims relate to staff competency and mitigating as much as possible the occurrence of human errors,” he says. “A major semiconductor recently suffered a major loss in its China facility where a Chinese contractor wrongly plugged in a gas pipe into the wrong hose. The resulting loss was in in the area of US$1billion.”

Many players in the high-tech arena are entering new markets in Asia, so they are yet to reach a scale where they have their own properties or storage locations. So, as Head of Marine Cargo and Hull for Singapore and Marine Cargo Practice Leader at AXA Asia, Sundeep Khera, explains, “they will probably lease a storage space from a third party who will be an aggregator for multiple companies, so we lose visibility and there is no control on the risk”. “The main risk is ‘who else is in that warehouse?’, and the visibility is quite low in Asia compared to other parts of the world,” Khera says. “For example, a few years back with Tianjin, a lot of cars got burned because no-one knew that next door were explosive chemicals that were not declared.” As Ronsisvalle puts it: “When a third party has a contractual agreement with a manufacturer of mobile phones, they may have multiple parts to a storage facility, so the phones might be 20 metres away from tanks containing flammable material.”

Another challenging and growing risk in the high-tech sector centres around theft. Because of the growing value in an ever-reducing volume, high-tech companies and their logistics partners have to develop highly sophisticated systems to combat this threat. Pierre Martelly explains how a highly organised hijack might work: “They will have insider information from a logistics partner and will hijack the truck with assault rifles. They can steal between a half a million and two million dollars worth in any one hijack. One insider job involved the manufacturer that had a policy of always using top-tier logistics partners, but sometimes these partners subcontract, and in this case the subcontracted trucking company was a complete fake. It had site offices, fake business registration, business cards, the lot. But as soon as the trucks were loaded, they were never seen again.”

Many Asia-based manufacturers are surprised to learn that hijack is not uncommon in Europe, where mitigation can be costly. “We know of one Asian manufacturer which, on a certain route, used two drivers instead of one to guard themselves against insider jobs and also to make sure the truck never stopped for rest or sleeping,” Martelly says. “You can imagine the cost in Europe of always having two drivers instead of one.” Head of Underwriting Marine Cargo (North Asia) at AXA Corporate Solutions Shirley Hung says that as well as parts of Europe, countries such as Brazil and Mexico can be hijack black spots. “It’s such a problem that sometimes the company will make their own call and spread the risk from, say, 10 to 20 trucks. Obviously, this will affect the cost of operations and their profitability.”

On the topic of transportation and shipment, multiple handling from shipment to destination is a big risk. Sundeep Khera says that this is a key factor that an insurer needs to be aware of for their clients. “Will it be shipped as you packed it from a to b, or will there be multiple parties opening, distributing, handling?” he asks. “For example, there have been cases where a consignment has reached Mexico, it has to go to three eventual buyers, so it’s unpacked and the hard drives are removed but the weight is kept the same with counterfeit items.” Khera cautions suppliers not to be tempted to leverage their spend and reduce logistics costs by “trying to put all their eggs in one basket”. “They better watch and manage that basket otherwise there can be a major disruption waiting to happen,” he warns. As a rule, best practices for mitigation include tracking of goods, vetting procedures for employees, and vetting procedures for providers and sub-contractors (or banning of sub-contracting).

In recent years, supply chains have become more complex and volatile, as the number of parties involved increases, as Associate Director, Asia, Aon, Jennifer Goh explains. “Traditional supply chains were relatively straight forward, with just a few parties making up the chain,” she says. “Supply chains today contain numerous suppliers, shipping companies, forwarders, stevedores and other (logistics) service providers. All these parties have third party goods in their custody. As an owner of these goods, it becomes more difficult to track who is taking care of your goods at any given point in time.”

High-tech manufacturers are also concerned about the risk of someone tampering with the components or the finished products. This is particularly relevant for network equipment manufacturers who face stringent requirements from their clients and governments keen to protect their data security. This is not a primary concern of the insurance companies, but it can create an alignment of interests between the insurer and the insured in investing enough to track the shipments.

For any insurance company focussed on global corporates in industrial sectors, high tech is a huge target. However, as Guillaume Parard explains, the exposures can be astronomical. “For one single policy you may exceed dozens of billions of dollars of value, and this increases every year,” he says. “The amount of annual extension works in this industry can be phenomenal. The concentration of risk in those facilities is probably the highest in the entire portfolio by far.” Willis Towers Watson’s James Wong emphasises that having comprehensive underwriting information provides insurers with clarity of the risk profile and confidence that the risk is well managed. “This will lead to better partnerships between insurers and insureds – with sustainable capacity and pricing, fit-for-purpose cover and claims handling action – making the risk transfer program a success,” he says.

From a property and business interruption viewpoint, the age of the plant can make a difference to its resilience during a stress scenario, but industry standards in this area are already high and continue to improve. From a stock throughput viewpoint, however, things are less clear-cut. Shirley Hung points out that this is where good information from clients can assist with the underwriting process. “Even though the industry can look very similar, it can be very different between different companies’ perspectives and operation levels, and the way they manage their logistics and supply chain management that would affect our underwriting decisions,” she says. “The most important things that we are now looking at include loss record and history, which show us the quality of the management and how they look at supply chain and insurance.”

The number one criteria that is considered is who is used for transportation, Hung continues. “The other things we look at are their storage locations, distribution and business models. Some customers will have very high accumulations of one or two hubs and that will bring a higher limit requirement for the insurance policy, while others will have well distributed storage locations which to us is more balanced.”

Through operations such as AXA Matrix Risk Consultants, Krishnan Venkatraman says, companies can learn about best practice loss prevention. “There are three main areas that we work on,” Venkatraman explains. “The first one is we do all the desktop reviews and risk assessment prior to underwriting of the risk by my colleagues at AXA Corporate Solutions. The second step is where AXA Corporate Solutions is the lead insurer, then we provide risk engineering and loss prevention support. Third is unbundled solutions for risk engineering and loss prevention.”

Sundeep Khera says that AXA Matrix Risk Consultants can perform benchmarking, vet the subcontractors, and rate the facilities in terms of risk profile, nat cat exposures and flood risk. “We have tools both in-house and external to grade the facilities of our insured clients when they want to use a subcontractor or third party,’ he continues. “And we have a global presence, located in Asia, Europe, Middle East and the US. We are able to address the needs locally, speak the same language as the client and so on.”

Aon’s Chief Broking Officer (Financial Specialties) and Head of Complex Casualty, Asia, Niloy Majmudar points out that technology in the semiconductor industry is evolving at an extremely fast pace, which has resulted in component manufacturers facing new and unforeseen risks. “There is an increasing emphasis on cost effectiveness, operating efficiency and greater sophistication at every new developmental cycle putting renewed pressure on R&D,” he says. “Product failures are a new threat to the industry as the intensity for the ‘next new’ prevails, and this will continue to keep insurers cautious of third party exposures. An example is the Samsung S7 battery failure. Insurance products such as products liability, product recall and manufacturer’s E&O can serve to help mitigate the potential financial burden of these exposures for high-tech manufacturers.”

Such is the rise of the size and sophistication of the high-tech industry in Asia that, as CEO Asia-Pacific at AXA Corporate Solutions Etienne Champion explains, it is well on its way to becoming one of the larger components of his organisation’s portfolio, especially for cargo coverages. “Therefore, we have developed know-how in those risks that are specific to semiconductor and mobile phone transportation.”

Click on the link below to download the full report.