The function of ERM (Enterprise Risk Management) is to control the balance among three key management indicators: profit (return), risk and capital.

1. Capital cost: Estimate based on the Capital Asset Pricing Model (CAPM)
2. Value Added (VA): An indication of how much value can be generated with respect to the risks assumed
3. Integrated risk amount represents the maximum amount of losses that are likely to be encountered once in 200 years. It is marked to market value.
4. Net asset value: Adjusted Net Assets + unrealized insurance liabilities + other equity liabilities, etc.
5. For MSI Aioi Life, an increase in EEV is deemed return. In the calculation of the entire Group’s ROR, Group Adjusted Profit (Group Core　Profit before 2017) includes MSI Aioi Life.

ERM is implemented through the planning, execution and monitoring phases.

Trends in ROR, which is an indicator of the profits that can be earned on risks assumed, are a proxy for the earnings power of the Group’s risk portfolio.

5. For MSI Aioi Life, an increase in EEV is deemed return. In the calculation of the entire Group’s ROR, Group Adjusted Profit (Group Core Profit before 2017) includes MSI Aioi Life.

The MS&AD Group has established the MS&AD Insurance Group Risk Management Basic Policy, which underpins the common risk management exercised throughout the Group. Specifically, the policy identifies the principal types of risk with an 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.

a. Occurrence of a large-scale natural catastrophe in Japan or overseas
The monetary damage attributable to such natural disasters as typhoons and earthquakes can be massive. In addition, a variety of factors including climate change may lead to an upswing in the frequency and size of natural disasters on a global scale. These circumstances could in turn result in damages of a greater magnitude than anticipated. On top of a deterioration in its working capital owing to such factors as an increase in natural disaster insurance payments, the Group could be forced to procure funds under terms and conditions that are significantly less favorable than usual. While the Group prepares for insurance payments to cover damages caused by natural disasters through the use of reinsurance and provisions for catastrophe reserves, its operating results could be affected should insurance claims reach massive amounts.

b. Sharp fluctuations in financial markets in Japan or overseas
The Group holds various assets under management (including off-balance sheet assets) such as securities, loans, and real estate. Changes in the value of assets and liabilities due to a deterioration in the economic environment and financial markets may affect the Group’s operating result. The main risks in this instance are as follows.
(a) Risk of a downturn in stock prices
MS&AD Insurance Group holds a considerable volume of shares in order, for example, to maintain medium- to long-term relationships with business partners. In the event of a stock market decline, the Company may incur a downturn in the value of assets, and a loss on devaluation or sales.
(b) Risk of interest rate variability
The value of such assets as bonds and loans held, savings-type insurance and long-term third sector insurance products as well as insurance liabilities to be paid in the future to life and other insurance policyholders may change due to variations in interest rates.
(c) Risk of foreign currency exchange rate variability
The Company holds assets and liabilities denominated in U.S. dollars and other foreign currencies. The value of these assets and liabilities may change due to variations in foreign currency exchange rates.

c. Substantial increase in credit risk
The value of assets held including shares, bonds, and loans, as well as credit, guarantee, and other insurance contracts sold may decline in value or the principal and interest become uncollectible should the issuers of stocks and bonds, or such parties as lenders experience a downturn in their creditworthiness, or file for bankruptcy, and in the event of a disruption in credit markets. While utilizing reinsurance in a bid to diversify the insurance liability assumed through insurance contracts and to stabilize earnings, the Group may not be able to collect on reinsurance proceeds should, for example, reinsurance companies file for bankruptcy. Based on the aforementioned, there is a risk that the Group’s operating results may be affected by these factors.

d. Occurrence of behavior that is detrimental to the corporate value of the Group, loss of social credibility
Actions that lead to a loss of social credibility encompass violations of the law and regulations related to the Group’s business, major labor-related issues (long working hours, harassment, etc.), inadequate data governance (the large-scale leakage and frequent misuse of personal and confidential information, etc.), and the lack of or inadequate customer-oriented approach (conduct risk).
  There is a risk that the Group’s operating results could be affected should it engage in such behavior.
 

e. Occurrence of cyberattacks that cause large-scale and serious impediments to operations, information leaks, and the payment of insurance
The Group is exposed to system risks that could lead to the shutdown, malfunction or improper use of its information systems or the leakage of information owing to unauthorized access or inadequate information systems as a result of a cyberattack. Although the Group is working to put in place a system risk management system, there remains the risk of a
major information system shutdown, malfunction or misuse, as well as the leakage of information. In addition, the underwriting of insurance policies that cover cyber risk may result in the payment of insurance claims. Taking these factors into consideration, there is a risk that the Group’s operating results may be affected.

f. Frequent occurrence of IT system failures, the occurrence of critical IT system failures and large-scale IT system development plan-related progress delays, shortfalls, budget overruns, and expected effects being unrealized
In the development of large-scale systems aimed at further improving business profitability, there is a risk that such factors as unforeseen accidents may cause progress delays in development work or development budget overruns. Although the Group is working to put in place a system risk management system, there remains the risk that the Group’s operating results may be affected should certain incidents arise including progress delays in the development of large-scale systems or development budget overruns.

g. Pandemic of such diseases as a new strain of influenza (including the novel coronavirus)
There is a risk that the Group’s operating results may be affected by the following events:
(a) While the Group has a system in place to prepare for such unforeseen accidents and situations as a pandemic of a new strain of influenza or other infectious disease that encompasses the formulation of a business continuity plan (BCP) and the development of a crisis management system to ensure that any disruption in its business is limited to a minimum period and that the Group can its operations, there is a risk that the Group’s business continuity could be impeded or impacted beyond expectations despite these crisis management measures.
(b) A slowdown in the economy due to a pandemic of a new strain of influenza or other infectious disease, or heightened anxiety regarding the same, could trigger significant volatility in domestic and international financial markets (see b. above) and a substantial increase in credit risk (see c. above).
(c) Premiums may decline due to a variety of factors including cutbacks in customer proposal activities for the purpose of proposing new policies and a decrease in business activity and the distribution volume of companies. In addition, the underwriting of insurance policies that cover risks related to infectious diseases such as new strains of influenza could result in the payment of insurance claims.