Seismic shift in Japan’s nat cat awareness, but still work to do for many risks

Risk and insurance professionals from a select group of Japan-based organisations gathered at the Park Hyatt Tokyo yesterday for a high-level debate on issues impacting the country’s risk landscape.

First on the agenda at the Zurich-sponsored StrategicRISK event was a poll of the top risks faced by Japanese corporations, with responses ranging from money laundering and fraud, through cyber risk, economic uncertainty and threats to supply chains, to product recall, reputation risk and human capital issues.

The undoubted top threat to both corporations and Japanese society in general was named as natural catastrophe risk. This perhaps comes as no surprise, given the massive impact of the 2011 Tohoku earthquake and subsequent tsunami and Fukushima Daiichi nuclear disaster.

Some interesting approaches to natural catastrophe risk management were put forward, including revision of communication procedures after both fixed and mobile phone networks proved useless during the magnitude 9.0 earthquake. Sourcing better information regarding the probability of natural disasters from private firms rather than government agencies was also seen as vital.

As one roundtable participant pointed out, Japan had a very small percentage of the of the earth’s land mass, but a disproportionate amount of risk from volcanoes, tsunami, earthquake and other natural disasters.

An observation was made that, while the havoc wreaked by the earthquake was enormous, the Thai floods in the same year had a much greater impact on the operations of many corporations and, certainly, on the Japanese insurance industry.

Interestingly, the roundtable heard that Japanese corporations don’t generally purchase earthquake insurance, but the majority of Japanese companies operating in Thailand had coverage. Furthermore, the Japanese insurers who wrote most of this insurance ceded the majority of it back to their head offices rather than the international reinsurance market. In general, they offered non-admitted, unlimited coverage for floods in Thailand, thereby leaving themselves open to unlimited losses.

It was observed that the concentration of supply chains of many Japanese companies – which is often seen as a strength providing major cost and operational benefits – was a major contributing factor to the impact of the Thai floods. Japanese production, especially for the automotive industry on the eastern seaboard of Thailand, was particularly heavily hit. It was suggested that this illustrated Japan’s unique risk profile as a very industrialised manufacturing country, where lengthy supply chains should be viewed as more of a concern than physical damage.

Targeting growing markets

In relation to overseas operations of Japanese firms, it was generally agreed that Japan was actively targeting growing markets overseas as its own population aged and declined in size. For most multinational companies with international strategies, the state of the China market loomed as a current and future risk, it was pointed out.

An example of how seriously this is being taken can be seen in preparations now being made by both the Japanese and Chinese governments to hold a working-level meeting on food safety later this month following a recent scandal over expired chicken meat provided by a Chinese producer.

However, it was pointed out that regional tensions and disputes, and political risk involving riots and strikes, had even greater potential to negatively impact on the international expansion of Japanese corporations.

Japanese prime minister Shinzo Abe is promoting the export prospects of technology companies to better allow Japan to tap into the expanding global market for infrastructure development. However, the Japanese government has been slow in executing overseas development assistance (ODA) projects, which has upset some recipient countries. Furthermore, corruption and bribery issues have plagued large Japan-backed infrastructure projects in Vietnam, for example, making investors and corporates wary of involvement in such operations.

Human capital

Conversely, plans to fill increasingly problematic labour shortages in Japan – especially in the construction industry -–with workers from countries benefiting from Japanese ODA programmes such as Vietnam, Cambodia and Indonesia, is providing hard to sell to the Japanese public. Human capital issues were a major risk that Japanese corporations will need to overcome, and fast, it was agreed.

While opinions on the wisdom of the recent devaluing of the Yen differed, it was agreed that it was helping to improve Japan’s international competitiveness, at least in the short term. This is reflected in Japan’s jump in the world rankings in the IMD World Competitiveness Yearbook, which was published at the end of June.

Behind the curve

When it comes to enterprise risk management, the roundtable heard, Japanese companies were generally “behind the curve” compared to Western companies. It was suggested that wisely run Japanese concerns needed to put risk firmly on the board agenda, even those risks that board members were least likely to appreciate hearing about.

Furthermore, acknowledging that every board member understands things in a different way is a vital step for an effective risk professional, so they can go on to employ a variety of methods to educate and change perceptions of risk in the C-suite.

A comprehensive StrategicRISK Japan Risk Report will be published later this year to expand on these and other issues. To see all our Asia risk reports,click here.