BPCE - 2019 Universal Registration Document

RISK REPORT

OPERATIONAL RISKS

CREDIT RISK Credit risk is defined as the risk of loss, due to non-payment by an obligor, 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 exposures (countries, sectors, obligors, etc.). Traditionally, Coface makes a distinction between frequency risk and event risk: frequency risk is the risk of a sudden material increase in • delinquency by a large number of obligors. This risk is measured for each region and country by monitoring the instantaneous loss ratio. As regards exposure and portfolio monitoring, the Group has set up detailed risk oversight. Accordingly, delinquent payments are analyzed weekly by the Senior Management Committee and monthly by Coface’s Underwriting Committee. Loss ratios for the different underwriting regions are also monitored at the consolidated Coface level; event risk is the risk of abnormally high losses recorded for • the same obligor or group of obligors, 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 obligor, which are then analyzed ex-post to improve the performance of the information, underwriting and collection business; oversight of underwriting risk, which, above a given level of • Debtor Risk Assessment (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 obligors. • DIVERSIFICATION OF THE CREDIT RISK PORTFOLIO Coface maintains a diversified credit risk portfolio, in order to minimize the risk of debtor default, a slowdown in a given business sector, or an adverse event in a given country having a disproportionate impact on its overall loss ratio. Insurance policies also contain clauses allowing credit limits to be changed mid-contract. Furthermore, the fact that the great majority of Coface’s risks is short-term (95% of total outstandings) allows it to reduce the risk covered for an obligor or group of obligors relatively quickly and to anticipate a decrease in their solvency.

Level 2 controls are set up to ensure that the Group’s credit risk standards are observed. The following chart analyzes the breakdown of obligors by total credit risk exposure incurred by Coface at December 31, 2019:

€200m and more 5.5 %

€1 - €100k 7.2 % €101 - €200k 4.7 %

€50m - €200m 8.4 %

€201 - €400k 6.4 %

€401 - €800k 8.1 %

€801 - €1,500k 8.6 %

€5m - €50m 32.6 %

€1,500k - €5m 18.6 %

FINANCIAL RISK Coface has implemented an investment policy that incorporates the management of financial risk through the definition of its strategic allocation, regulations governing insurance companies and constraints related to the management of its liabilities. Management of financial risks is thus based on a rigorous system of standards and controls which is regularly reviewed: interest rate risk and credit risk: the majority of Coface’s • allocations are in fixed-income products, ensuring stable and recurring revenues. The modified duration of the bond portfolio has been deliberately capped at 4 and stood at 3.9 at December 31, 2019. Exposures to Greek sovereign debt were once again nil. The Group expanded its international diversification in 2019, mainly in emerging countries, while maintaining exposures to Asia and North America in order to capture higher rates of return and to accommodate the various interest rate hikes or reduce forex hedging costs. Interest rate hedges had been set up in 2018 for some European sovereign debt exposures and were sold in Q1 2019; foreign exchange risk: the majority of Coface’s investment • instruments are denominated in euros. Subsidiaries and branches using other currencies must observe the same principles of congruence. In 2019, Coface systematically set up hedges against the euro in the portfolio combining its European entities, to protect investments in bonds denominated mostly in dollars, Pound sterling, Canadian dollars and Australian dollars;

6

655

UNIVERSAL REGISTRATION DOCUMENT 2019 | GROUPE BPCE