2018 Registration document and annual fi nancial report - BNP PARIBAS440

5 RISKS AND CAPITAL ADEQUACY PILLAR 3

5

Insurance risks

The minimum guaranteed benefi t reserve is (re)assessed every quarter and takes into account the probability of death, based on a deterministic scenario, and stochastic analyses of changing fi nancial market prices. The reserve amounted to EUR 10.6 million at 31 December 2018 (versus EUR 6.5 million at 31 December 2017).

PROTECTION These risks result mainly from the sale of creditor insurance, as well as personal risk insurance (individual death and disability, extended warranty, theft, accidental damage, third party liability, annuity policies in France), with geographic coverage in many countries.

Creditor insurance mainly covers death, disability, critical illness, work disability, loss of employment and fi nancial loss risks for revolving credit, personal loans and mortgage loans. The insurance book comprises a very large number of policies representing low risks and low premiums. Margins depend on the size of the insurance book, effective pooling of risks and tight control of administrative costs. The term of these contracts is usually equal to the term of the underlying loan and the premium is either deducted once upon issuance of the policy (single premium) or deducted regularly throughout the term of the policy (regular or periodic premiums).

Other contracts (individual death and disability, extended warranty, theft, accidental damage, and annuity policies in France) are either for personal risk (death, accidental death, hospitalisation, critical illness, healthcare expenses) or property & casualty risk (accidental damage, breakdown or theft of consumer goods or vehicles). The individual sums insured under these contracts are generally low, whether they are indemnities or lump-sum payment.

Lastly, principally through its expanding entities in France and Italy, Cardif IARD, and CARGEAS respectively, motor vehicle coverage (material damage, civil liability) and comprehensive household coverage are also underwritten. This type of insurance coverage is also developing in the international market, namely in Latin America.

The actuarial oversight system set up to prevent and control actuarial risks in France and internationally is based on guidelines and tools that describe the principles, rules, methods and best practices to be followed by each actuary throughout the policies life cycle, the tasks to be performed by the actuaries and their reporting obligations. It also sets out the practices that are excluded or that are allowed only if certain conditions are met.

Risks underwritten must comply with delegation limits set at various local and central levels depending on the estimated maximum acceptable losses, the estimated Solvency II capital requirements and the estimated margins on the policies concerned. The experience acquired in managing geographically diversifi ed portfolios is used to regularly update risk pricing databases comprising a wide range of criteria (loan type for creditor insurance, guarantee and insured population, etc.). Each contract

is priced by reference to the profi tability and return-on-equity targets set by the Executive Management of the BNP Paribas Cardif group.

Reinsurance is a complementary element of the underwriting risk management system. Its objective is to protect the BNP Paribas Cardif group against three main risks:

■ so-called peak risk from exposure to an individual risk exceeding a certain threshold, called full retention . In personal insurance, this threshold is currently set at EUR 2 million per life. The reinsurance of peak risk may take the form of surplus or excess of loss treaties;

■ the catastrophe risk associated with exposure to a single low occurrence event, but very strong fi nancial impact (concentration risk). This risk can be reinsured in the form of a catastrophe excess of loss treaty;

■ risk on new products, linked to insuffi cient pooling, lack of mastery of the technical databases or uncertainty on benefi ciaries data. This risk can be reinsured in the form of quota share, stop loss or excess of loss treaties, depending on the level of risk identifi ed.

Risk exposures are monitored periodically by the Executive Committee of the BNP Paribas Cardif group through the Commitment Monitoring Committees and the Risk Committees that are based on a two-pronged approach:

■ quarterly monitoring of loss ratios at each accounting quarter end;

■ supplemented by monitoring of the portfolio characteristics according to a schedule based on the type of product (monthly, quarterly and annually).

Contract pricing for annuity contracts are based on mortality tables applicable under insurance regulations, adjusted in some cases by portfolio specifi c data which is certifi ed by independent actuaries. The result is a low annuity risk.

Underwriting risks are covered by various technical reserves:

■ the mathematical reserves in Life insurance;

■ the unearned premiums reserves for non-Life underwriting, generally calculated on an accruals basis, possibly supplemented by reserves for current risks;

■ the reserves for increasing risk in certain cases (long-term policies with constant periodic premiums and increasing risk);

■ the outstanding claims reserves, determined by reference to reported claims;

■ the IBNR (claims incurred but not reported) reserves, determined on the basis of either observed settlements or the expected number of claims and the average cost per claim;

■ the reserves for claims management, generally calculated pro rata to the claims reserves.

The level of prudence adopted for the overall assessment of claims incurred but not reported corresponds to the 90% quantile.