EXECUTIVE SUMMARY: RISK MANAGEMENT IN JAPAN

December 2001

Risk has been quantified bureaucratically with cartelised rates and cross-subsidisation within industries and keiretsu. Specialist "risk management" is intellectually understood, but is being resisted by generalists at the working level as an impediment to business marketing and career prospects. Senior management members are generalists by definition and concerned with management formalities and corporate and keiretsu precedent.

Leading Government Advisor, Asset Management Studies, Leading University said, ".....Japanese banks have relied on land as collateral and have not really got into sophisticated risk management. The inability to buy in experienced staff is a very serious problem as markets become more competitive. This is behind much of the problem at the present time. The distinguishing mark of Japanese financial services is a regrettably general lack of professional attitudes to risk assessment....."

European Head, Tokyo Office, Leading European Casualty Insurance Company said, ".....the Company has a first rate niche product. It is in highly protected risks where there is expertise in avoiding risk and the certified low risk plant enjoys a low premium. The experience has been that the Japanese employment, cultural, and behaviour patterns make this a non-starter and that despite the joint venture with a leading domestic casualty insurer......" [Analytica note: The Company is now reportedly closing its Tokyo Office.]

European Head, Tokyo Office, Major US Asset Management Firm said, ".....essential to the marketing of services is plain commitment and perseverance: Japan is very demanding. In Japan, if you slowly move up the pyramid of decision making to the key person, then after several years you will be given business. The first private pension mandate was Hitachi which started on an experimental JPY80m per month of new money and the then-London Head Office was extremely unsupportive. It has grown substantially since....."

Head, Planning, Casualty Insurance-related Trade Association said in relation to construction performance risk exposure, ".....policies were sold into the re-insurance market as excess treaty business. However, the high re-insurance premiums ate into premiums retained and given the magnitudes of risk exposure, the business was unremunerative. Frankly speaking, I take a negative view of Japanese expertise in the field....."

Head, Natural Disaster Risk Quantification, Japan/US Leading Firms Joint Venture said in relation to earthquakes, ".....Japanese insurers were previously largely laughed out of court in the Lloyds re-insurance market with their risk independent premiums. The new foreign entrants have shown themselves to be adept at sophisticated risk portfolio management. While domestic players are withdrawing from writing new risk cover in the Kanto and Tokai, foreign players are still continuing to write cover....."

Leading Government Advisor, Risk Management Studies, Minor University said, ".....at the Construction Surety Companies there is now a move to start assessing the risks involved. The three CSCs are due for a real shake up. The construction market is stagnating and the risk of bankruptcy of the major general construction companies is rising. There is an opening for foreign players, free of keiretsu complications, professionally assessing risk....."

Ex-Head, Finance, Major keiretsu Plant Manufacturer said, ".....risk management is intellectually known, but key is winning business and risk is assessed post factum at scale premium rates. In consensus management, specialist risk assessment as a preliminary hurdle and a possible deal killer is very difficult. As advice on entry into Japanese risk management, and fairly obviously, the key steps are: 1. target new small companies, 2. establish reputation, 3. liaise with bureaucracy and 4. move up to established larger companies....."

US Lawyer, Patents, Major keiretsu Plant Manufacturer said, ".....senior management perversely thinks that the domestic market is low risk and a stable profits base. Overseas business can therefore be done on a risk-leveraged basis. The attitude to contingent risk events is that they do not occur. If a risk event were to occur, it would be fate. A high performance specification in-house US plant was constructed in the path of major dust storms for reasons of easy flight access and is a perfect hostage to fortune....."

Foreign risk management players have an expertise currently attracting attention in Japan. There are strong parallels to portfolio asset management expertise some twenty years ago. Interviewees 3. and 7. above stated: 1. commitment and perseverance is required in Japan as is the control of expectations at Head Office and 2. there are four obvious and specific steps to be taken for successful foreign entry. Their opinion constitutes a perfect summation of the "Edo Due Diligence" practice model.

Note:
1. Above summarises a 15-interviewee scale Phase I Project
2. Business prospects consultation led to a "No Go" for Phase II