BPCE - 2020 Universal Registration Document

RISK FACTORS & RISK MANAGEMENT

CREDIT RISKS 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 (1) . 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 accumulationof 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 provisions 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; a Debtor Risk Assessment (DRA) system covering all debtors; • 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. 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. The insurance policies also include clauses to modify credit limits during the contract: the credit insurer may reduce or cancel its credit insurance cover for new sales to the debtor concerned. As an exception to this rule, and depending on the policyholder’s expertise, Coface may grant certain policyholders a degree of autonomy in setting credit limits for outstandings not exceeding an amount set in the contract.

Underwriting decisions are made by groups of arbitrators in various underwriting centers, who work in real time and networked through the advanced ATLAS arbitration system. These underwriting decisions are part of the overall risk underwriting policy placed under the responsibility of the Group Arbitration department. The overall quality of the insured receivables portfolio is monitored by an indicator comparing the volume of exposure weighted by the risk assessment to the estimated volume of premiums. This indicator is broken down by geographical area. 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 on December 31, 2020:

€200m and more 5 %

€1 - €100K 8 %

€101 - €200K 5 %

€50m - €200m 9 %

€201 - €400K 6 %

€401 - €800K 8 %

€801 - €1,500K 8 %

€5m - €50m 33 %

€1,500K - €5m 18 %

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. The investment strategy implemented must make it possible to meet the Group’s commitments to its policyholders while optimizing investments and performance within a defined risk framework.

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(1) The instantaneous loss ratio is a weekly indicator used to reconstruct changes in the loss ratio. It is monitored for each region and each country and is the subject of weekly reports within Coface, allowing the arbitrators to monitor the evolution of their portfolio and detect any possible deterioration in order to implement corrective actions at a later date.

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UNIVERSAL REGISTRATION DOCUMENT 2020 | GROUPE BPCE