Small chips, big role: How earthquakes can hurt supply chains

Our modern economies rely on global trade. Value and supply chains have become international, as goods are produced in one country – typically relying on raw material from other countries – before they ultimately start their voyage to the end consumer.

In this web of dependencies and interdependencies, a lot can go wrong. And when it does, it might mean that you, as an end consumer, have to wait longer for your order. Or you may not receive your order altogether, and have to settle for an alternative instead.

In our article Earthquake Preparedness at Critical Ports we looked at how ports are bottlenecks in today's trade-reliant economies and at how a strong earthquake can knock a port out, impacting companies way beyond the earthquake-affected area itself: a contingent business interruption scenario where parametric insurance can offer fast, transparent and flexible relief.

It's not only some major ports that are located in highly earthquake-exposed areas. The same is true for some of the largest semiconductor factories on the planet. Semiconductors are critical components that power electronics from computers and smartphones to the brake sensors in cars.

One of the leading nations in the semiconductor business is Taiwan. And Taiwan is not only highly exposed to Typhoons, but also has a history of destructive earthquakes. So does Japan, the once dominant nation in the global semiconductor market, which recently set itself the goal of tripling domestic chip revenue by 2030.

The global chip shortage, caused by snowball effects of the COVID-19 pandemic, has heavily impacted the automotive and consumer electronics industries, for as technology has advanced, chips have found their way into smart toothbrushes, tumble dryers or fridges.

Under this scenario, your business will likely feel some impact from the earthquake, even if you have no physical presence in e.g. Taiwan or Japan. But when ordered chips don't arrive, machines at the other end of the globe may stop because goods can't be finished.

Such a contingent business interruption scenario can be addressed by parametric insurance. The quick and transparent claims settlement features of parametric insurance mean that any company having an exposure to overseas semiconductor firms, and that opts to buy, could have cash in hand in the days after an overseas earthquake, protecting its balance sheet.

The fast liquidity will not magically make chips appear out of thin air, but companies with an insurable exposure to perils affecting their suppliers get a quick cash injection that will help them to cover for extra expenses, and to hedge their financial exposure arising from the contingent business interruption.

To learn more, please visit our website that details our QUAKE product.