3092019 Universal registration document and annual financial report - BNP PARIBAS

5risks and CaPital adequaCy Pillar 3

5

Capital management and capital adequacy

Requirements applicable to the Insurance business

Since 1 January 2016, BNP Paribas insurance business is governed by Solvency II, the standard for calculating the solvency coverage ratio (Directive 2009/138/EC as transposed into French law).

The objective of Solvency II is to:

■ integrate the concepts of risks and risk appetite to which insurance companies are exposed;

■ harmonise the insurance regulatory regimes across Europe;

■ give more power to supervisory authorities.

Solvency II is divided into three pillars aiming to:

■ Pillar 1: assess solvency using what is known as an economic capital- based approach;

■ Pillar 2: implement qualitative requirements, i.e. governance and risk management rules that include a forward-looking approach to risk assessment. This assessment is called ORSA (Own Risk & Solvency Assessment);

■ Pillar 3: improve the transparency of the insurance business by making solvency the cornerstone of disclosures to the public and the supervisory authority.

The BNP Paribas Cardif group complies with this regulation both in terms of risk management and governance, as well as calculation and reporting. Solvency II-related data as at 31 December 2018 are available in the Solvency and Financial Condition Report (SFCR) for the BNP Paribas Cardif group, published on the institutional website https://www.bnpparibascardif.com.

Insurance risks are presented in section 5.10 Insurance risks.

Solvency II sets out two capital requirements:

■ the Solvency Capital Requirement (SCR);

■ the Minimum Capital Required (MCR) or, for groups, the SCR Group Minimum.

The SCR (Solvency Capital Requirement) is the level of own funds required to absorb a full series of bicentenary impacts after accounting for the correlation between risks. It is calibrated to cover such an event with a return period of 200 years within a one-year timescale (Value at Risk at 99.5%). The BNP Paribas Cardif SCR is evaluated by means of the standard formula laid down by the regulation.

The Capital Management Policy of BNP Paribas Cardif aims notably to ensure that the prudential solvency requirement are met, to cover at least 100% of the SCR defined within the scope of the ORSA assessment and to structure own funds so that the best balance can be found between the share capital, subordinated debt and other own funds elements, complying with the limits and levels laid down by regulations.

As at 31 December 2018, eligible own funds to meet the SCR stood at EUR 11,418 million. The amount of SCR was EUR 7,506 million and the SCR coverage ratio was 152%. Eligible own funds to meet the SCR Group Minimum amounted to EUR 8,568 million. The amount of SCR Group Minimum was EUR 3,629 million, and the SCR Group Minimum coverage ratio was 236%.

The Solvency Report as at 31 December 2019 will be published on 19 May 2020.

Compliance with the regulation on the additional supervision of financial conglomerates

As a bancassurer, the BNP Paribas Group is also subject to additional supervision as a financial conglomerate, pursuant to European Directive 2002/87/EU, supplemented by Delegated Regulation 342/2014 of the European Commission and implemented into French law by the Order of 3 November 2014.

The financial conglomerates directive has established additional prudential supervision, added to the rules existing in the banking and insurance sectors, because it has introduced additional constraints on capital adequacy, the monitoring of large exposures, and intragroup transactions.

A financial conglomerate is required to meet additional capital adequacy requirements on a consolidated basis. The purpose is to require sufficient capital to cover both banking sector and insurance sector risks, while eliminating multiple gearing.

The capital surplus or shortfall results from the difference between the financial conglomerate s equity capital and the solvency requirements applicable to the banking and insurance industries:

■ the financial conglomerate s capital is determined based on the sector s solvency rules (CRR for the banking sector and Solvency II for the insurance sector);

■ the requirements for the financial conglomerate are determined on the basis of banking sector requirements, calculated according to the CRR and CRD 4 rules, including all capital buffers as well as the requirement resulting from the SREP 2018 applicable in 2019, and on the basis of the solvency capital requirement (SCR) for the insurance sector, calculated in accordance with the Solvency II regulation.

In calculating the financial conglomerate s capital adequacy, the requirements and deductions of insurance entities are treated in compliance with Solvency II rules in replacement of the rules defined in the CRR. The latter consist primarily of a 370% weighting of investments in equities treated according to the simple weighting method (see section 5.4, Credit risk: equities under the simple weighting method).

Governance for the prudential supervision of financial conglomerates falls to the Capital Committee, which meets quarterly under the Chairmanship of the Chief Operating Officer.

As at 31 December 2019, BNP Paribas Group, as a financial conglomerate, had capital of EUR 114.1 billion compared to a total requirement of EUR 95.5 billion, which represents a capital surplus of EUR 18.6 billion. This surplus takes into account the effect of the Decree of 24 December 2019 on life insurance surplus capital. This amount is estimated at EUR 3.5 billion based on a fixed value of 70% of the accounting value of the provision for profit-sharing.

RECOVERY AND RESOLUTION Following the 2008/2009 financial crisis, international banking regulatory bodies adopted a series of regulations and directives based on the recommendations of the Financial Stability Board to facilitate the authorities management of crises involving financial institutions