2012 Registration document and annual financial report - BNP Paribas

RISKS AND CAPITAL ADEQUACYInsurance risks5Cardif’s risk preferences can be summarised in three objectives: (a)control the general fund’s contribution to growth in savings productsin order to limit the proportion of market risk, (b) support growth ofProtection products and (c) expand in the P&C market to increase therelative proportion of underwriting risk and the diversification effect.This risk strategy is implemented and controlled through an organisationtailored to the broad risk classes and supported by ad hoc governancestructures. The main risk decision-taking or monitoring committees are:■ the Insurance Risk Management Committee covers all risks and isresponsible for defining the risk policy and for overseeing the keyrisks. It monitors progress in BNP Paribas Cardif’s transition towardsthe future Solvency II, alongside “ Valor” , the dedicated structure forthis purpose set up in 2009;■ the various committees that take risk decisions are the UnderwritingCommittee for risks outside the limits granted to the local and regionalentities, New Business Committee for new underwriting risks andunderwriting risks that are not new for BNP Paribas Cardif but newfor a particular entity, and New Asset Class Committee for investmentsin new types of asset;■ the Insurance ALM Committee covers market risks and is responsiblefor defining the strategic asset allocation;■ the Exposure Monitoring Committee oversees underwriting risks andthe credit risk on receivables arising from insurance business;■ the Asset Credit Risk Committee monitors credit risk on issuers offinancial instruments;■ the Operational Risk Committee monitors actual and potentialincidents.MARKET RISK AND CREDIT RISKMarket risk and credit risk arise mainly in the Savings business, wheretechnical reserves represent over 95% of the insurance subsidiaries’liabilities.Interest rate risk management for the general insurance fund and theasset diversification policy have driven investment in real estate assets,equities and fixed-income securities, including government bondsparticularly in the euro zone countries. The target strategic allocationof Cardif Société Vie, the main Savings insurance subsidiary, is basedmainly on fixed-income securities (80%). The proportion of equities andreal estate is significant (10% each).Market risk and credit risk fall into four categories:INTEREST RATE RISKPolicyholder returns on non-unit-linked life insurance policies are basedon either a fixed rate specified in the policy or a variable rate, with orwithout a minimum guaranteed return. All of these policies give rise toan interest rate and asset value risk, corresponding to the risk that thereturn on admissible assets (i.e. assets acquired by investing premiums)is less than the contractual return payable to policyholders. The averageguaranteed return in 2012 fell to 1.41% compared with 1.47% in 2011. 97%of BNP Paribas Cardif’s mathematical reserves have guaranteed minimumreturn commitments with a term of less than or equal to two years.In France, to cover future potential financial losses, estimated over thelifetime of the policies, a provision for future adverse deviation (provisionpour aléas financiers) is booked when total amount of technical interestplus the guaranteed return payable to policyholders through technicalreserves is not covered by 80% of the return on the admissible assets. Noprovision for future adverse deviation was booked at 31 December 2012,2011 or 2010 as the returns guaranteed by the insurance subsidiaries arelow and the guarantees are for short periods, resulting in only limitedexposure.LIQUIDITY RISKLiquidity risk is managed centrally by the BNP Paribas Cardif Asset/Liability Management unit, which coordinates its activities with theBNP Paribas ALM-Treasury Department. Regular asset-liability matchingreviews are performed to measure and manage the financial risks,based on medium and/or long-term income statement and balancesheet projections prepared according to various economic scenarios.The results of these reviews are analysed in order to determine anyadjustments to assets (through strategic allocation, diversification, useof derivatives, etc.) that are required to reduce the risks arising fromchanges in interest rates and asset values.CREDIT RISKBNP Paribas Cardif has a balanced spread of bond exposure betweensovereign risk and corporate risk (respectively 55% and 45% for CardifAssurance Vie’s portfolio). Euro zone portfolios focus on issuers with anaverage rating of better than A+.Limits by issuer and rating type (investment grade, high-yield) aremonitored regularly. Issuer credit quality is also reviewed frequently.There is little exposure (less than 8%) to sovereign risk in the peripheraleuro zone countries.52012 Registration document and annual financial report - BNP PARIBAS 317