SMFG Capital Ratio Information (B) Implementation of Regular Verification Process To confirm the appropriateness of the quantification model on a continuing basis, we conduct a regular verification process.  Specifically, there are two types of verifications. One is back testing, which enables us to make a comprehensive judgment on the  appropriateness of measurement results, and the other is pre-testing, in which we verify the accuracy of the quantification model  prior to conducting actual measurements. In the following paragraphs, we present an explanation of these two test types.  Back testing is a well-known method for verifying comprehensively the appropriateness of VaR (statistical) models. We  employ the test to obtain the maximum loss amount with the given confidence interval which the tests work effectively. By  comparing the test results with the losses that actually occur, we increase the effectiveness of back testing. In conducting back tests, we compare the estimates made by the quantification model with the maximum loss arising from  business activities to verify on an ex post facto basis whether the measurement results obtained from the model are conservative  enough and appropriate. When actual losses become greater than the losses estimated by the model (actual losses exceed the  estimate when back tests are conducted), we apply the multiplier factor in accordance with the number of excesses in order to  ensure conservativeness of quantification results. Pre-testing is conducted periodically, prior to use of the model for actual measurements, to verify whether the possibility of  underestimation is increasing (model risk is rising), since it is possible that the multiplier used in back testing may lead to  underestimation. As a result of pre-test verifications, we are able to confirm, on a continuing basis, whether the multiplier used  in back testing is conservative enough or model risk is emerging. SMFG had not taken measures to mitigate operational risk through insurance coverage for exposures. 3. Usage of Insurance to Mitigate Risk b. Pre-testing a. Back Testing SMFG  2011 208