2018 Registration document and annual fi nancial report - BNP PARIBAS436

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Insurance risks

5.10 Insurance risks

BNP PARIBAS CARDIF GROUP RISK MANAGEMENT SYSTEM

Risk management is a process that allows to identify, measure, monitor, manage, and report both the risks arising from the external environment as well as intrinsic risks inherent to the BNP Paribas Cardif group. The objective is to guarantee the solvency, business continuity, and development of the BNP Paribas Cardif group, under satisfactory conditions of risk and profi tability.

Within the framework of the provisions of article L.354-2 of the French Insurance Code, the BNP Paribas Cardif group conducts a forward looking assessment of its solvency and risks every year under the Solvency II framework, in particular:

■ the defi nition and evaluation of a capital requirement specifi c to the risk profi le;

■ the level of capital that the BNP Paribas Cardif group wishes to hold to cover this specifi c requirement, in excess of the regulatory capital requirement;

■ the forward-looking solvency ratios under the medium-term plan;

■ the resilience of these ratios in stress test cases.

Depending on the observed solvency ratio levels and the forecasts made under ORSA (Own Risk and Solvency Assessment), remedial actions may be undertaken to adjust own capital.

The risk typology adopted by the BNP Paribas Cardif group is changing in pace with methodological work and regulatory requirements. It is presented according to the main categories as follows:

■ underwriting risk: underwriting risk is the risk of a loss in value caused by a sudden, unexpected increase in insurance claims. Depending on the type of insurance business (life, non-life), this risk may be statistical, macroeconomic or behavioural, or may be related to public health issues or disasters;

■ market risk: market risk is the risk of a loss in value arising from adverse movements of fi nancial markets. These adverse movements are notably refl ected in price fl uctuations (foreign exchange rates, bonds, equities and commodities, derivatives, real estate, etc.) and derived from fl uctuations in interest rates, credit spreads, volatilities and correlations;

■ credit risk: credit risk is the risk of loss or adverse change in the fi nancial situation resulting from fl uctuations in the credit standing of issuers of securities, counterparties, and any debtors to which the BNP Paribas Cardif group is exposed. Among the debtors, risks related to fi nancial instruments (including the banks in which the BNP Paribas Cardif group holds deposits) and risks related to receivables generated by the underwriting activities (premium collection, reinsurance recovering, etc.) are divided into two categories: assets credit risk and liabilities credit risk;

■ liquidity risk: liquidity risk is the risk of being unable to fulfi l current or future foreseen or unforeseen cash requirements coming from insurance commitments to policyholders, because of an inability to sell assets in a timely manner, for an acceptable amount without having a signifi cant impact on market prices; and/or an inability to get access to alternative fi nancing instruments in a timely manner;

■ operational risk: operational risk is the risk of loss resulting from the inadequacy or failure of internal processes, IT failures or external events, whether accidental or natural. These external events include those of human or natural origin.

The BNP Paribas Cardif group is exposed mainly to credit, underwriting, and market risks. The BNP Paribas Cardif group closely monitors its exposures and profi tability, taking into account these various risks and the adequacy of its capital with regard to regulatory solvency requirements. It endeavours to contain potential losses in adverse scenarios at acceptable levels.

The risk strategy is implemented and monitored through an organisation tailored to the broad risk classes and supported by ad hoc governance structures. The governance and risk management systems are presented in sections B. System of Governance and C. Risk profi le of the BNP Paribas Cardif group s Solvency and Financial Condition Report (SFCR), available on the institutional website at https://www.bnpparibascardif.com.

The solvency requirements for the BNP Paribas Cardif Group under Solvency II are shown in section 5.2 Capital management and capital adequacy.

MARKET RISK [Audited]

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 diversifi cation policy have driven investment in real estate assets, equities and fi xed-income securities, including government bonds particularly in the euro zone countries.