Enterprise Risk Management (ERM)
We promote Enterprise Risk Management (ERM) as the platform on which we advance the new mid-term business plan. Specifically, we remain constantly aware of the relationship between risks, capital, and profits to achieve both capital adequacy and profitability relative to risk and thereby realize capital efficiency that exceeds cost of capital* (7%). Through this approach, we will seek to maintain financial soundness while realizing ongoing improvements in corporate value.
Our ERM initiatives are supported by the ERM Cycle. For Tokio Marine Group, the ERM Cycle is a cyclical framework of formulating business plans in accordance with risk appetite, deciding capital allocation, reviewing, and evaluating results.
First, Tokio Marine Holdings establishes a Risk Appetite Framework that articulates a basic management policy for the types of risks to be taken and the business fields in which they will be taken to ensure expected returns. The Group primarily takes risk in the insurance business, where such risks include insurance underwriting risks and investment risks. We aim to address underwriting risks through risk diversification and investment risks through investments promising high profitability relative to risk. By increasing capital efficiency while mitigating risks in this manner, we aim to achieve ROE of around 12% in the future. In regard to financial soundness, we are targeting a capital level that will maintain an AA credit rating. The Risk Appetite Framework compiles these basic policies as well as the specific risk-taking policies for individual risk categories and business fields.
Next, each Group company formulates business plan drafts based on the Risk Appetite Framework. Tokio Marine Holdings takes an overall Group perspective in assessing whether the drafts will maintain an appropriate balance between financial soundness and profitability while achieving sustained growth. We then make decisions with regard to allocation of capital to each business plan and segment. The results of Group companies based on the allocated capital are reviewed annually and improvements are made if necessary.
We promote disciplined management based on the economic solvency ratio (ESR) to ensure financial soundness. Tokio Marine Group calculates ESR (net asset value ÷ risk capital) by quantifying risks calculated at the 99.95% value at risk (VaR) confidence level, which corresponds to an AA credit rating, and comparing these risks to net asset value, which is arrived at based on the figure for consolidated net assets used for financial accounting purposes. We target ESR in the range of 150% to 210%.
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.
The new mid-term business plan is also fundamentally based on this ERM Cycle. The diagram below examines the new mid-term business plan from the perspective of ERM. 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.