Risk Factors

The Group is committed to Enterprise Risk Management (ERM) as the management platform for promoting its Mid-term Business Plan. Specifically, we will be constantly aware of the relationship between "risk," "capital" and "profit," and by realizing "capital adequacy" and "high profitability" in relation to risk, we will strive to achieve sustainable growth of corporate value.
In regard to capital adequacy, we are targeting a capital level that will maintain an AA credit rating. As for profitability, we aim to realize capital efficiency that exceeds cost of capital^*1 (7%), and we intend to target return on equity (ROE) of approximately 12% in the medium to long term.
Based on ERM, the Group aims to achieve "growth and stable high earnings" by transforming our business model through digital strategies, improving the profitability of our core insurance business, and pursuing group synergies, while maintaining financial soundness. We also aim to apply the profits and capital generated to effective use, such as business investments and enhancing shareholder returns, to lead it to further growth.

• *1 Cost of capital is the profit margin investors expect from investees. The Group calculates cost of capital based on the capital asset pricing model (CAPM) and uses this figure to determine growth indicators and make business investment decisions.

The Group goes beyond conventional risk management, which only aims at preventing and mitigating risks, to perform the quantitative and qualitative monitoring of risks in order to appropriately control risks, capital, and profits Groupwide through the effective utilization of risk information.
The following information include forward-looking projections which were determined as of the date of submission of our FY 2021 securities report (available only in Japanese).

(1) Qualitative Risk Management

With regard to qualitative risk management, the Company has a system in place to comprehensively identify and report all risks to management, including "emerging risks" that may occur as a result of changes in the environment and other factors. The risks faced by the Group are discussed at the management level when necessary.
Through this process the Company makes comprehensive assessments of risks not limited to factors such as financial damages or frequency, but it also adds factors such as business continuity and reputation. Those risks that seriously impact the financial soundness, business continuity of the entire Group or its Group companies are defined as "material risks."

Identifying Emerging Risks and the Process of Determining Material Risks

Examples of Emerging Risks

Emerging risks	Assumptive scenarios
Intensifying competition for　human resources	Intensifying competition for human resources with the latest IT and AI skills and talented new graduates; loss of talent and difficulty in replacing them due to the more divers work patterns or other factors caused by the COVID-19 pandemic.
Risk of uncontrollability of innovative new technologies	Occurrence or increase of damage or accidents involving third parties at insured companies due to inadequate controls over innovative new technologies.
Innovations in medicine and biotechnology	Increase in medical claim costs due to innovations in cancer diagnosis and genetic diagnosis technologies causing adverse selections.
Risks related to the global protection of human rights	Unintentional violations of stakeholders’ human rights due to increased global awareness of human rights and economic security measures, resulting in reputational damage and restrictions on business operations in some countries and regions.

Material Risks for Fiscal 2022 and Assumptive Scenarios

Material risks	Assumptive scenarios
Domestic or overseas economic crisis, chaos in financial and capital markets	A global economic crisis with the magnitude of the 2008 global financial crisis occurs, and the value of the Group’s assets falls substantially. The value of the Group’s assets declines significantly due to turmoil in financial and capital markets caused by a further deterioration or prolongation of the situation in Ukraine or the emergence of other geopolitical risks.
Loss of confidence in JGBs	Japanese government bonds plummet in value due to a decline in the government’s　creditworthiness, and the value of the Group’s assets falls substantially.
Major earthquakes	An inland earthquake occurs below Tokyo, resulting in large insurance payouts. This also results in significant impact on the Group’s business continuity, as well as a substantial fall in the value of the Group’s assets. A mega earthquake in an ocean trough, such as the Nankai Trough, occurs, resulting in large insurance payouts. This also results in significant impact on the Group’s business continuity, as well as a substantial fall in the value of the Group’s assets.
Major wind and flood disasters*2	Major wind and flooding disasters caused by huge typhoons and torrential rains occur in Japan, resulting in large insurance payouts. This also results in significant impact on the Group's business continuity. Multiple major hurricanes hit the American East Coast in the same year, resulting in large insurance payouts.
Volcano eruptions	Massive volcanic ash fallout is caused by a major eruption of Mt. Fuji, causing issues such as widespread transportation network disruptions, power outages, and communication interference, paralyzing Tokyo’s capital city functions. This also results in significant impact on the Group's business continuity, as well as a substantial fall in the value of the Group's assets.
Pandemics	The spread of a new infectious disease leads to many deaths, resulting in large insurance payouts. This also results in significant impact on the Group’s business continuity, as well as a substantial fall in the value of the Group's assets. The current situation for COVID-19 infections continues for several years, and the world economy stagnates. The value of the Group's assets falls substantially.
Transformation of industrial structure due to new innovative technologies	Earnings decline, especially in automobile insurance, due to the spread of connected cars, autonomous driving, car sharing, and electric vehicles. Earnings decline as companies from other industries enter the insurance industry and erode the Group's business foundation, particularly in the individual insurance market. The Group loses its competitive advantage due to delays in addressing changes in the business environment from digital transformation and in the post-COVID-19 era, resulting in declined earnings.
Cyber risk	A cyberattack causes a failure in the Group’s systems or those in its distribution channels, causing serious impact on the Group’s business continuity. In addition, the emergence of reputational risk harms corporate value. Damage from cyberattacks grows immensely at client companies, resulting in large insurance payouts.
Terrorism and riots	Major acts of terrorism and/or riots occur near main Group company locations, resulting in serious impact on the Group's business continuity.
Conduct risk	The practices of the Group and the insurance industry deviate from societal norms and are regarded as inappropriate corporate behavior, and corporate value is damaged by the emergence of reputational risk.
Violation of laws and regulations	The Group's transactions violate domestic or overseas laws or regulations, forcing payment of significant fines or settlement fees to regulatory authorities. In addition, the emergence of reputational risk harms corporate value.

• *2：The effects of climate change could cause more frequent and severe disasters.

(2) Quantitative Risk Management

In quantitative risk management, the Company measures risk amounts and conducts stress tests using risk models based on the latest knowledge available, verifying from multiple perspectives that its capital is sufficient relative to the risks it holds, with the aim of maintaining its credit ratings and preventing bankruptcy.
Specifically, the Company quantifies potential risks using a statistical metric called "Value at Risk (VaR)" on a 99.95% confidence level, which corresponds to an AA credit rating, and verifies its capital adequacy based on the Economic Solvency Ratio (ESR) arrived at by dividing net asset value^*3 by risk capital. The Company also determines the capital policy by comprehensively considering business investment opportunities and future market conditions.
The Group has set its ESR target range at 100 to 140%. As of March 31, 2022, the ESR is 128%, indicating that the Group’s level of capital is adequate.
Furthermore, among the “material risks” identified in the qualitative risk management, stress scenarios are assumed for scenarios where economic losses are expected to be extremely large, specifically, “economic events” and “insurance losses from natural disasters or other causes.” Stress tests are also conducted for spillover losses when these risks occur, and for combined risks where multiple material risks occur simultaneously. Stress tests are also used to verify business continuity and to confirm that there are no issues regarding capital adequacy and liquidity of funds.

• *3 Net asset value: Calculated by adding the value of catastrophe loss reserves,deducting for goodwill, and making other adjustments to consolidated net assets on a financial accounting basis.

Status of Economic Solvency Ratio (ESR)

(3) Formulation of BCP (Business Continuity Plan)

We have formulated a disaster BCP and conduct regular training to ensure continuance of critical operations and quick recoveries from the event of a large-scale disaster.