Enterprise Risk Management

Japanese

Along with the completion of “Reorganization by Function,” promoting “ERM” is positioned as one of the two key drivers of the MS&AD Insurance Group’s “Next Challenge 2017” medium-term management plan. ERM (Enterprise Risk Management) plays an important role in enabling us to raise “Group Core Profit,” a numerical management target of “Next Challenge 2017” and also attain an “AA-rated financial base.”

Overall Picture of ERM

Picture:Roles and Functions of ERM

Roles and Functions of ERM

  • In insurance company management, ERM is an important means of managing the balance among three management indicators – profit (returns), risk, and capital.
  • ERM requires the quantitative and qualitative evaluation and appropriate management of risk from a comprehensive perspective.
  • ERM requires measuring the net assets value (capital) and maintaining a balance between capital and risk. In particular, because fluctuations in financial security markets, etc., cause fluctuations in capital and risk, it is important to maintain soundness based on an understanding of those situations.

Picture:Indicators emphasized in ERM

Picture:ROR (Return on Risk)

Picture:ESR (Economic Solvency Ratio)

Picture:ERM Cycle

ERM Cycle

ERM is implemented through a management PDCA (Plan, Do, Check, Action) cycle.

Plan
By identifying and assessing risks, the Group quantitatively and
qualitatively measures the risks it bears. (See section ‘A.’below.)
By determining risk appetite and management resource allocation, a management plan is drafted. (See section ‘B.’ below.)
Do
Business is driven based on the management plan.
Check
The actual risk appetite is monitored.
In addition,business performance is evaluated in comparison with risk appetite. (See section ‘C.’ below.)
Act
In cases when the Check process has discovered problems, response and remediation measures are drafted in the Plan process and then implemented in the Do process.

A. Specifying Risks

Picture:Material Risks of the Group (FY2016)

B. Establishing Management Plan Based on the Determination of Risk Appetite and Allocation of Management Resources

Risk Appetite Policy←→Management Plan

C. Monitoring Risk Appetite and Business Evaluation

Picture:Monitoring,Business Evaluation

Control of Risk

Positioning risk management as a top-priority management task, the MS&AD Group has established the MS&AD Insurance Group Risk Management Basic Policy which underpins common risk management exercised throughout the Group. Specifically, the policy identifies the principal types of risk with impact on the Group’s business portfolio, stipulates how risk factors are to be evaluated both quantitatively and qualitatively, and promotes risk management based on those evaluations. More-detailed information on the Group’s risk management systems is posted on the Group’s official website.

Qualitative Management

The Group divides risks into four categories - insurance underwriting risk, asset management risk, liquidity risk, and operational risk - and confirms and evaluates the condition of the risk management and systems of the Group’s domestic insurance companies. In addition, to ensure that the Group’s overall soundness is not impacted by such factors as intra-Group risk propagation, uneven risk distributions, and risk concentrations, the Group monitors such factors as the management of investment and financing concentration and the situation regarding transactions among Group companies.

Quantitative Management

With respect to insurance underwriting risk, asset management risk, and operational risk, each risk amount is measured using stochastic methods and regularly confirms that the level of assumed risks is commensurate with the Group’s capital resources. In addition, monthly monitoring is implemented to confirm that the risks assumed by the Group’s domestic insurance companies do not exceed the stipulated limits, and emphasis is placed on monitoring the risk trends of each company.
Furthermore, daily monitoring is implemented regarding the impact of market fluctuations on the Group, aiming for the early recognition of significant (or incipient) market plunges while also building systems for the flexible implementation of countermeasures.
With respect to the risk and capital situation, medium-term confirmations are implemented based on the management plan (budget plan), and confirmations (stress tests) are implemented regarding the impact that would be exerted in the case of large-scale natural disasters, financial market turmoil, and other exceptional phenomena.

Changes in the Risk Portfolio

By means of risk control based on the risk appetite policy, we are aiming to build the following kinds of risk portfolios. Specifically, we are accelerating sales of strategic equity holdings while moving ahead with the expansion of insurance underwriting risk.

Picture:Risk Weight by Business Domain

Picture:Medium-to-long term target levels

Reduction of Equity Risk

MSI and ADI have strategic equity holdings of the stock of transactional partners based on the premise that they will be long-term holdings for the purposes of obtaining stable fund management returns from dispersed investments and of comprehensively maintaining and strengthening transactional relations.
However, for the purpose of maintaining a solid financial position, there is a need to proceed with the shrinkage of risk assets concentrated in strategic equity holdings. For this reason, the Group is moving forward steadily with risk reduction by defining target levels for the medium-to-long term and by defining sales goals in the medium-term management plan.

Increasing Advancing Risk Management

Efforts to Enhance the Methods of Risk Management

Aiming to accurately assess and manage risk, the Group is moving ahead with efforts to enhance the methods of risk management. In fiscal 2014, the Group built a unified systems base for all Group units, including overseas bases and started full-scale application from fiscal 2015. Thereby, the Group enhanced the methods of risk management while also realizing the unification of data management processes for the Group as a whole.

Strengthening Natural Disaster Risk Management

As natural disaster risk is one of the most-important kinds of risk for the Group, we are undertaking the following measures aimed at controlling such risks and augmenting capital efficiency.

  • ■Controlling insurance underwriting risk
    Revising premium rates and products for property insurance and introducing domestic and overseas underwriting limits based on consideration of risk concentration situations
  • ■Arranging reinsurance to transfer risk
    Arranging reinsurance to adjust risk amounts while also confirming the soundness of reinsurance companies and avoiding excessive concentration regarding transactions with specified reinsurance companies to reduce reinsurance credit risk
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