BPCE - 2018 Registration document

RISK REPORT Non-compliance, security and operational risks

To manage market risk, sources of return have been diversified, namely via investments in new asset classes (funding of the economy, low-volatility equities, etc.). This diversification is governed by a strategic allocation, defined on a yearly basis, that takes into account regulatory constraints, commitments to policyholders and commercial requirements. Credit risk Credit risk is monitored and managed in compliance with Natixis Assurances’ standards and internal limits. At December 31, 2018, 63% of the fixed-income portfolio was invested in securities rated higher than A-. Life insurance underwriting risk The main life insurance underwriting risk is related to the Investment Solutions activity. In an especially low interest-rate environment, the biggest risk is that of fewer redemptions and/or excessive inflows in euro-denominated vehicles, as reinvestments in securities dilute the main fund’s return. Measures have been taken to prioritize unit-linked inflows, such as the creation of unit-linked products and communication campaigns, and a communication campaign targeting customers and the network. Non-life insurance underwriting risk Natixis Assurances’ non-life insurance underwriting risk is predominantly borne by its subsidiary BPCE Assurances: premium risk: in order to ensure that the premiums paid by ● policyholders match the transferred risk, BPCE Assurances implemented a portfolio supervision policy whereby each policy is given a score based on its track record over three years. Factored in are types of claims, number of claims, their cost and other variables specific to the activity in question (degree of liability and bonuses/penalties for auto Insurance, for instance). This supervision policy also helps to detect potential risks arising from large claims, and to arrange adequate reinsurance coverage; risk of loss: each time inventory is taken, an actuarial assessment of ● the reserves for claims to be paid is conducted based on methods widely recognized by the profession and required by the regulator; catastrophe risk: catastrophe risk is the exposure to an event of ● significant magnitude generating a multitude of claims (storms, civil liability risk, etc.). This risk is therefore reinsured either through the government in the event of a natural disaster or an attack, for example, or through private reinsurers, specifically in the event of a storm or a civil liability claim, or through reinsurance pools. Counterparty risk The counterparty risk to which Natixis Assurances is exposed mainly concerns reinsurance counterparties. A sound reinsurer selection process is key to managing this risk:

Natixis Assurances deals with reinsurers that are subject to a ● financial rating by at least one of the three internationally recognized rating agencies, and that have a Standard & Poor’s equivalent rating of A- or higher; reliance on multiple reinsurers ensures counterparty diversification ● and limits counterparty risk. COFACE Through its activities, Coface is exposed to five types of risk: strategic risk, credit risk, financial risk, operational risk and non-compliance risk, and reinsurance risk. The two main types of risk are credit risk and financial risk. Credit risk Credit risk is defined as the risk of loss, due to non-payment by a debtor, of a receivable owed to a policyholder of the Group. Coface manages credit risk through a number of procedures, whose scope includes the approval of the terms of product policies, pricing, monitoring of credit risk hedges and portfolio diversification. Credit risk can be exacerbated due to the concentration of exposure (country, sector, debtor, etc.) and is modeled as premium risk, reserve risk and disaster risk. Traditionally, Coface makes a distinction between frequency risk and event risk: frequency risk represents the risk of a sudden material increase in ● delinquency by a large number of debtors. This risk is measured for each region and country by monitoring the instantaneous loss ratio (1) and the monthly indicator that breaks down the changes in domestic/export credit by DRA (2) and business sector, by acceptance rate on the DRA scale, or by product line (deposit, single risks). As regards exposure and portfolio monitoring, the Group has set up detailed risk oversight based on a sector/country; breakdown. Accordingly, delinquent payments are analyzed weekly by the Senior Management Committee and monthly by Coface’s Underwriting Committee. This risk is mitigated by Coface Re SA reinsurance. Loss ratios for the different underwriting regions are also monitored at the consolidated Coface level; event risk represents the risk of abnormally high losses recorded for ● the same debtor or group of debtors, or of an accumulation of losses for the same country. Event risk is covered by Coface Re SA reinsurance. In addition to weekly and monthly monitoring of each region and country, Coface has implemented a system based on: the centralization of reserves for claims exceeding a certain amount ● per debtor which are then analyzed ex-post to improve the information, underwriting and collection activity’s performance; oversight of underwriting risk, which, above a given level of ● DRA-based outstandings, generates an approval and the establishment of an overall budget by Coface’s Underwriting department; and a DRA-based risk assessment system covering all debtors. ●

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The instantaneous loss ratio is a weekly indicator that reproduces the change in the loss ratio. It is monitored for each region and each country and is reported weekly by Coface, particularly (1) so that underwriters can monitor the change in their portfolio and detect any deterioration in order to introduce corrective actions as early as possible. Debtor Risk Assessment: Assessment of debtors using a Group-wide scale. (2)

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Registration document 2018