Risk Factors

The Group is committed to Enterprise Risk Management (ERM*1) as the management platform for advancing 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*2 (7%), and we intend to target return on equity (ROE) of approximately 12% in the future.
The following framework was produced by organizing the mid-term business plan in accordance with an ERM-based perspective. Looking ahead, we will work to achieve sustainable profit growth through the enhancement of our business structure and the fostering of Group synergies. The profits and capital generated in this manner will be dedicated to the efficient deployment of capital, which will entail maintaining financial soundness while further diversifying the portfolio and enhancing shareholder return, for example, as we seek to create the foundations for future growth.

  • *1 ERM:Enterprise Risk Management
  • *2 Cost of capital is the profit margin investors expect from investees. Tokio Marine 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.
Based on ERM, realize profit growth while maintaining financial soundness and strategically allocating capital. | Enterprise Risk Management (ERM) | [Sustainable profit growth] Domestic non-life insurance business: Sustainable growth as the Group core business. Change our portfolio by sales expansion of specialty insurance. Domestic life insurance business: Expand corporate value based on the economic value as a growth driver contributing to the long-term profit for the Group. Increase in protection-type products. International insurance business: Realize high organic growth and implement new business investment as a growth driver of the Group. The Group total: Generate further synergy effect. Appropriate control of business expenses. |  | → Generate profits ← Strategic capital allocation | [Efficient deployment of capital] Invest for growth: Invest in new business with diversification effects. Prior investment to establish future profit base (new products/new technology). Risk reduction/control: Continuing sales of business-related equities, control of the risk of nat-cat losses and interest rates. Shareholder return: Raise level of shareholder dividend. Adjustment to the appropriate level of capital via flexible share buybacks, etc. | Profit growth + Enhancement of shareholder return + Maintain financial soundness

Tokio Marine 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 including forward-looking statements were determined as of the date of submission of our securities report (available only in Japanese).

(1) Qualitative Risk Management

In qualitative risk management, we have a process to comprehensively assess and report every kind of risk, including emerging risks that result from changes in our business environment. The risks faced by the Group are discussed with top management when necessary.
Furthermore, through this process we assess not only quantitative elements of the risks identified, such as economic loss and frequency, but also qualitative elements such as business continuity and reputation. Those risks that seriously impact the financial soundness, business continuity, and other aspects of Tokio Marine Group are identified as "material risks".

Identifying Emerging Risks and the Process of Determining Material Risks

[Emerging risks] New risks that appear as a result of factors such as changes in the environment, risks that have previously not been acknowledged as risks, or risks whose severity has significantly increased. Candidates for "emerging risks" to Group: Emerging risks identified in the previous year, or its candidates. Emerging risks for business units or major Group companies. Risks newly identified as candidates for emerging risks. Screening: Screening based on impact, state of readiness, and the increase of risk.  → "Emerging risks" to the Group | [Material risks] Risks that will have a major impact on financial soundness, business continuity, etc. Candidates for "material risks" to the Group: Group’s material risks from the previous year. Group’s emerging risks that have major impact. Identify risks by matrix evaluation: Identify risks by the matrix evaluation of "Scale of damage" x "frequency and possibility" → "Material risks" to the Group

Material Risks for Fiscal 2020 and Main Anticipated Scenarios

Material risks Main anticipated scenarios
Domestic or overseas economic crisis, chaos in financial and capital markets

Significant decline in the value of our group’s assets arising from :

  • Global economic crisis with the magnitude similar to the global financial crisis in 2008
  • Chaos in financial and capital markets due to geopolitical risk events, etc.
Loss of confidence in JGBs Significant decline in the value of our group’s assets arising from crash of Japanese government bonds caused by loss of the government’s credibility
Major earthquakes

Large claims payments, material impact on our group’s business continuity and significant decline in the value of our group’s assets arising from :

  • Tokyo inland earthquake
  • Major ocean trough type earthquakes such as a Nankai Trough mega earthquake
Major wind and flood disasters
  • Large claims payments and material impact on our group’s business continuity arising from large-scale wind and flood disasters caused by giant typhoons and concentrated heavy rainfalls in Japan
  • Large claims payments arising from multiple giant hurricanes hitting East Coast of the United States in the same year
Volcano eruptions Material impact on our group’s business continuity and significant decline in the value of our group’s assets arising from fallout of massive volcanic ash due to a major eruption of Mt. Fuji leading to transportation network disruption, power outages and communication failures over a wide area as well as paralysis of Tokyo metropolitan’s capital function
Pandemics Large claims payments, material impact on our group's business continuity and significant decline in the value of our group's assets arising from mass deaths due to wide spread of newly appeared infections
Transformation of industrial structure due to new innovative technologies

Decrease in profits arising from :

  • Adverse impact on automobile insurance due to wide use of connected cars, automated driving, car sharing, electric vehicles, etc.
  • Erosion of our group’s business foundation, particularly in the personal lines, due to entry of companies from different industries into insurance sector
  • Loss of competitive advantage due to slow response of our group to new innovative technologies
Cyber risk
  • Material impact on our group's business continuity arising from failures of internal and agency systems due to cyber attacks
  • Damage of our corporate value due to failures becoming reputational risk events
  • Large claims payments arising from rapid increase in cyber-attacks on clients
Terrorism and riots Material impact on our group's business continuity arising from large-scale terrorism attacks and riots around our main business locations
Conduct risk*3 Damage of our corporate value arising from reputational risk events as a result of the gap between our group or the insurance industry and the general public who deems the group and industry practices as inappropriate corporate behavior
Violation of laws and regulations
  • Large amount of fines and settlements for our group’s transactions arising from violation of domestic and overseas laws and regulations
  • Damage of our corporate value due to fines and settlements becoming reputational risk events
  • *3 The risk of damage to corporate value as a result of fraud, inappropriate responses, and divergence of internal and industry practices from the public, resulting in adverse effects on customer protection, market integrity, effective competition, and the public interest.

(2) Quantitative Risk Management

In quantitative risk management, the Company verifies 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*4 by risk capital. Furthermore, the Company determines the capital policy by comprehensively considering business investment opportunities and future market conditions.
Tokio Marine Group has set a target range for ESR of 150%–210%. On March 31, 2020, the ESR was 153%, indicating that the Group’s level of capital was adequate.
Furthermore, of the "material risks" identified in the qualitative risk management, stress tests are conducted for those risks which have major economic loss in order to validate business continuity and avoidance of bankruptcy, to ensure that there are no issues with capital adequacy or liquidity of funds.

  • *4 Net asset value: Calculated by adding the value of life insurance policies in-force, capital liabilities such as catastrophe loss reserves, price fluctuation reserves, etc. to consolidated net assets on a financial accounting basis, while deducting planned distribution to shareholders, goodwill, etc.

Status of Economic Solvency Ratio (ESR)

153%: 2.7 Trillions of yen Risk, 4.2 Trillions of yen Net asset value. March 31, 2020. Note: Risk capital is calculated using a capital model based on 99.95% VaR (equivalent to AA credit rating). | Capital strategy based on Economic Solvency Ratio (ESR) | ESR: Implementation of; Business investment, and/or. Additional risk-taking, and/or. Shareholder return. 210%: Target Range, Strategic consideration of; Business investment, and/or. Additional risk-taking, and/or. Shareholder return. 150%: Aim to recover capital level through accumulation of profits. Control risk level by reducing risk-taking activities. 100%: De-risking. Consideration of capital increase. Review of shareholder return policy.

(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.

(4) Impacts of COVID-19

The impact on insurance underwriting is as follows:

  • Decrease in premium revenue due to the decline in economic activity
  • Increase in claims payments for specialty insurance mainly overseas

The impact on investment is as follows:

  • Decrease in income yields due to lower interest rates
  • Impairment due to decline in stock prices, etc.

The major effects expected as of the date of submission of our securities report (available only in Japanese) are as follows.

Classification Major impacts
Underwriting Domestic Automobile insurance:Premium revenue decrease due to smaller number of new vehicle sales, while claims payments decrease due to smaller traffic volumes
Personal accident insurance:Premium revenue decrease in travel insurance due to smaller number of travelers
Marine insurance:Premium revenue decrease in cargo insurance due to drop of the global logistics volume
Specialty insurance:Increase in claims payments for endorsements (for specific industries, etc.) that explicitly cover infections
Overseas Event Cancellation insurance:Increase in claims payments due to cancellation or postponement of events
Business Interruption insurance:Increase in claims payments of contracts that explicitly cover infections
Credit / Surety insurance:Increase in claims payments due to prolonged economic stagnation
Investment Decrease in income yields due to lower interest rates
Valuation losses under U.S. GAAP due to falls in stock prices
Impairment of credit risk assets due to higher default rate