Taiyo Mutual Life Moves Towards Real-Time Risk Management Analysis

TOKYO--Taiyo Mutual Life Insurance Company, one of Japan's largest insurance companies, is restructuring its enterprise-wide risk management operations along the lines of sellside institutions such as investment banks. Taiyo officials say their risk revamp comes in response to regulatory and market pressures. As part of the changes, the insurance company is installing a new Monte Carlo simulation system from Palo Alto, California-based Cats Software.

Masanori Saito, Taiyo's senior general manager of investment administration, says the insurance company has divided its trading operation into two departments: trading and administration. The administration division's responsibilities include risk measurement and control, he adds, covering both market and credit risk.

The administration group analyzes Taiyo's risks by the minute, says Saito, and advises traders on suitable investments and hedges. He adds that Taiyo is "continuously reforming" its risk management methods, in a distinct break with previous practices of Japanese financial institutions. Japan's Ministry of Finance is also urging banks and investment funds to adopt more advanced risk management techniques, he adds.

Global growth

A source adds that Taiyo is experiencing global expansion and asset growth. This has exposed the company to a greater number of risks, adds the source, prompting the decision to revamp its enterprise-wide risk management operations.

Saito adds that Taiyo is implementing Cats' Catalyst derivatives trading system and Carma risk management engine at its Tokyo headquarters. Taiyo will use Catalyst and Carma to support trade processing and risk management of its foreign exchange, interest rate and equities books, he adds.

Real-time risk

Taiyo plans to use Carma's Monte Carlo simulator to generate market and credit risk management reports in near-real time, says Saito. The insurance firm also has plans to move towards integrated market and credit risk management, he adds. The real-time nature of the system is important, he adds, since Taiyo has to be able to respond quickly to turbulent Asian markets.

Cats was selected from a number of vendors primarily for its Carma product, says a source from Cats. The insurance fund is also licensing Catalyst to pick up transactions from front office trading systems and enter them into Carma.

Carma's flexibility allows for coverage of a large breadth of insurance products, says the Cats source. The vendor has added support for a number of cashflow specific products traded by Taiyo, the vendor source adds.

Saito describes Carma as "quick, impressive and reasonably priced". The system's speed was a key selling point, he adds. Cats recently released the results of a benchmarking test conducted at Sun Microsystems' laboratories in Menlo Park, California. In these tests, Carma took four minutes to evaluate current and future exposures to a counterparty with 230 open positions (Derivatives & Risk Technology, July 6).

Industry observers note the sale represents a significant leap forward for Cats' Carma application. Thought the system is widely used by banks and investment funds, the sale to Taiyo represents Carma's first appearance in the insurance market sector.

-- Adriana Saraceni