1. PDCA Cycle of Strategic Risk Management
The Group implements Strategic Risk Management to maximize the Group’s corporate value by minimizing unforeseen losses while effectively utilizing its capital, increasing its profits under appropriately control of risks.
To achieve these objectives, we have formulated our “Group Risk Appetite Statement,” which serves as a guideline for risk taking. We have constructed and implement a PDCA cycle (an iterative four-step management plan-do-check-act cycle) for Strategic Risk Management to operate our business based on this guideline.
Plan: Each business unit formulates a business plan based on the Group Risk Appetite Statement. The Group conducts quantitative validation of the appropriateness of such factors as Group-wide capital efficiency (ROE), financial soundness (ESR) and return on risk (ROR), thereby determining optimal business plans as the Group. The Group also allocates its capital to each business unit based on growth potential and profitability.
Do: Each business unit takes risks within its allocated capital, aiming to achieve the profit targets in its business plan.
Check, Act: The Group periodically monitors changes in the business environment and progress on plans, and revises business plans and capital allocation as necessary.
2. Risk Control System
Sompo Holdings has created and operates a stringent risk control system that enables comprehensive identification of and responses to risks affecting the Group based on risk assessments.
(1) Top Risk Management
Top risks are defined as "risks that may have significant impact on the Group." A risk owner (officer class) is appointed for each risk and officers are responsible for implementing countermeasures and process management.
Top risks are selected through both a top-down approach, which is based on the recognition of the business environment by management and outside directors, and a bottom-up approach, which is based on risk assessment.
(2) Emerging Risk Management
Emerging risks are defined as "risks that could materialize or change due to changes in the operating environment and other factors and may exert a significant impact on the Group in the future." Specific risks are identified based on risk assessment, reports from external institutions, and other measures, and appropriate risk management is performed.
It is important to consider emerging risks in terms of not only mitigating losses but also future business opportunities, such as development of new insurance products and services. We are thus monitoring, researching, and studying risks on a Group-wide basis.
(3) Capital Management
Regarding the risk tolerance for financial soundness necessary for executing Group strategies, the Group uses value at risk (VaR)—a risk indicator—to measure the estimated level of damage that the Group may suffer for a holding period of one year, and manage such risk in order to maintain financial soundness equivalent to an AA rating.
We regularly monitor the status of risk and capital of the Group and each business unit. A system has been established so that when there is a risk of breaching risk tolerance, the Group will formulate and implement measures aimed at reducing risk or reinforcing capital.
(4) Stress Test
To accurately understand and manage events having a major impact on Group management, scenario stress tests, reverse stress tests, and sensitivity analyses are conducted on a Group-wide basis to analyze the degree of impact on capital and risk. A system has been established to implement countermeasures as necessary.
|Scenario Stress Tests
||The Company evaluates the possible impact of stress scenarios with the potential to significantly affect management, such as large-scale natural catastrophes and financial market disruptions, with the aim of verifying the sufficiency of capital and the efficacy of risk mitigation measures. Moreover, Sompo Holdings regularly verifies the appropriateness of stress scenarios to ensure that it is able to respond effectively to changes in the business environment.
|Reverse Stress Tests
||Reverse stress tests are conducted to identify specific events that breach risk tolerance and prepare actions in advance.
||Sensitivity analyses are conducted to understand the impact of major risk factor fluctuations on capital and risk and to verify the appropriateness of internal models through comparisons with actual business performance.
(5) Risk Limit Management
To avoid huge losses due to the occurrence of specific events, we have set Group-wide limits that are consistent with risk tolerance with regard to credit risks, reinsurance counterparty risks, and overseas natural catastrophe risks. Risks are managed to ensure that they do not exceed these limits.
As a preventive management measure, warning lines have been set, and a system for formulating and implementing countermeasures in the event that risks exceed the warning lines has been established.