2020 Universal registration document and annual financial report - BNP PARIBAS 467

5risks and CaPital adequaCy Pillar 3

5

Insurance risks

MARKET RISK

Market risk arises mainly in the Savings business, where technical reserves represent most of the BNP Paribas Cardif group subsidiaries liabilities.

Interest rate risk management for the general insurance funds and the asset diversification policy have driven investment in real estate assets, equities and fixed-income securities, including government bonds particularly in the eurozone countries.

Market risk falls into four categories:

■ interest rate risk:

Euro funds in underwritten life insurance policies are measured based on either a contractual fixed rate or a variable rate, with or without a minimum guaranteed return. All of these policies give rise to an interest rate and asset value risk, corresponding to the risk that the return on admissible assets (i.e. assets acquired by investing premiums) is less than the contractual return payable to policyholders. In France, the average rate guaranteed by Cardif Assurance Vie in 2020 is below 0.1%.

In France, to cover for future potential financial losses, estimated over the lifetime of the policies, a provision for financial assets insufficient yield reserve (provision pour aléas financiers) is booked when total amount of technical interest plus the guaranteed return payable to policyholders through technical reserves is not covered by 80% of the return on the admissible assets. No provision for future adverse deviation was booked at 31 December 2020, 2019 and 2018, as the returns guaranteed by the insurance subsidiaries were low and the guarantees were for short periods, resulting in only limited exposure;

■ liquidity risk:

Liquidity risk with a 24-month horizon is managed by the Asset Management Department. Asset-liability matching analyses over the medium to long term are also carried out regularly by Asset-Liability Management in order to supplement the measurement of the financial risks incurred. They are based on medium and/or long-term profit and loss account and balance sheet projections prepared using a range of economic scenarios. The results of these reviews are analysed in order to determine any adjustments to required assets (through strategic allocation, diversification, use of derivatives, etc.);

■ spread risk:

Limits by issuer and rating type (Investment Grade, non-Investment Grade) are monitored regularly. Issuer credit quality is also reviewed frequently;

■ change in the value of assets:

The exposure to the risk of a fall in asset values (interest rate, spread, equities, real estate) is mitigated by the mechanism of the deferred participating benefit, attached to the insurance contracts with a participation feature.

GROUP BNP PARIBAS CARDIF INVESTMENTS The BNP Paribas Cardif group manages EUR 180.0 billion at net book value i.e. EUR 181.9 billion at market value, through its subsidiaries in France, mainly Cardif Assurance Vie, representing EUR 141.7 billion, its subsidiaries in Italy, mainly Cardif Vita, representing EUR 25.2 billion and its subsidiary in Luxembourg, Cardif Lux Vie (EUR 9.8 billion).

BNP Paribas Cardif group investments break down as follows:

➤ TABLE 103: BREAKDOWN OF BNP PARIBAS CARDIF GROUP INVESTMENTS (EXCLUDING INVESTMENTS IN UNIT-LINKED CONTRACTS) [Audited]

In millions of euros

31 December 2020 31 December 2019

Net book value Market value Net book value Market value

Equities and variable-income securities (including UCI) 39,797 39,797 37,459 37,459

Real estate 5,202 6,812 5,028 6,609

of which buildings 2,950 4,560 3,247 4,829

of which shares in real estate companies 2,252 2,252 1,780 1,780

Government bonds and similar 58,151 58,411 58,618 58,949

Other bonds 73,987 74,005 72,545 72,559

Derivative instruments and other 2,845 2,845 2,458 2,458

TOTAL 179,983 181,871 176,109 178,035