Group Management Based on ERM
The function of ERM (Enterprise Risk Management) is to control the balance among three key management indicators: profit (return), risk and capital. The MS&AD Insurance Group promoted ERM as a driver in the previous medium-term management plan, “Next Challenge 2017,” establishing a platform for Group management.
Under the new medium-term management plan “Vision 2021,” MS&AD will push forward with initiatives to improve profitability and capital efficiency, while ensuring soundness, and base Group management on the ERM cycle.
Function and Role of ERM
- ERM requires measuring net asset value (capital) and risk amount, and maintaining a balance between capital and risk.
In particular, because fluctuations of financial markets, etc., cause changes in capital and risk, it is important to maintain soundness based on understanding of those situations.
- From a Groupwide perspective, risk must be quantitatively and qualitatively identified and properly managed.
From the standpoint of effectively deploying capital, ERM requires to maximize returns while increasing risk-taking in existing businesses and seeking diversification in terms of geography and risk categories.
*2 NAV used to calculate Group Adjusted ROE is equal to consolidated net assets plus catastrophe reserves and others minus goodwill and other intangible fixed assets.
*3 Integrated risk amount represents the maximum amount of losses and total value of associated insurance payments that are likely to be encountered once in 200 years. It is marked to market value.
*4 Net asset value is an indicator used as a management buffer to enable thorough net asset management. In addition to adjusted net assets, it includes such items as unrealized insurance liabilities, other equity liabilities, etc.
ESR (Economic Solvency Ratio)
● ESR is an indicator of capital adequacy with respect to the risk amount.
● Risk amounts are calculated based on the statistical quantification of risks of losses and price fluctuations associated with businesses and asset portfolios, and the integrated risk amount represents the total amount of risk assumed by the Group as a whole. The Group uses a probability of once in 200 years for estimating the probability of loss amounts.
● Starting with the new medium-term management plan “Vision 2021,” a more sophisticated formula is used to calculate ESR, following the integration of after-tax value of taxable items and changes to the method of weighing risks from natural disasters in Japan.
● Aiming to ensure financial soundness equivalent to an AA rating, based on the new formula, MS&AD prepares capital roughly equivalent to double the losses that would be incurred statistically by a once-in-200-year event with ESR at an appropriate level of 180%-220%.
ROR (Return on Risk)
● ROR is an indicator that expresses how much profit can be obtained with respect to the subject risks assumed.
● To assume risk, it is necessary to secure capital that balances that risk. Consequently, in business where ROR is high (in other words, business where profit is large relative to the risk assumed), the profit that can be earned is large relative to the capital necessary.
VA (Value Added)
● Value Added (VA) indicates how much value can be generated with respect to the risks assumed.
● While ROR (Return on Risk) indicates the rate of return that can be obtained with respect to the risks assumed, VA is an indicator of absolute value.
ERM and Risk Management
The MS&AD Insurance Group formulates management plans in accordance with the Group Risk Appetite Statement with the aim of improving profitability and enhancing capital efficiency while ensuring soundness based on the ERM cycle. Capital is allocated in accordance with the ERM cycle and the risks assumed, and by monitoring return on risk (ROR) for the risks assumed, we take steps to strengthen our risk controls and underwriting.
Initiatives to Improve ROR
Trends in return on risk (ROR), which are 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. The MS&AD Insurance Group aims to continue improving ROR by setting targets for ROR in each business domain, periodically checking ROR and taking initiatives to improve ROR.
Although each business domain has performed differently, Groupwide ROR*1 has been on a steady uptrend.
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. Please refer to the below link for the Group’s risk management systems.
・Risk Management Basic Policy
・Risk Management Structure
・Insurance Business Risks
・Risk Management in International Business
・Crisis Management System (Including Business Continuity Management System)
Group Material Risks (FY2018)
The Group specifies material risks to be controlled by management and formulates a Management Action Plan as well as regularly monitors the status with respect to
individual risk to maintain a focus on the potential impact of those risks on the Group.
1. Occurrence of a large-scale natural disaster in Japan or overseas
2. Sharp fluctuations in financial markets in Japan or overseas
3. Increase in credit risk and nonperforming loans
4. Occurrence of behavior that loses interest for customers or behavior that violates laws and regulations and is detrimental to the corporate value of the Group
5. Occurrence of cyberattacks that cause large-scale and serious impediments to operations, information leaks, the payment of insurance, and frequent occurrence of large-scale leaks and illicit use of personal information
and confidential information
6. Frequent occurrence of IT system failures and the occurrence of critical IT system failures
7. Pandemic of a new highly toxic strain of influenza
8. Occurrence of a serious labor problem (e.g., longworking hours, harassment), loss of social credibility
Group Emerging Risks
Group Emerging Risks are defined as 1) events that could affect the Group business from a medium- to longer-term perspective and 2) events that could affect the Group business that management should be aware of but are difficult to measure in terms of scale and timing. By quickly grasping when such risks rise, we can take specific steps to address them with an eye on the
future. Group Emerging Risks are viewed as not only threats but also potential business opportunities for solving environmental and social issues. Group Emerging Risks are reflected in developing products and services and formulating management strategies.
Strengthening Natural Disaster Risk Management
In 2017, a number of natural disasters struck, including several massive hurricanes and widespread wildfires in North America, resulting in the largest amount of insured losses in the history of the non-life insurance industry.
The MS&AD Insurance Group has built a system able to ensure the soundness of the entire Group by performing stress tests versus large-scale insured losses caused by earthquakes, windstorms and floods in Japan, as well as hurricanes in the United States, while securing the necessary capital based on event probability of once in 200 years to calculate estimated loss amounts. In FY2017, the Group was able to reliably sustain operations while maintaining a proper
level of financial soundness.
Recently, however, major hurricanes, typhoons and heavy snowfalls like those seen in FY2017 have occurred with greater frequency, increasing the scale and frequency of natural disasters. Under these circumstances, the Group intends
to advance the level of its natural disaster risk management by refining methods for measuring risks related to windstorms, floods and heavy snow in Japan, as well as windstorms and floods in the United States, enhancing stress tests, and promoting research and assessments of natural disaster risks in Asia.
Controlling the Retained Amount of Natural Disaster Risk
In FY2017, although our financial soundness was not affected, the Group’s fiscal year earnings were severely affected by large-scale losses caused by natural disasters. Accordingly, we redoubled our efforts to control the retained amount of risk for natural disasters.
Specifically, we 1) strengthened Group management of risks related to windstorms, floods and heavy snow in Japan and windstorms and floods in the United States; 2) began monitoring the amount of risk with reoccurrence intervals of 10 years; and 3) our two Group domestic non-life insurance companies jointly issued catastrophe bonds to cover the domestic risks of windstorms and floods.
Strengthening Management of Cyber Risks (Underwriting Risk)
The threat of cyber risks has grown rapidly in the past few years alongside advances in digital technology and the proliferation of products that use this technology. Multiple cyber risks can emerge simultaneously around the world,
making it imperative that we strengthen our accumulation management of insurance underwriting risk that covers damages caused by cyberattacks.
The Group has to date viewed information leaks caused by cyberattacks as a material risk for the Group. From FY2018, the Group is reinforcing its accumulation risk management system by adding the risk of insurance payments due to cyberattacks and assessing the scale of cyber risk through stress testing.