The Insurance Institute of Hong Kong

Our Bowling Tournament is back and it will be held on 7^th November 2000 between 6:30 pm to 9:00pm at AMF Amoy Super Bowl.The deadline is 27^th October 2000.

Just pick up your phone and call Pricilla Tang at 2582 7207 for your registration form now!

Mark this date in your diary! Another seminar session has been arranged for our members on 22 November 2000 at the HKFI office.The topic will be on Employees Compensation insurance.Hope to see you there.

A total of 526 polling stations throughout Hong Kong were open until 10.30 pm on September 10 for the second election of the Legislative Council since the handover.

More than 1.3 million of people, or 43.57 per cent of voters, cast their votes. The turnout rate was a drop of almost 10 percentage points on 1998 despite the government' s territory-wide publicity on the election.

I still remember how Hong Kong people braved the wind and rain to cast their votes in 1998 for the first Legco election after the handover.

This year the number of candidates or their election tickets has increased but the number of voters turned out decreased. It is difficult to explain about the drop. Some analysts said it was because the voters were sick of the scandals of some candidates reported by media just weeks before the election. Some attributed it to the poor government performance recently.

No matter what reasons, it' s time for every candidate, government official and political activist to think about the democratic development in Hong Kong.

Instead of confrontation and scandals, I believe members of the public would like to hear concrete proposals to bring them prosperity and stability. What they want is co-operation, not confrontation.

Although I return unopposed, I visited the votes counting station at the Hong Kong Convention and Exhibition Centre in the early morning on September 11 where I met lots of colleagues of the Legco and friends from different constituencies. The atmosphere was tense and candidates were waiting anxiously for their results. At that moment I thought perhaps voting rather than the results was the most important. Voting is the most fundamental way to exercise the right of citizenship.

UPDATE ON proposed new practice directions & HOW INSURERS CAN PREPARE AND RESPOND TO THE PROPOSED CHANGES

Changes to the Personal Injury Litigation procedures in the draft of the proposed new Practice Directions prepared by Mr. Justice Seagroatt, of the High Court of Hong Kong were outlined in the previous article in this section of the last newsletter.

There has been much comment and debate on the proposed Practice directions within the Legal Profession, however, it is not the intention of this article to deal with the questions raised on the practicalities of compliance with the proposed Practice Directions given that they are still in draft form.

Instead, this article looks at the proposed changes as pointers to assist insurers in reviewing their current handling of Personal injury claims.

While it was intended that the proposed new directions were to come into effect in September, 2000, it may now take some time for the proposed practice directions to be implemented.

A further revised draft of the proposed new practice directions was sent out by the Law Society on 12 October, 2000 to Personal Injury Practitioners. The revised draft takes into account feedback on the previous draft from Personal Injury practitioners in the Law Society, the Legal Aid Department and the Bar Council. A committee has also been set up including representatives from the Law Society and the Bar Council as well as Mr. Justice Seagroatt to look into the technical legal implications in the implementation of the Practice Direction. It is therefore still unclear when these directions will be implemented.

While the proposed changes are still in draft form and may be subject to amendment after further comments from Legal Practitioners, Insurers handling personal injury claims should take note of the proposed changes as they are an indication of the Court' s expectations on how such cases should be handled.

It may therefore be an opportune time for insurers to review their handling of personal injury claims and assess how well they can respond if the proposed changes are implemented, or at least, where they can, address the areas of the Court' s concern which are highlighted by the proposed changes.

The changes proposed as outlined previously remain unchanged. The main changes relevant to Insurers are outlined below.

Before a prospective plaintiff commences proceedings, the proposed practice directions require that a letter before action must have been sent to the prospective defendants and directly to their insurers (if known) no later than 3 months prior to the commencement of proceedings and the intended defendants/insurers should reply constructively to the same within 21 days.

In addition, any medical reports from Government hospitals should be disclosed together with the letter of claim.

If the defendant/insurer replies within the time period, the defendant/ insurer will have a period of 3 months in which to investigate the claim at the end of which period the defendant/insurer should state whether liability is denied and if so, give reasons for the denial.

There are cost consequences for the Plaintiff if proceedings are prematurely issued before the expiration of the three month period between the defendant/insurer' s reply to the letter before action and the issuance of a writ, unless the intended defendants or insurers fail to reply within 21 days to the letter before action.

However, the three month period between the issuance of a letter before action and commencement of proceedings will not apply where the claimant first instructs solicitors towards the end of the 3 years' limitation period so that the end of the limitation period falls within the requisite 3 month period.

Under these circumstances, the Plaintiff will issue the writ and withhold service of the same. The Plaintiff will write the letter before action and the defendant/insurer will be required to reply within the three-month investigation period. However, the proposed practice direction also stipulates that the existing Checklist Review practice directions still apply under these circumstances so that a Checklist Hearing date will be fixed not later than 5 months of the issue date of the writ.

Once proceedings are commenced, the new proposed procedure requires both parties to have their cases prepared at the outset and the parties are required to provide more detailed documentation relied on by each party - including inter alia notes of any Prosecution proceedings, witness statements, photographs and earnings of the Plaintiff - together with their respective Statements of Claim and Defence.

Clearly, the proposed directions aim to give the parties a 3-month period to explore settlement possibility and investigate the claim before resorting to litigation. The Court comments in the accompanying Notes to the Proposed Practice Directions that :

" Too many actions are commenced far too late without giving Defendants the chance to negotiate a settlement. An excessive level of costs is also generated before notification is given."

The proposed new Practice Directions also aim to expedite personal injury litigation so that by the time Court proceedings are begun, the parties would have prepared all the relevant documentation. Again, in the accompanying Notes to the Proposed Practice Directions, the Court warns Defendants that :

" If the Defendants do not use that 3-month period for the purpose for which it is intended they will not be able to obtain extensions of time in the course of proceedings to compensate for their omission or neglect in that regard.¡¨

The realities faced by Insurers is that a thorough investigation of an accident often takes more than 3 months given that the relevant items such as machinery involved in an industrial accident may have been disposed of by the time the letter before action is received and it will take time to locate all the witnesses and take full statements from them.

It is therefore imperative, as it has always been, that whenever Insurers are notified of any accidents or potential claims, they should arrange for proper investigation of the claim as soon as possible, including requiring the key witnesses to provide signed witness statements.

Existing Policy wordings do require Insureds to assist Insurers by providing all information requested by Insurers to settle the claim. However, although Insureds may have been co-operative in this respect, information provided have usually been inadequate and no proper records, if at all, were kept in respect of the accident.

Insurers could enlist their Insured' s co-operation in ensuring that there should be a system in place as part of their operational procedures to record all relevant information when accidents occur in their premises, whereby a thorough investigation of the incident should be carried out with as much information recorded as possible including taking photographic or video record of the scene, the preparation of witness statements and recording and updating witness' contact details

As part of their risk assessment in underwriting risks, Insurers may also consider whether a proposed insured has such a system in place and if so, review the effectiveness of the system. The importance of setting up such a system in view of the strict timeframe laid down in the proposed Practice Directions should be impressed upon Insureds at the outset.

Indeed, information accurately recorded by such a system may also eventually assist adjusters and solicitors as this will save time and reduce costs incurred in their investigation of the accident substantially.

Insurers should consider taking the initiative again as they did previously to contact the Legal Aid Department to negotiate claims before a writ is issued. It may now be an appropriate time to review with the Legal Aid Department the previous arrangement and discuss improvements to the same to facilitate effective negotiations between the parties.

The proposed new Practice Directions does pose new challenges to Insurers in handling Personal Injury claims, however, by taking the above initiatives, Insurers may not only be able to prepare themselves for the proposed changes but also be able to more effectively handle personal injury claims and reduce costs at the same time.

Hong Kong' s demography in the millennium

Statistics collected by the Hong Kong Government projected that there will be a gradual ageing of the Hong Kong population, which now stands at a size of about seven million, in the new millennium. Unlike other developed countries, Hong Kong does not have any comprehensive social scheme to take care of her citizens' old age. The allowance provided by the Social Welfare Department under the Comprehensive Social Security Assistance scheme is far from sufficient to cover the daily needs of most people and indeed, as the Government explains, it only intends to maintain living at a subsistence level.

Many sociologists have claimed that the ageing problem in Hong Kong is a social time bomb. The Government' s laissez faire policy in leaving her people to accumulate savings at their own wish to take care of their old age is naive in handling retirement. Most people spend their savings with short-term and medium-term goals and very rarely do they spend with retirement in mind. If these people have not saved enough during their working years, their descendents in future will have to bear some of the cost of supporting the retired seniors e.g. by paying higher tax. Due to the demographic changes in recent years, the average age of the population is shifting upward quickly year by year. This means that the burden on the future working population will grow unless the senior members of society have already been making provisions for their retirement now.

Discussions to provide some forms of retirement protection to the people of Hong Kong started in as early as the 80s but for various reasons no concrete scheme has been put into place until 1995 with the passing of the Mandatory Provident Scheme Ordinance. Even with this enactment, it has not been plain sailing. Society at large still has divided views on the timing of the implementation of the scheme. Thought it is finally decided that the full implementation of the scheme will start in December this year.

Voluntary retirement schemes

Despite the absence of a government initiated central provident fund scheme, some employers, mostly big ones, do provide some forms of retirement protection to their employees. These are voluntary schemes set up by employers to accumulate contributions put in by both employers and employees. There was no government supervision over the operations of these funds in the past. As a result, several serious problems caused by the mismanagement of some of these provident funds had arisen in the early 90s. The Government, determined to rectify the situation, then passed the Occupational Retirement Scheme Ordinance. This was still not a legislation establishing any form of retirement scheme for the people of Hong Kong. The main purpose of this Ordinance is to require the separation of the scheme assets from the employers own so as to provide a greater certainty to employees under these voluntarily established funds to collect their benefits when the benefits fall due. The Ordinance establishes a registration system for the voluntary occupational retirement schemes and ensures that these registered schemes are properly regulated.

The Mandatory Provident Fund Schemes Ordinance

The main object of the Ordinance is to establish a mechanism whereby employers are required to establish schemes for the purpose of funding retirement benefits to their employees. The schemes are all non-governmental. The paragraphs below will provide an overall view of the major parts of the Ordinance.

The mandatory schemes would apply to employers, employees and self-employed persons. Any employee aged between 18 and 64 and is continuously employed for not less than 60 days is entitled to the benefits stated in the Ordinance from the employer. However the following categories of employees are outside the scope of the Ordinance:

Employers are obligated to establish provident fund schemes for their employees when the Ordinance is in full implementation. All schemes must be under trust and registered with the Mandatory Provident Fund Authority set up under the Ordinance. The schemes are defined contribution schemes. Both employers and employees are required to contribute to the scheme. The prescribed percentage is 5% from each side. In the case of the self-employed, he/she only needs to pay in 5%. Employer on employee' s completion of 60 days' employment will have to pay 5% of the cash income into the fund, including 5% of income of the first 60 days. For the employee' s contribution, the contribution will be based on the whole period of employment except the first 30 days.

HK$4,000 is set as the minimum income for contribution purposes. This means that employees or the self-employed earning less than this sum a month is not required to contribute to the fund. Nonetheless, the employers of the employed are not exempted. They are still required to contribute 5% of the income into the fund.

The maximum monthly income is currently set at HK$20,000. Both employers and employees are not required to contribute any percentage of the income in excess of this sum. The sums contributed based on these minimum and maximum limits are called mandatory contributions.

Any contributions, except for the mandatory contributions, are purely made on voluntary basis and are not subjected to the preservation restriction prescribed for the mandatory portion.

All mandatory contributions and any accrued investment returns arising therefrom are fully and immediately vested in the employees.

Under current legislation, employees cannot withdraw the money deposited in the fund until age 65. The only circumstances where employees are allowed to withdraw their contributions earlier than 65 include:

In all other cases, money is preserved or locked in the schemes. In the event of change of employment, employees will be allowed to transfer the accrued sums to other funds provided by other Provident Fund providers or to the new employers schemes. Such sums are kept in the preserved accounts.

As the purpose of the money so saved is earmarked for retirement, the sum is protected against any claim made by creditors.

The Mandatory Provident Fund Authority will set up a compensation fund to cover any employees who have suffered losses as a result of misfeasance or illegal conduct by the trustee or any person in the administration and management of a registered scheme.

The Government will initially put in a sum of HK$600 million to kick off the fund and then the fund will be topped up to the amount of HK$900 million with money coming from levies on asset values of registered schemes.

Mandatory Provident Fund Participants

Apart from employer and employees, there are other participants to a retirement scheme.

The trustee will be an independent party appointed by the employer charged with the responsibility of registering and administering the scheme. Trustee can be a corporation or an individual and has the onerous task of protecting members' benefits. Monthly contributions are sent to the trustee who will verify and keep proper records of all the transactions. The trustee will also oversee investment manager' s performance and compliance.

The assets of the scheme must be invested. An investment manager will be appointed to provide professional investment services to scheme members. The investment manager must comply with any investment guidelines and restrictions set by the trustee.

The assets of a scheme are maintained by a custodian appointed by the trustee. The custodian must comply with the custodial agreement and is responsible for the settlement of transactions.

An auditor will be appointed to check the scheme accounts on an annual basis and report on financial statements and scheme liabilities to the trustee.

Mandatory Provident Fund Scheme Types

These schemes are established by employers for employees of their own companies and associate companies. In this type of schemes, employers will have to bear the cost of establishing the scheme and it can be very high. Despite the cost, employers running this type of schemes can always shape their schemes to suit their human resources policy and incorporate features that are not mandatory to attract and retain good staff.

These schemes are operated by trustee companies, banks, and insurance companies. They are open to employers and the self-employed. For individuals who change their employment they can also move their preserved accounts into this type of schemes.

These are schemes that are offered to employees working in certain industries. At the moment, two industry schemes will be made available to employees working in the construction and the catering industries respectively. The Mandatory Provident Fund Authority will help set up the schemes.

There are some reasons why the Government treat the two industries differently. Employees working in the construction industry, for instance, are very often employed by sub-contractors of sub-contractors. It is not uncommon that these employees experience difficulty in identifying their employers let alone making contributions into the employers' provident fund. Furthermore, the high staff turnover rate in these two industries also make the running of any employer-sponsored schemes or master trust schemes difficult if not impossible.

Conclusion

In the next month or so, the Government and the various scheme providers will make their last efforts to publicise the Mandatory Provident Fund Schemes as much as they can and get employers put their schemes in place before the statutory deadline. Though there are still arguments over the usefulness of the schemes as a form of retirement provision in light of the low mandatory amounts, we must agree that the financial burden created by the ageing population needs immediate action. Perhaps, if you were one of those who have strong views over the MPF Schemes, you can express your views through various channels. Let' s together build a better future for Hong Kong.

By Irene Wong, FCII, MBA , FLMI, Are

Highlights

The Hong Kong economy swung out of its 1998 recession to register double-digit growth in the first half of 2000. China' s imminent accession to the WTO should help the SAR to sustain this robust growth momentum. However, over the long term, the territory will come under increasing pressure from growing regional competition and trade disintermediation. Against this backdrop, both long-term and general insurance will continue to expand, albeit at a slower pace than in the previous decade. The growth of general insurance business will continue to be underpinned by infrastructure construction and by the expansion in personal lines and new products. Long-term business is expected to benefit from further increases in personal income and Hong Kong' s as yet unsaturated life market. The implementation of Mandatory Provident Fund schemes from December 2000 will also deliver a boost to the market.

Economic backdrop

Hong Kong suffered its worst recession in decades in 1998 when the economy shrank by an estimated 5.1%. Conditions began to improve in 1999, cumulating in a strong rebound in early 2000. The territory is currently experiencing intensive downward cost adjustments in lieu of nominal currency depreciation that is aimed at restoring price competitiveness. This is reflected in the persistent deflation Hong Kong has been experiencing since the economic crisis. In the near term, the Hong Kong economy will continue to be buoyed by sustained demand from the industrial nations and China' s imminent WTO accession. According to the Hong Kong Monetary Authority, the "business creation" effect arising from China' s WTO accession could raise Hong Kong' s annual GDP growth by somewhere between 0.5% to 1%. The long-term impact, however, is less clear because of the "diversion effect" that will arise as trade and investment are attracted to the developing cities of mainland China. In fact, there is growing apprehension that Hong Kong will lose its traditional role as a gateway for China' s exports in the long term. The development and improvement of port facilities in southern China is threatening Hong Kong' s re-export trade, while China's maturing economy will eventually allow its workforce to handle most of the trade-servicing processes. Furthermore, there is the distinct possibility that direct trade links between China and Taiwan will be allowed sometime soon. In light of these challenges, Hong Kong' s potential GDP growth rate will fall to around 4.5% from the previous 6%.

General insurance

Hong Kong boasts a highly competitive and open general insurance market. With some 140 direct insurers, the market is considered over-serviced and highly fragmented. The top five insurers only accounted for 25% of market premiums in 1998, compared to 54% in Japan and 74% in South Korea. The absence of entry barriers and the supervisory authorities' focus on solvency rather than on forms and rates have resulted in intense competition among the market players. Profitability has been hit by general price cuts and the particularly bad weather of 1999.

Set against this backdrop of an overcrowded marketplace, some of the major concerns facing direct insurers include Hong Kong' s reduced potential GDP growth and a hollowing out of the manufacturing/industrial base. This indicates the need for insurers to fully understand the changing structure of the Hong Kong economy and to reposition their business strategies accordingly; for example, in view of the difficult traditional commercial lines, insurers are focusing increasingly on personal products and retail insurance, which have so far remained relatively undersold.

Insurers are also feeling the effects of rising legal costs and court awards in compulsory lines. Preliminary figures for 1999 show a claims ratio of 66% for motor business (voluntary and statutory) and a staggering 119% for statutory general liability business. Losses in these two lines of business more than wiped out any surpluses generated by other business lines in 1999. Market sources suggest that results have not only failed to improve in 2000 but have even deteriorated further. In tandem with the difficult market situation, there are growing concerns about the level of reserves held by some insurers operating these two lines of business. Both public and private initiatives are endeavouring to find a solution to the situation. In order to expedite claim settlements and save on legal expenses, for example, the judiciary is already considering measures aimed at streamlining the legal procedures for claims made by injured employees. While these initiatives will certainly help, a lot has to be done to make the system sustainable in the long run.

Given the difficult prospects for Hong Kong' s general insurance sector and its highly fragmented business landscape, consolidation may set in to remove some of the excess capacity and to strengthen the competitiveness of remaining insurers. The process has so far got off to a slow start in Hong Kong and has mainly reflected a number of realignments in parent company ownership. However, unrelenting price competition, sustained losses in major lines of business and the desire to reap benefits from economies of scales will bring general insurers under enormous pressure to merge and consolidate. This will result in higher business concentration and possibly a further polarisation of insurers.

Taking the above into consideration, projections estimate that non-life premiums will increase by an average 2.2% (adjusted for inflation) between 2001 and 2008 to around HKD 23 billion. The growth will likely be stemmed by non-motor personal lines, in particular accident & health and general liability business. Commoditised products will face such fierce price competition that insurers will only be expecting business growth in innovative products and distribution.

Long-term insurance

Hong Kong' s long-term insurance market is dominated by a handful of large companies, although there are around 60 direct players (including some 20 composite insurers). The top five insurers, most of whom are global players, accounted for some 65% of premiums in 1998. The ability to recruit large numbers of quality agents remains an important factor in business expansion. Although the market is still far from saturated, heightened competition and aggressive price-cutting are already clouding the outlook for the sector. In response to this, many insurers are showing increasing interest in the distribution of investment funds as another source of revenue.

The implementation of Mandatory Provident Fund (MPF) schemes in December 2000 will provide a boost to long-term pension business. The annual contribution to MPF schemes is estimated at HKD 20 billion; but competition for these funds will be fierce, with insures having to compete (or sometimes work together) with banks and fund management companies. The early enthusiasm for the MPF market and the very tight pricing offered by some players could prove unsustainable. It is conceivable that some companies will eventually drop out of MPF business.

The implementation of MPF schemes has provided an excellent opportunity for insurers to co-operate with banks. Indeed, such co-operation, or bancassurance as it is called, is not restricted to MPF schemes but can take the form of various distribution and cross-selling activities. Major banking groups in Hong Kong are actively positioning themselves in bancassurance to leverage their vast branch networks and databases. The ability to increase fee-based income and to expand third-party asset management have been the major factors fuelling banks' enthusiasm. Insurers are also keen to develop alternative distribution.

channels to streamline their high distribution costs. In this regard, it is perhaps still too early to estimate the impact of direct marketing and the internet on the overall distribution strategy of long-term insurers.

On balance, Hong Kong's life insurance market should see further steady growth in the years to come, mainly on the back of individual life policies and pension business. Life premiums are projected to increase by an annual average of 6.8% in real terms between 2001 and 2008, to HKD 118 billion.

Hong Kong insurance business in international comparison

At USD 1.8 billion, Hong Kong' s general insurance market was larger than Malaysia's but smaller than India's in 1998. The level of penetration (premiums per GDP) has remained fairly stable since 1990, indicating that general business has grown more or less in line with the overall economy. The steady expansion of business brought per-capita spending on non-life covers to USD 275 in 1998, which is higher than most developing Asian countries, with the exception of Singapore (USD 290). This high level of penetration and density suggests that Hong Kong's general insurance market is fairly advanced and developed.

Despite the recent rapid expansion of long-term insurance business, there is still ample room for growth. Long-term premiums totalled USD 4.7 billion in 1998 - higher than Singapore, although still behind China and India, the two most populous countries in Asia.

Article is contributed by
Clarence Wong - Senior Economist
Swiss Re Economic Research & Consulting (Asia)

Source: Swiss Re Economic Research & Consulting

The Semiconductor Industry

Integrated circuit chip (IC) technology has changed our way of life. Computer, communication, industrial and consumer markets are all drivers of the semiconductor industry. Items such as calculators, coffee machines, cellular phones and our automobiles all require IC chips to function. Simple chips may be only a few square millimeters and contain 1,000 transistors, while the most advanced chips are roughly a square inch and contain as many as 10 million transistors.

Market Overview

The Worldwide Semiconductor market is divided into four sectors: America, Europe, Japan and the rest of the world. The Americas are considered the center of the semiconductor industry and comprise roughly 33% of worldwide production. The ¡¥Rest of the World' category (RoW) includes the high-growth countries of Taiwan, Korea, Malaysia and Singapore. European production is centered in France, Scotland and Germany, while close behind Europe is Japan. Reed Electronics Research estimates the total worldwide market could reach $240 billion by 2003.

The semiconductor industry has an extremely high barrier of entry. A new or ¡¥greenfield' 12¡¨ fabrication facility can cost $2.5 billion to construct. Only a handful of companies have the ability to fund these capital expenditures on their own and this has led to more joint venture projects and continued growth in the Foundry market. Nevertheless, companies need to keep pace with the staggering advances in technology. According to Semiconductor International, capital spending in 1999 reached $36 billion, $20 billion of which was on greenfield fabs.

Types of Semiconductor Facilities

The major classifications of facilities are as follows:

1.IDMs (Integrated Design Manufacturers) both design and manufacture their own IC chips. Market leaders such as Intel and Motorola are examples of IDMs.

2.Design Houses (Fabless Fabs) design and sell the IC chip but contract out the fabrication / manufacturing.

3.Foundry Companies design ¡¥process techniques' , but not the actual IC design. Both Design Houses and some IDMs outsource all or some of their fabrication to Foundries. This fast growing area was developed in Taiwan and two companies, UMC and TSMC accounted for close to 65% of the global Foundry market in 1999.

4.Assembly and Testing Companies receive IC chips from fabrication facilities, test for defects,package and ship the finished products.There are four basic operations involved in the manufacture of semiconductors: Crystal Production and Wafer Preparation, Mask Manufacturing, Wafer Fabrication and Packaging/Assembly. Today, the four operations are usually performed by separate and distinct companies. The heart of the semiconductor industry, and the greatest challenge from an underwriting standpoint, is the fabrication facility. Wafer Fabrication¡X The Production Process Wafer fabrication is the photo-litho-graphic imprinting of circuitry onto the wafer material. The manufacturing takes place in clean rooms that are rated as stringent as Class 1, meaning that the atmosphere is filtered to have no more than one particle of dust greater than 0.5 micron (1 micron=1 millionth of a meter) in one cubic foot of air. For reference, there are approximately 5 million particles of the same size in the air we breathe every day. In fact, Class 1 clean room environ-ments are up to 10,000 times cleaner than a hospital operating room. The process requires water that is deionized to the point that it will not conduct electricity, and the alignment of a mask over the wafer is so critical that the floor must be dampened against vibration from the building' s air-handling system. The process itself is analogous to developing a photo-graph, whereby ultraviolet light is passed through a mask (the negative) that contains the circuit design (the image) which is then imprinted or developed onto the wafer (the paper). The process is extremely complex and while the individual steps can vary from company to company, it basically involves the following: the wafer surface is coated with a light-sensitive chemical called photoresist, which is then positioned behind the mask or reticle and exposed to light. The light causes a chemical reaction in the unmasked photoresist which prevents it from hardening. The exposed pho-toresist is then chemically washed away and the underlying surface etched by gases to form the basic path of the circuit. Finally, various impurities known as dopants are infused into the circuit to give it the necessary polarity, resistivity and other desired characteristics. The preceding steps¡X all of which are controlled by mainframe computers that are auto-mated with the wafers themselves and untouched by humans¡X are repeated multiple times as each layer of circuitry is built one upon the other like floors of a high-rise building. When the layering is finished, the circuit is pack-aged in a protective coating.

Underwriting Considerations

The unique nature of semiconductor manufacturing poses particular underwriting challenges.

Although combustible loading and continuity are very low, a small propagation of smoke in the clean room can cause significant contamination and damage equipment, most of which is equally sensitive to water contamination from sprinkler systems. The sprinkler system is a system of last resort. By the time the sprinklers operate, the equipment below is already inoperable.

Rapid advances in technology require companies to constantly upgrade their facilities. Construction within an operational fab is a significant exposure and requires well-trained contractors who are experienced in working in such a sensitive environment.

Replacement costs of clean rooms (including machinery/equipment, sub-fab areas and work-in-process chips) can approach $10,000 per square foot. Photolithography machines (steppers) can cost upwards of $15,000,000 and take weeks to recalibrate once in place on the process line.

Normal replacement time for critical machinery can be up to 18 months.

The lack of sprinklers in exhaust ductwork is considered to be a serious deficiency, even if the rest of the fab area is fully sprinklered.

The design of air-handling systems is critical in the minimization of contamination spread. Laminar air flow barriers and zoning of HVAC, fume exhaust, and smoke removal systems can significantly reduce loss potential. The age of the fab generally will dictate the degree of compartmentalization of the air-handling system.

The type of chip being manufactured impacts the recovery time and thus the BI potential after a loss. Manufacturers of simple logic chips or memory chips have much quicker recovery times than manufacturers of sophisticated micro-processing chips. This is because "off-the-shelf¡¨ steppers are generally utilized to fabricate low-end chips and can be more easily repaired/replaced than the custom designed steppers required for manufacture of higher-end chips.

Since fab equipment, particularly the steppers and other types of photolithography equipment, is extremely sensitive to water damage, Earthquake Sprinkler Leakage (EQSL) must be underwritten carefully. Many people feel that the EQSL exposure in earthquake prone areas is a greater threat than fire.

With many fab facilities located in earthquake prone areas like California, Japan and Taiwan, it is imperative that proper bracing is utilized on both sensitive equipment and fire protection devices.

Although theft of completed chips is a huge problem in the industry, the incidence on the actual fab sites is low due to very tight security and low inventories maintained on premises.

Due consideration should be given to policies with Extended Periods of Indemnity. The ramping up period once equipment is repaired/replaced can take weeks and the process time for a single chip can vary from 10 to 30 days. Due to the very competitive nature of the industry¡X particularly in low-end commodity-type chips¡X it may take months to recover lost sales.

Potential bottlenecks should be identified. Particular areas of concern include IC testing areas and air-handling units.

With an increase in foundry production, JV' s and outsourcing (even by some IDMs) Contingent Business Interruption (CBI) is a major concern and should be sub-limited on policies.

Recent losses in Taiwan have highlighted the importance of utility company reliability and the need for an Uninterrupted Power Source (UPS) for major equipment. Sublimits on Service Interruption coverage or a total policy exclusion is preferable.

Characteristics of Wafer Fabs

Construction: Fab buildings are purpose-built and almost exclusively of fire-resistive construction. True fire divisions within the fab area are not common. Design of the facility will typically be one of two types: ballroom or bay, sometimes called chase. A ballroom fab is one that has all the processes in one large, open area with no partitions whatsoever and represents the greatest loss potential. Bay, or chase, fabs consist of small modules dedicated to an individual process, each possessing separate, dedicated air-handling systems that serve to minimize smoke contamination.

Protection: Fabs are normally fully equipped with sprinklers and operate 24 hours/day, 7 days/week, 365 days/year. Security is extremely tight ¡Xaccess to buildings that contain fab areas is normally restricted.

Combustibles: Combustible loading and continuity are extremely low. All equipment and work surfaces with the exception of the immediate wet-bench (acid dip) areas are of non-combustible construction. Older fabs, however, may have polypropylene exhaust ductwork and/or wall insulation panels, both of which represent a significant hazard, particularly if non-sprinklered (some fabs lack sprinklers in the ductwork only; however, this is considered a serious deficiency).

Special Hazards: Many of the processes involve corrosive, flammable, and pyrophoric (combustible upon contact with normal atmosphere) gases; however, the quantities used are quite small and the safety controls extreme.

The gas cabinets themselves are normally cut-off from the fab area and are often located outside the building altogether. One area that poses great concern in the process area is the ¡¥wet bench,' where heated acid baths are used to etch and strip the wafers.

Construction should be of ceramic or stainless steel. Frequent losses have prompted insurance carriers to require a higher level of fixed protection within the wet benches themselves.

Summary

While methods of fabrication may vary over the coming decade, the demand for IC chips will only grow. With fab plants projected to cost up to $10 billion by the year 2010, exposure to the insurance industry will increase significantly and capacity will be needed from the global market.

While loss experience in much of the world has been favorable there are regional differences. Within the past four years alone, Taiwan has had three losses that have resulted in several hundreds of millions of dollars in damages. Two losses involved fires during the erection phase and the third was the result of massive business interruption losses following the September 21, 1999 earthquake. It is the responsibility of insurance companies and their underwriters to have an in-depth knowledge of the industry and to influence semiconductor companies to utilize state-of-the-art protection and improve the quality of risk management at their facilities.

Source

www.semiconductor.net

www.intel.com

Electronic Business Asia NFPA Handbook

This information was compiled by GeneraCologne Re and is intended to provide background information to our underwriting community, as well as to our clients. The information may need to be revised and updated from time to time. It is not intended to be legal advice. You should consult with your own legal counsel before relying on it.

2000 General Re Corporation, Stamford, CT

Defined as the ratio between net claims incurred and net earned premiums.