4392019 Universal registration document and annual financial report - BNP PARIBAS

5risks and CaPital adequaCy Pillar 3

5

Insurance risks

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 euro zone countries.

Market risk falls into four categories:

■ interest rate risk:

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 2019 is below 0.1%.

In France, to cover for future potential financial losses, estimated over the lifetime of the policies, a provision for future adverse deviation (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 2019, 2018, or 2017, 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 is managed centrally by the Asset/Liability Management unit. Asset-liability matching reviews are performed regularly to measure and manage 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 assets (through strategic allocation, diversification, use of derivatives, etc.) required to reduce the risks arising from changes in interest rates and asset values;

■ 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 containing a participation feature.

GROUP BNP PARIBAS CARDIF INVESTMENTS The BNP Paribas Cardif group manages EUR 176.1 billion at net book value i.e. EUR 178.0 billion at market value, through its subsidiaries in France, mainly Cardif Assurance Vie, representing EUR 138.8 billion, through its subsidiaries in Italy, mainly Cardif Vita, representing EUR 23.7 billion and its subsidiary in Luxembourg, Cardif Lux Vie (EUR 9.8 billion).

BNP Paribas Cardif group investments break down as follows:

➤ TABLE 99: BREAKDOWN OF BNP PARIBAS CARDIF GROUP INVESTMENTS (EXCLUDING INVESTMENTS IN UNIT-LINKED CONTRACTS) [Audited]

In millions of euros

31 December 2019 31 December 2018

Net book value Market value Net book value Market value

Equities and variable-income securities (including UCI) 37,459 37,459 34,869 34,869

Real estate 5,028 6,609 4,838 5,842

of which buildings 3,247 4,829 3,138 4,142

of which shares in real estate companies 1,780 1,780 1,700 1,700

Government bonds and similar 58,618 58,949 53,960 54,368

Other bonds 72,545 72,559 65,707 65,723

Derivative instruments and other 2,458 2,458 2,140 2,140

TOTAL 176,109 178,035 161,513 162,942

MARKET RISK