Risk Factors

The Group is committed to ERM^*1 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.

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Enterprise Risk Management

The risks surrounding Tokio Marine Group are becoming more diversified and complex due to global business development and changes in the business environment. In addition,in today’s uncertain and rapidly changing political,economic, and social climate, we must proactively anticipate the emergence of new risks and their warning signs and take appropriate action. From this point of view, we are not limited to conventional risk management for the purpose of risk mitigation and avoidance, but are comprehensively assessing risk in qualitative and quantitative ways.

In addition, we are continuing our efforts to further strengthen the ERM structure. For instance, we are enhancing risk assessments to include risks that are difficult to quantify, such as cyber risks, and improving natural disaster risk management, including a review of our reinsurance schemes.

ERM Cycle

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Emerging risks are new risks that arise due to changes in the environment or other factors, encompassing those that were not traditionally recognized as risks and those that have increased markedly in severity.
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Material risks refer to risks that could have a substantial impact on financial soundness, business continuity, and other critical aspects. Specifically, we focus on emerging risks as well as material risks from the previous business year within the Group. We assess the impact (evaluating economic, business continuity, and reputational impacts) and consider the frequency and likelihood to identify the most significant factors. We specify these risks using the following 5×5 matrix.
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For material risks, we formulate response measures (Plan), implement these measures (Do), assess the outcomes (Check), and make improvements (Act).

(1) Qualitative Risk Management

In qualitative risk management, all risks, including risks that emerge due to changes in the environment, are identified and reported to management, while risks to the Group are discussed at the management level as needed.

Risks identified in this manner are evaluated not only in terms of the economic loss or frequency of occurrence but also in terms of business continuity and reputation. Risks that have a large impact on the financial soundness and business continuity of the Group or of individual Group companies are identified as “material risks.” For identified material risks, we assess the sufficiency of capital through the quantitative risk management process described below, draw up control measures before the risks emerge and countermeasures^*5 to be taken if the risks do emerge,and conduct PDCA management.

In addition, while we have been implementing such risk management practices, in light of the series of irregularities that occurred at TMNF, we have added scenarios related to competition law to the categories of “material risks” concerning “violation of laws and regulations” and “conduct risk,” and have developed corresponding countermeasures.

*5

Pre-emergence risk control measures include monitoring and risk management based on the market environment and regulatory trends, while post-emergence risk response measures include manuals (including business continuity plans) and mock drills.

Detection of Emerging Risks and the Process of Identifying Material Risks

[Emerging Risks] New risks that emerge due to changes in the environment or other factors, and that have not been previously recognized as risks, or risks that have increased markedly in severity. Potential emerging risks: Emerging risks for major Group companies. New emerging risks identified by the CRO or risk management department. Emerging risks identified in the previous fiscal year. Risk information from external sources. 1 Screening → Emerging risks → [Material Risks] Risks that have a significant impact on financial soundness, business continuity, etc. Potential material risks: Material risks of the Group in the previous year. High-impact risks among the emerging risks. 2 Identification by matrix evaluation → Material risks → PDCA for material risks

Examples of Emerging Risks

Emerging risks/Scenarios	Examples of responses
(1) Inadequate response to decarbonization and a nature-compatible society (climate change and nature-related transition risk) Risk of a decline in value of invested companies that lag behind in transitioning to decarbonization and a nature-compatible society, which could impact the value of the Group’s assets Risk that the Group’s efforts toward decarbonization and a nature-compatible society are perceived as inadequate by society, potentially damaging our reputation	Announced the Tokio Marine Group Policy to Address Environmental and Social Risks and identified businesses that are prohibited from underwriting or require special attention Accelerating the development of insurance products and risk consulting services related to new decarbonization technologies Implementing ESG integration, where non-financial data, in addition to traditional information, is used in the investment decision-making process
(2) Global warming, loss of natural capital and biodiversity (climate change and nature-related physical risks) Risk that the progression of global warming and the loss of natural capital and biodiversity will lead to more severe natural disasters, resulting in increased insurance payouts both in the short term and long term	Working on refining risk measurement models for natural disasters and developing methods to evaluate the impacts of climate change in efforts to enhance natural disaster risk assessment Engaging in research and analysis regarding the dependency on and impact of our business on the natural environment
(3) Business partner risk As responsibility and expectations for the entire value chain of corporate activities increase, incidents or accidents occurring with business partners, contractors, or collaborators could have a significant impact on our business continuity and reputation	Established the Guidelines for Responsible Procurement and communicated these basic principles within the Group, encouraging business partners to cooperate with our initiatives Organizing perspectives related to economic security in the selection of external contractors and business partners, and promoting efforts across companies
(4) Delay in adhering to global human rights standards Risk that the Tokio Marine Group’s efforts regarding respect for human rights are perceived as inadequate by society, damaging our reputation	Established the Tokio Marine Group Basic Policy on Human Rights to demonstrate our commitment to respecting human rights across all business activities, including the value chain, and are encouraging our business partners to adhere to this policy Defined and publicly disclosed our Policy to Address Environmental and Social Risks, which evaluates the prevention and mitigation of human rights risks in specific sectors, as part of our efforts to promote respect for human rights in insurance underwriting and investment Set up a hotline for external stakeholders in addition to our internal hotline for employees

Material Risks for Fiscal 2024

Emerging risks/Scenarios	Examples of responses
(1) Economic and financial crisis The value of the Group’s assets could fall substantially due to a global economic crisis on the magnitude of the 2008 global financial crisis, or turmoil in financial and capital markets caused by geopolitical risk or a large-scale disaster. The value of the Group’s assets could fall substantially as Japanese government bonds plummet in value due to a decline in the government’s creditworthiness or the emergence of hyperinflation.	Response to economic impact Investigate the impact on the market due to geopolitical risks Control exposure through credit risk aggregation and management Conduct stress tests to confirm capital adequacy and funding liquidity Establish action plans for financial crises
(2) Major earthquakes A major earthquake beneath Tokyo or along the Nankai Trough might lead to significant human and material losses, causing widespread disruptions to social and economic activities, including those of the Group, resulting in large insurance payouts.	Response to economic impact Appropriately assess risks, including risk aggregation, and develop products that meet customer needs, while generating stable profits through risk-appropriate underwriting, risk diversification, and arranging reinsurance With respect to (2), (3), and (5) shown at left, conduct stress tests to confirm capital adequacy and funding liquidity Response to the impact on business continuity and reputation Establish crisis management systems and business continuity plans, and verify their effectiveness through emergency drills With respect to (6) shown at left, develop cybersecurity measures, and verify their effectiveness through emergency drills
(3) Major wind and flooding disasters (including physical risks of climate change) Major typhoons or torrential rains could cause extensive physical damage, leading to significant disruptions in social and economic activities, including those of the Group, resulting in large insurance payouts.
(4) Volcanic eruptions The eruption of Mount Fuji or similar volcanic activities could result in widespread physical damage due to volcanic ash and other effects, leading to significant disruptions in social and economic activities, including those of the Group, resulting in large insurance payouts.
(5) Pandemics The widespread outbreak of a new infectious disease could result in significant insurance payouts.
(6) Cyber risk A cyberattack targeting many Group customers or supply chains could lead to significant insurance payouts. A cyberattack targeting the Group’s systems might result in the leakage of sensitive information and disruptions to business operations.
(7) Geopolitical risk Escalation of tensions between nations into military conflicts could lead to extensive human and material damages, leading to significant disruptions in social and economic activities, including those of the Group.	Response to the impact on business continuity and reputation Establish crisis management systems and business continuity plans, and verify their effectiveness through emergency drills (Response to economic impact is detailed in (1) shown at left)
(8) Inflation Due to soaring raw material costs and rapid increases in global prices, insurance payout costs rise, resulting in diminished underwriting profits from the inability to revise products in line with risks or secure reinsurance.	Response to economic impact Analyze the impact of inflation on insurance products and undertake product revisions and underwriting commensurate with risk
(9) Violation of laws and regulations and conduct risk Non-compliance with regulations related to competition law, personal data protection, anti-money laundering, and the reinforcement of economic sanctions related to the U.S.-China tensions and the Ukraine conflict might result in the imposition of fines and penalties and harm the Group’s reputation. Deviation between industry and corporate practices and societal norms, along with the lack of fostering an appropriate corporate culture, could lead to the perception that the initiatives of the Tokio Marine Group are inadequate by society, damaging our reputation.	Response to the impact on business continuity and reputation Advance the consideration of implementing global measures in response to actions at TMNF that might have violated antitrust laws Monitor domestic and international social environments, trends in government agencies, and changes in regulatory requirements, and take necessary measures accordingly Conduct surveys on employee awareness and behavior, and enhance the efforts of the Group by compiling and sharing best practices
(10) Disruptive innovation Innovations that drastically reshape industry structures through digital transformation and innovative new entrants might erode the Group’s competitive advantage and lead to significant reductions in premium income and profits.	Response to economic impact Ensure the competitive advantage of our insurance business by implementing basic strategies and executing projects for digital transformation Expand into new businesses, primarily in areas closely aligned with our insurance operations
(11) AI/data governance deficiency The inability to properly manage issues such as vulnerabilities, the output of misinformation, or ethical concerns while advancing the use of AI and data might lead to litigation, reputational damage, or hinder productive business activities.	Response to the impact on business continuity and reputation Establish common Group-wide rules for the use of AI and data to strengthen the frameworks of Tokio Marine and its Group companies

(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^*6 by risk capital. Our capital policy is determined by comprehensively considering business investment opportunities and future market outlooks. A 99.95% VaR is equivalent to the damage caused by an occurrence of a risk that happens once in 2,000 years. Although many insurance companies around the world use 99.5% VaR (once in 200 years), Tokio Marine Group uses a much more stringent standard to evaluate risk capital.

The target range of the Group’s ESR is 100%‒140%, and as of March 31, 2024, the Group’s ESR was 140%^*7, confirming that the Group is adequately capitalized.

We also conduct stress tests based on scenarios involving significant economic losses from material risks such as domestic and international economic crises, disruptions in financial and capital markets, loss of confidence in Japanese government bonds, major earthquakes, major wind and water-related disasters, and widespread outbreaks of new viruses. We also assess scenarios where multiple critical risks materialize simultaneously. In addition, we conduct reverse stress tests, which assume scenarios that could severely impact the financial soundness of the Group, allowing us to comprehensively verify that there are no issues with capital adequacy and liquidity.

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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.
*7

ESR after the acquisition of 200 billion yen in treasury stock is 135%.