2012 Registration document and annual financial report - BNP Paribas

RISKS AND CAPITAL ADEQUACYInsurance risks5➤ TABLE 57: AVERAGE LAPSE RATES FOR BNP PARIBAS CARDIF GENERAL FUNDS2012 Annual redemption rateFrance 7.50%Italy 14.50%Luxembourg 15.00%SAVINGS - UNIT-LINKED CONTRACTS WITHA GUARANTEED MINIMUM BENEFITThe unit linked liabilities are equal to the sum of the market values of theassets held in the unit-linked portfolios. The insurer’s liability is thereforecovered by corresponding assets. The match between unit-linkedliabilities and the related assets is controlled at monthly intervals.Certain unit-linked contracts include whole life covers providing for thepayment of a death benefit at least equal to the cumulative premiumsinvested in the contract, whatever the conditions on the financial marketsat the time of the insured’s death. The risk on these contracts is bothstatistical (probability of a claim) and financial (market value of the units).The capital guarantee is generally subject to certain limits. In France,for example, most contracts limit the guarantee to one year (renewableannually) and a maximum of EUR 765, 000 per insured. In addition, theguarantee is not normally available beyond the insured’s 80th birthday.The minimum guaranteed benefit reserve is (re)assessed every quarterand takes into account the probability of death, based on a deterministicscenario, and stochastic analyses of changing financial market prices.The reserve amounted to EUR 12 million at 31 December 2012 (versusEUR 19 million at 31 December 2011).PROTECTIONThese risks result mainly from the sale of creditor insurance worldwideand other personal risk insurance (individual death and disability,extended warranty, annuity policies in France).Creditor insurance covers death, total or partial disability, loss ofemployment and financial loss risks for personal loans and mortageloans . The insurance book comprises a very large number of individualpolicies representing low risks and low premiums. Margins depend onthe size of the insurance book, effective pooling of risks and tight controlof administrative costs. The term of these contracts is usually equal tothe term of the underlying loan and the premium is either deductedonce upon issuance of the policy (single premium) or deducted regularlythroughout the term of the policy (regular or periodic premiums).Other contracts are either for personal risk (death, accidental death,hospitalisation, critical illness, healthcare expenses) or property &casualty risk (accidental damage, failure or theft of consumer goodsor vehicles). The individual sums insured under these contracts aregenerally low and the cost of claims predominantly flat rate.Lastly, through joint ventures in France and Italy, motor contracts(material damage, civil liability) and comprehensive household contractsare also underwritten.The actuarial oversight system set up to prevent and control actuarialrisks in France and internationally is based on guidelines and toolsthat describe (i) the principles, rules, methods and best practices tobe followed by each actuary throughout the policies’ life cycle, (ii) thetasks to be performed by the actuaries and their reporting obligationsand (iii) practices that are excluded or that are allowed only if certainconditions are met.Risks underwritten must comply with delegation limits set at various localand central levels, estimated maximum acceptable losses, estimatedSolvency II capital requirements and estimated margins on the policiesconcerned. The experience acquired in managing geographicallydiversified portfolios is used to regularly update risk pricing databasescomprising a wide range of criteria such as loan type for creditorinsurance, the type of guarantee and the insured population. Eachcontract is priced by reference to the profitability and return-on-equitytargets set by the Executive Management of BNP Paribas Cardif.Risk exposures are monitored at quarterly intervals by BNP ParibasCardif’s Executive Committee, based on an analysis of loss ratios.Claims experience for annuity contracts are based on mortality tablesapplicable under insurance regulations, adjusted in some cases byportfolio specific data which is certified by independent actuaries. Annuityrisks are low.Underwriting risks are covered by various technical reserves, includingmathematical reserves in life insurance, the unearned premiums reservesgenerally calculated on an accruals basis, the outstanding claimsreserves, determined by reference to reported claims, and the IBNR(claims incurred but not reported) reserves, determined on the basis ofeither observed settlements or the expected number of claims and theaverage cost per claim.The level of prudence adopted for the overall assessment of claimsprovisions corresponds to the 90% quan tile.52012 Registration document and annual financial report - BNP PARIBAS 321