Enterprise Risk Management(ERM)

ERM is the “compass of management.” By enabling appropriate management of increasingly diverse and complex risks, ERM is underpinning our transformation into “A Theme Park for Security, Health & Wellbeing.” Furthermore, it is helping us increase corporate value and benefit society.

ERM Supporting the Realization of “A Theme Park for Security, Health & Wellbeing”

Emerging trends including the increased frequency of largescale natural catastrophes, the prolongation of a low interest rate environment, and the spread of COVID-19 indicate the volatility, uncertainty, complexity, and ambiguity (VUCA) of the current era. In such an era, risk management’s role no longer simply entails taking measures to avoid loss. Increasingly, risk management is expected to “navigate” an optimal course for the Group by reducing the opportunity loss that it could incur as a result of mistimed investments or other miscalculations.
The roles of ERM can be likened to the three functions of a sophisticated compass in a voyage across rough, unpredictable seas. That is to say, ERM enables correct understanding of the Group’s current position, sensitive detection of potential risks, and clear indication of the route the Group should take. Given the volatility of the current environment, these capabilities are more important than ever.
For ERM to function accurately as the “compass of management,” dramatic changes in conditions inside and outside the Group must be appropriately understood. Moreover, all Group employees must understand and implement ERM correctly. Therefore, it is important to develop a deeply rooted risk management culture throughout our organization so that every employee can make decisions based on common criteria.
To ensure that all Group officers and employees understand ERM and move in the same direction, we have formulated the ERM Vision, which explains the basic philosophy and aims of ERM. Based on the vision, we are taking steps to develop a risk management culture throughout our organization. The goal is to realize world-class ERM by enabling the senior management team and all other employees to take concrete actions and decisions that enhance return on risk (ROR) and maintain stable financial soundness (the economic solvency ratio (ESR)).
We are advancing Group-wide transformation with a view to the realization of “A Theme Park for Security, Health & Wellbeing.” This initiative includes the development of ERM optimally suited to the Group’s business model. To this end, we are building a framework for risk-taking that heightens capital efficiency and developing an ERM framework for the retail platform of the overseas insurance business.

ERM Vision

  • The Sompo Group’s ERM aims to support both the enhancement of corporate value and contributions to society through appropriate risk management, achieving a mutually beneficial relationship with all stakeholders.
  • To this end, we:
    1. identify and control changing and diversifying risks appropriately to maintain the Group’s financial soundness;
    2. provide services of the highest quality possible to our customers at fair and proper prices, and underwrite risks at appropriate premiums; and
    3. strive to construct an optimal business portfolio to realize “A Theme Park for Security, Health & Wellbeing.”
  • Every employee and officer within the Group seeks to practice ERM up to the point that Sompo’s ERM becomes evaluated as No.1 in the world.

ERM Implementation

The Group is embedding tangible, practical ERM measures at all levels of its organization, from the pricing of insurance products in frontline operations through to important management decisions that affect the strategies of businesses.
Further, the Group has developed a robust risk control system that incorporates both qualitative and quantitative elements to minimize unforeseen losses in its operations.

Management Use of ERM

(1) Insurance Product Development and Management

While taking into account the characteristics of each insurance business, we verify ROR when setting insurance premiums in product development and when managing the profitability of products after launch. We use ROR not only in assessing and managing the profits of each product but also in establishing sales strategies and marketing budgets.

(2) Evaluation of Risks in M&A Deals

We decide on M&A deals and other new business investments after measuring investment effects and performing thoroughgoing due diligence. In this process, we also verify the appropriateness of investments from an ERM perspective, taking into consideration the impact of investment implementation on Group-wide capital efficiency (return on equity (ROE)), financial soundness relative to risk (ESR), and ROR.

(3) Natural Catastrophe Risk Management

We appropriately manage natural catastrophe risks by conducting quantitative analysis of data on past natural catastrophes and keeping the risks within tolerance levels, which are established in light of capital and profits. Further, in response to the recent increase in the frequency of natural catastrophes, we are acquiring the latest knowledge through analysis of the damage trends of recent typhoons and other natural catastrophes as well as through analysis of meteorological and climatic big data. We then incorporate our findings into in-house models and upgrade them. At the same time, we use evaluations of natural catastrophe risks when considering appropriate premium levels and in business management decisions on business plans and reinsurance strategies.

2. Risk Control System

(1) Material Risk Management

We exhaustively identify and assess the risks that businesses face and define risks that could have a significant impact on businesses as Material Risks. The Group determines the adequacy of countermeasures for Material Risks and continuously monitors these risks. If measures are found to be inadequate, we appoint a person responsible and implement countermeasures. Further, the Group defines emerging risks as those that are not currently material but which, due to environmental changes, could become material and have a significant impact on the Group in the future. We identify the precursors of risks becoming significant and manage such risks accordingly. Through dialogue with experts in Japan and overseas and with reference to various sources of information, we identify candidate emerging risks. Of these risks, we monitor, research, and study on a Group-wide basis those with potential effects above a certain level. Such activities not only mitigate losses but also contribute to the realization of business opportunities through the development of new insurance products and services.

(2) Capital Adequacy Management

We quantify the various types of risks that we face by using value at risk (VaR) as a unified risk indicator. If needed, we take management measures to ensure that capital is maintained at an adequate level relative to risks.

(3) Stress Testing

To accurately identify and manage events that could significantly affect its business management, the Group conducts scenario stress testing, reverse stress testing, and sensitivity analyses on a Group-wide basis. We analyze the degree to which such events would affect both capital and risk and take countermeasures if required.

Scenario Stress Testing We evaluate how significantly large-scale natural catastrophes, financial market disruptions, and other stress scenarios could affect business management and verify capital adequacy as well as the effectiveness of risk mitigation measures. Moreover, we regularly verify the validity of stress scenarios to ensure that we can respond appropriately to environmental changes.
Reverse Stress Testing We identify specific events that breach risk tolerance levels and consider appropriate countermeasures for stress events in advance.
Sensitivity Analyses We identify the impact on capital and risks of fluctuations in key risk factors. Also, we verify the validity of in-house models by comparing theoretical figures calculated by in-house models with the figures of actual results.

(4) Risk Limit Management

We have established limits on a Group-wide basis for credit risks, reinsurance counterparty risks, and overseas natural catastrophe risks to avoid huge losses arising from the occurrence of specific events. We manage the risks to ensure that they do not exceed these limits.

(5) Liquidity Risk Management

In addition to projecting cash needed for day-to-day operations, we project the maximum cash outflows that could result from such events as large-scale natural catastrophes. We then conduct management to ensure we have adequate liquid assets to meet such outflows.