Jun 20, 2019

ISJ Advanced Course 2019

Enterprise Risk Management

Yukiyoshi Tanakamaru
Risk Management Dept.
Tokio Marine Holdings

｜企画書タイトル｜March 1, 2015
Table of Contents

Section 1：What is ERM? ・・・P.2

Section 2：ERM Processes ・・・P.12

Section 3：Challenges ・・・P.28

Appendix ・・・P.35

1
1 What is ERM?
1.1 Impression of “ERM”
 ERM (Enterprise Risk Management) is;
Number oriented
Full of jargon (VaR, etc.)
CRO’s or actuaries' responsibility
Unclear Benefits
Hard to understand

 Today's Goal

??? !!!
3
 1.2 Origin of ERM
 Why has ERM become so popular?
 Background is...
 More complicated risks
 External Pressure
 Business Portfolio Overview
 Risk Quantification
 Borderless Benchmarking
 Risk as Opportunity

4
1.3 History of ERM
2001
• Accounting fraud (e.g. Enron Scandal)
Sept. 2004
• COSO* published ERM framework
• Concept: Tools of internal control for US-SOX regulated institutions
to implement annual financial report adequately
• Scope: All operational companies (incl. Insurance companies)

Sept. 2017
• COSO updated ERM framework
• ERM integrating with Strategy and Performance
• Designed to help organizations to create, preserve, and realize value
while improving their approach to managing risk.
* the Committee of Sponsoring Organizations of the Treadway Commission
5
1.4 ERM for Insurance companies
Since 2007
• Development on international regulations for insurers (e.g.
Solvency Ⅱ)
• Rating standards for Insurers by rating agencies
＋ Repetition of Nat Cat (Hurricane Katrina, Ondoy, Thailand
flood, etc.)

Why important for insurers ?

• Taking risks is an insurer’s core business
• Various intrinsic risks
- Underwriting, Reserving, Investment, Credit, Operational, etc.
• Long duration (Life/Casualty)
6
1.5 Assessment by Rating Agencies
 Rating agencies consider the implementation of ERM as an
important factor for the ratings of insurers.

e.g. S&P’s ERM measurement

• Including ERM as a factor for the ratings of insurers
• Five grades: ”Very Strong”, “Strong”, “Adequate with Strong
Risk Control”, “Adequate”, and “Weak”
• Possibility of down grade due to poor ERM implementation

 It is important for insurers to recognize their risks both

quantitatively and qualitatively and to operate based on those
recognitions.

7
1.5 Assessment by Rating Agencies (Cont.)

The importance for insurers to obtain a high rating

• Source of competitiveness
Hallmark of business for customers, especially in reinsurance

• Lowering capital-raising cost

Backing up liquidity in need and avoiding bankruptcy

8
1.6 ERM vs. Risk Management
“Traditional”
ERM
Risk Management
• All kind of risks
• Limited to insurable
Risk Scope associated with
risks
business
Approach • Separate (“silo”) • Holistic
• Structured,
Actions • Ad-hoc continuous and
organizational
• Both up & down
Risk
• Should be mitigated or sides.
Recognition
/Strategy
avoided. • Source of
differentiation.
9
 1.7 Benefits of ERM
 Improve Profitability
 Existing businesses
 Investment in new businesses
 Reduction of cross-share holdings

 Maintain Financial Soundness

 Better Nat Cat management
 Ensure capital adequacy (credit rating)

 Link to Stakeholders
 Policyholders
 Shareholders
 Employees
 Regulators
 Analysts, Credit Rating Agencies 10
 1.7 Benefits of ERM (Cont.)
 With ERM, insurers are able to estimate
 How much the worst losses
 How much the losses in 100 or 1000 years
 What necessary treaty limit
 What the amount of capital enough to support existing
portfolio

11
2 ERM Processes
- A case in Tokio Marine Group-
 2.1 Tokio Marine Group
 Tokio Marine Group was founded in 1879 as Japan’s first insurance company.
Since then, the Group has built its business with a global view and developed
numerous insurance products after quickly perceiving changes in the market
environment.
 We aim to become a global insurance group that supports our customers in
times of need and lives up to the trust placed in us by people and society.

1887

1918

Present
13
2.1 Tokio Marine Group
<Major Business Domains and Group Companies>

1% Tokio Marine Nichido

Domestic P&C
Domestic
P&C Nisshin Fire
30%

Domestic Life
Tokio Marine Nichido Life

International
Insurance
(P&C・Life・Reinsurance)

14
2.1 Tokio Marine Group

Four major acquisitions since 2007

Kiln, Philadelphia, Delphi, and HCC 15
 2.2 ERM's Key Elements
 ERM is comprised of the following key elements.

Risk
Quantification

Risk
Risk Culture
Appetite

Stakeholder Business
Communication
Planning

16
2.3 Risk Quantification
 Need reliable data
 Benefits:
 Estimate loss by a statistical measure
 Prepare for the worst case losses
 Check premium adequacy for expected losses
 Assess efficiency of reinsurance purchased

17
2.3 Risk Quantification

8,000

7,000

6,000
FY2018 FY2019
5,000

4,000

3,000

2,000

1,000

0
Risk A Risk B Risk C Risk D Risk E Risk F Risk G Risk H

For instance, US hurricane Risk, Credit Risk, and Interest Rate

Risk are quantified and categorized as above.

18
 2.4 Risk Appetite
Risk Appetite:
 Is the amount and type of risk that an insurer is willing
to take in order to meet its strategic objectives within its
risk taking capabilities, and
 Should be developed through intensive management
discussions
 Which risks to take?
 Which risks are preferable, or avoidable?
 To what extent do you allow to take each risk?
 What is your company’s risk taking capabilities?

19
2.4 Risk Appetite

Risk Appetite Framework

 As a global insurance group, conduct risk-taking in insurance underwriting

and investment.
Risk Appetite Statement

 As for insurance underwriting risks, expanding life and non-life insurance

businesses globally, and aim to achieve sustainable growth and improve
capital efficiency through risk diversification.
 As for investment risks, proceed with reducing business-related equity, and
aim to secure liquidity and stable profits mainly through asset and liability
management (ALM).
 While ensuring a balance between risk and capital that enables the Group to
maintain its AA (Aa) credit ratings, aim to ensure profitability exceeding the
cost of capital.
Risk Strategy

( Risk strategy by risk category and business unit )

Source: Tokio Marine Holdings “Sustainability Report 2018”

20
2.5 Business Planning
 Business plan should be linked to risk appetite
 Quantifying risk according to:
 Risk Category
 Legal Entity
 Key points for validation
 Earnings
 ROE
 Risk limit
 Earnings volatility
 Liquidity
 Consistency with risk appetite
 Material Risks in achieving the business plan, etc. 21
2.5 Business Planning

Source: Tokio Marine Holdings “Integrated Annual Report 2017”

http://www.tokiomarinehd.com/en/ir/ 22
2.6 Stakeholder Communication
*

* ESR: Economic Solvency Ratio

Source: Tokio Marine Holdings “FY2018 Results and FY2019 Projections” 23

2.6 Stakeholder Communication

Source: Tokio Marine Holdings “FY2018 Results and FY2019 Projections” 24

2.6 Stakeholder Communication

Mar. 31, 2019

Source: Tokio Marine Holdings “FY2018 Results and FY2019 Projections” 25

 2.7 Risk Culture
 Sound risk culture supports appropriate risk
awareness, risk taking behaviours
 Need effective system of controls
 Board (Risk Committee)
 Executive Risk Committee
 Sub Risk Committee (ALM, Investment, etc.)

 Soft factors
 Tone from the top
 Communication within organization:
“Bad news travels fast.”
26
 (Reference) ERM Committee
 ERM Committee has been strengthened through the participation of top management of Group companies outside
Japan in order to obtain global expertise and perspectives.
 The Committee discusses important issues such as the identification of material risks for the Group and formulation
of countermeasures to respond to those risks, such as the ALM policies and product strategies of the Japanese life
insurance subsidiary affected by the Bank of Japan’s negative interest rate policy.

Source: Tokio Marine Holdings “Tokio Marine Group Business Strategy May 2019” 27
3 Challenges
 3.1 Considerations
 Limitations
 Models are only models
 Limited Data
 Differences among regions
 Different Market Conditions

 ERM is not almighty

It is important for insurers to use ERM as a tool
to enhance chances of survival, while recognizing its
limitations.

29
 3.2 Material Risks
Industry structure changes from
Global financial crisis
disruptive new technologies

Japanese government bond risk Conduct risk

Japan wind and flood Breaches of overseas regulations

Japan earthquake
Terrorism/ Riot
(incl. Mt. Fuji eruption)

Large international Nat-Cat Pandemic

Cyber risk

＊ Conduct risk = risk of damage to corporate value as a result of misconduct, inappropriate response or gap between industry/company practice
and common sense, which negatively impact the protection of customer rights, market integrity, effective competition, the public interests, etc.

Source: Tokio Marine Holdings “Integrated Annual Report 2018”

http://www.tokiomarinehd.com/en/ir/ 30
3.3 Stress Test
 Plausibility of Stress test scenarios

Stress Test:
 The method of solvency assessment that provides
for the consideration of the impact (current and
prospective) of a particular defined set of
alternative assumptions or outcomes that are
adverse.
 Consideration is given to the effect on the
insurer’s assets, liabilities and operations of a
defined adverse scenario.
31
 3.4 Challenges
 Further enhancing group-wide ERM
 Started direct communication between Group-CRO
and CROs at subsidiaries

 Enhancing ERM infrastructure

 Large-Scale Natural Disaster
(Potentially caused by climatic variation)
 Cyber Risk
 Highly correlated global financial market, etc

 Cultivating and enhancing risk culture

 Risk Culture
 ERM Talent Management 32
Thank you very much
for your attention!
4 Appendix
- Japanese Peers -
4.1 MS&AD

35
4.1 MS&AD

36
4.2 SOMPO

37