2020 Universal registration document and annual financial report - BNP PARIBAS 469

5risks and CaPital adequaCy Pillar 3

5

Insurance risks

➤ TABLE 107: NON-INVESTMENT GRADE FINANCIAL ASSETS MEETING THE SPPI CRITERION IN ACCORDANCE WITH IFRS 9 [Audited]

Rating In millions of euros

31 December 2020 31 December 2019

Gross book value Market value Gross book value Market value

BB+ 704 704 279 279

BB 200 200 21 21

BB- 161 161 212 212

B 16 16 21 21

Unrated 1,607 1,607 1,819 1,819

TOTAL 2,688 2,688 2,353 2,353

INSURANCE UNDERWRITING RISK

Underwriting risk arises mainly from the surrender risk in the savings business line, and in creditor insurance contracts for the protection business.

There are three types of underwriting risk:

SAVINGS SURRENDER RISK Savings contracts include a surrender clause allowing policyholders to request reimbursement of all or part of their accumulated savings. The insurer is thus exposed to the risk of surrender volumes being higher than the forecasts used for ALM purposes, leading to potential capital losses on asset disposals needed to finance excess surrenders.

The surrender risk is limited, however, as:

■ expected short-, medium- and long-term liability flows are regularly estimated and any liquidity gaps with expected asset flows are

identified and controlled in order to reduce the risk of huge instant asset disposals. Changes in assets and liabilities are projected over periods of up to forty years, in order to identify treasury mismatches and over or under covered maturities giving rise to a liquidity risk. These analyses are then used to determine the choice of maturities for new investments and the assets to be sold;

■ the guaranteed revaluation of policies is completed by a participating benefit feature, partly discretionary, that raises the total return to a level in line with market benchmarks and reduces the risk of an increase in surrenders. The policyholders surplus reserve is the mechanism in France that enables the surplus actually paid out to be pooled and spread between generations of policyholders and to manage the performance of contracts over time;

■ the return on financial assets may be protected through the use of hedging instruments.

➤ TABLE 108: AVERAGE REDEMPTION RATES FOR BNP PARIBAS CARDIF GROUP GENERAL FUNDS(*) [Audited]

Annual redemption date

2020 2019

France 5.5% 5.3%

Italy 7.6% 7.7%

Luxembourg 7.5% 5.2%

(*) Individual savings.

SAVINGS UNIT-LINKED CONTRACTS WITH A MINIMUM COVERAGE The insurer s liabilities are covered by the assets held, which are used as a valuation reference. The consistency of this coverage is controlled at monthly intervals.

Certain unit-linked commitments provide for the payment of a death benefit at least equal to the cumulative premiums invested in the contract, whatever the conditions on the financial markets at the time of the insured s death. The risk on these contracts is both statistical (probability of a claim) and financial (market value of the units).