SOLVENCY AND FINANCIAL CONDITION REPORT SFCR BNP PARIBAS CARDIF GROUP

Transcription

1 SOLVENCY AND FINANCIAL CONDITION REPORT SFCR BNP PARIBAS CARDIF GROUP December 31, 2017

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3 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER A. BUSINESS AND PERFORMANCE... 7 A.1 Business and significant event of the period... 7 A.1.a Business... 7 A.1.b General information... 8 A.2 Summary of BNP Paribas Cardif results... 9 A.2.a Gross written premiums evolution A.2.b Evolution of the current operating income from insurance activities A.2.c Financial investment management B. SYSTEM OF GOVERNANCE B.1 General information on the system of governance B.1.a Board of directors B.1.b Special committees of the Board of directors B.1.c Chair of the Board of directors and Executive Management B.1.d Operational governance bodies B.1.e Key functions B.1.f Remuneration policy B.1.g Director charter B.2 Competency and integrity requirements B.3 Risk management system B.3.a Risk management global framework B.3.b Key risk management processes B.3.c Management of risk categories B.4 Internal assessment of risks and solvency B.4.a Process for determining the risk profile B.4.b ORSA report B.5 Internal Control System B.5.a Organisation of internal control B.5.b Key Internal Control procedures B.6 Internal Audit Function B.7 Actuarial Function B.8 Sub-contracting B.8.a Sub-contracted activities B.8.b Sub-contracting governance B.8.c Control system B.9 Suitability of the governance system C. RISK PROFILE C.1 Underwriting risk C.1.a Definition C.1.b Risk exposure C.1.c Concentration C.1.d Risk management and monitoring C.1.e Stress tests and sensitivity analyses C.2 Market risk C.2.a Definition C.2.b BNP Paribas Cardif group financial investments C.2.c Risk exposure... 41

4 4 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 C.3 C.4 C.5 C.2.d Concentration C.2.e Risk management and monitoring C.2.f Stress tests and sensitivity analyses Counterparty risk C.3.a Definition C.3.b Risk exposure C.3.c Concentration C.3.d Risk management and reduction Liquidity risk C.4.a Definition C.4.b Risk exposure C.4.c Risk management and reduction C.4.d Sensitivity Operational risk C.5.a Definition C.5.b Risk exposure C.5.c Risk management and reduction D. VALUATION FOR SOLVENCY PURPOSES D.1 D.2 D.3 D.4 D.5 D.6 Balance Sheet at 31 December Scope of consolidation Assets valuation methods Valuation methods for liabilities D.4.a Valuation methods for technical provisions D.4.b Valuation methods for other liabilities Alternative valuation methods Other information E. CAPITAL MANAGEMENT E.1 E.2 E.3 E.4 E.5 Own funds E.1.a Objectives and policy for own funds management to cover the SCR and the SCR Group Minimum E.1.b Highlights of financial year E.1.c Structure, amount and quality of own funds E.1.d Classification of own funds excluding transitional measures Regulatory capital requirements (SCR and SCR Group Minimum) E.2.a Amounts of SCR and SCR Group Minimum E.2.b Information on the data used for calculating the SCR Group Minimum E.2.c Amount of SCR per risk module E.2.d Coverage ratios E.2.e Use of Undertaking Specific Parameter (USP) Calculation option taken for calculating the SCR (article 305b) Differences between the standard formula and the internal model Non-compliance with SCR and SCR Group Minimum... 63

5 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER INTRODUCTION This Solvency and Financial Condition Report concerns BNP Paribas Cardif group. It is based on the results of the assessment according to the Solvency II standard for the year 2017, submitted to the Board of directors on 14 June The requirements relating to the solvency and financial condition report are set forth in the delegated Acts, adopted by the European Commission on 10 October They provide details as to the contents, structure and methods for releasing reports: Art. 290 to 292: Definition of the structure, relative importance and digest Art. 293: Business and performance Art. 294: System of governance Art. 295: Risk profile Art. 296: Valuation for solvency purposes Art. 297: Capital management The report contains both qualitative and quantitative descriptive information, supplemented if need be by quantitative reporting templates. The data is usually presented in millions of euros. They can be disclosed in billions of euros whenever relevant. Caution The data disclosed in this report are not audited. This report can include forward-looking statement based on current beliefs and expectations about future events. The value of the technical reserves thus relies on long term cash-flow projections, and requires the formulation of assumptions and the use of models. This exercise implies the appreciation and the use of information available at the date of computation. As such, technical reserves include a measure of uncertainty. As a consequence, no guarantee can be given regarding the outcome of these previsions which are subject to inherent risks, uncertainties and assumptions about BNP Paribas Cardif, its subsidiaries and investments, as well as changes in economic conditions and general financial situation. The information contained in this presentation as it relates to parties other than BNP Paribas Cardif or derived from external sources has not been independently verified. No representation, warranty or engagement is given regarding their accuracy or completeness. The responsibility of BNP Paribas Cardif or one of its subsidiaries may not be engaged.

6 6 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 SUMMARY Business and performance Gross written premiums of the BNP Paribas Cardif group amounted to 22.2 billion at 31 December 2017, up 10% compared to 2016, with a stable distribution between Savings and Protection businesses, which represented respectively 76% and 24%of the total amount. The rate of return on financial assets was 3.53% in 2017 in France, up 12 basis points compared to As at 31 December, 2017, the policyholder participation benefit reserve amounted to 4 billion, representing close to 5% of mathematical reserves. System of governance BNP Paribas Cardif is a public limited company with a board of directors within which the functions of Chairman and Chief Executive Officer are separated. The internal control framework is based on BNP Paribas Group framework, supplemented with the requirements relating to Solvency II. Thus, the functions of control of the insurance activities (Compliance, Risk Management and Internal Audit) are placed under the authority of the BNP Paribas Group functions. The head of those key functions continue to report hierarchically to BNP Paribas Cardif Executive Management. Risk profile The Solvency Capital Requirement (SCR) is up 7% compared to 2016, mainly driven by the increase of the market risk of Cardif Assurance Vie. The market solvency capital required stood at 6,288 million and represents 64% of the basic solvency capital required before diversification. It is up to 9% compared to 31 December 2016, increase mainly due to the rise of the equities shock. Valuation for Solvency purposes As of 1 st January 2017, the consolidated financial statements of BNP Paribas Cardif group are prepared under IFRS. BNP Paribas Cardif prepares its consolidated balance sheet under Solvency II pursuant to Article 75 of the Solvency II directive, i.e. mainly in market value. Capital management The Capital Management Policy of BNP Paribas Cardif aims notably to ensure that the prudential solvency requirement are met, to cover at least at 100% the SCR defined within the scope of the ORSA assessment and to structure own funds so that the best balance can be found between the share capital, subordinated debt and other own funds elements, complying with the limits and levels laid down by regulations. As at 31 December 2017, eligible own funds to meet the SCR stood at 12,061 million. The amount of SCR was 7,696 million and the coverage ratio was 157%. Eligible own funds to meet the SCR Group minimum amounted to 9,036 million. The amount of SCR Group Minimum was 3,548 million and the coverage ratio was 255%.

7 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER A. Business and performance A.1 Business and significant event of the period A.1.a Business For over 40 years, BNP Paribas Cardif has designed, developed and marketed savings and protection products and services to insure people, their projects and their assets. With more than 100 million insurance customers in 35 countries, BNP Paribas Cardif provides saving solutions to build and grow capital but also prepare for the future, through guaranteed capital products, unit-linked funds, or Euro-growth contracts. As the world leader in credit protection insurance, BNP Paribas Cardif has extended its protection offering to include health insurance; budget insurance, income protection, and means of payment insurance, protection against unforeseeable events (unemployment, injury, death, theft, or breakage); and personal data protection, to meet consumers changing needs. Building on a unique business model, BNP Paribas Cardif co-creates its products and services with more than 500 of the BNP Paribas Group s internal and external distribution partners. This multi-sector partner network comprises banks, credit institutions, financial institutions, car manufacturers, retailers, telecoms, brokers and independent wealth management advisers. To better serve its distribution partners and insurance customers, the insurer, which has close to 8,000 employees, has adopted a structure based on domestic markets, international markets and central functions. BNP Paribas Cardif occupies strong positions in Europe, Asia and Latin America: Domestic markets comprise France, Italy and Luxembourg. International markets cover all activities of BNP Paribas Cardif in: Europe, domestic markets excluded, comprising Northern Europe (Denmark, Norway and Sweden), Central Europe (Bulgaria, Czech Republic, Hungary, Netherlands, Poland, Romania, Slovakia) and Continental Europe (Austria, Belgium, Germany, Portugal, Spain and United-Kingdom) ; Latin America : Argentina, Brazil, Chile, Colombia, Mexico, and Peru; Asia : China, India, Japan, South Korea, Taiwan and Vietnam; Other countries: Algeria, Russia, Turkey and Ukraine.

8 8 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 A.1.b General information Since the general assembly that took place on 6 March 2012, BNP Paribas Cardif share capital amounts to 149,959, composed of 62,482,938 shares with a 2.40 capital. BNP Paribas Cardif capital is mainly held by BNP Paribas (62,482,937 shares). One share is held by Antin Participation 5. BNP Paribas Cardif did not issue options giving right to subscribe for shares. BNP Paribas Cardif financial statements are audited by the following audit firms: BNP Paribas Cardif is supervised by the Autorité de Contrôle Prudentiel et de Résolution (ACPR), located 61 rue Taitbout à Paris.

9 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER A.2 Summary of BNP Paribas Cardif results The following figures are from the consolidated financial statements of BNP Paribas Cardif prepared according to International Financial Reporting Standards. In millions of euros Year to 31 Dec Year to 31 Dec Gross written premiums 22,188 20,133 Change in unearned premiums Gross earned premiums 22,049 20,057 Income from other activities Investment income 4,541 4,688 Investment expense Gains and losses on disposed invested assets, net of depreciation and amortisation reversals Share of earnings of equity-method investment entities Net change in investments at fair value through profit or loss 3,624 1,050 Net change in investments impairment Investment income excluding financing expense 8,052 5,432 Technical charges related to contracts -24,789-20,368 Net result from ceded reinsurance Expenses from other activities Acquisition costs on contracts -2,796-2,645 Depreciation on acquired portfolio Administration expenses -1,223-1,149 Other current operating income and expenses 13-4 Other current income and expenses -29,008-24,489 Other non-current operating income and expenses Pre-tax operating income 1,488 1,030 Financing expenses Share of earnings of equity-method entities Corporate income tax NET CONSOLIDATED INCOME 1, Net income attributable to minority interests - 4 Net income attributable to equity shareholders 1,

10 10 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 A.2.a Gross written premiums evolution The variations presented below are at constant scope and exchange rates. Gross written premiums of the BNP Paribas Cardif group amounted to 22.2 billion at 31 December 2017, up 10% compared to 2016, with a stable distribution between the Savings and Protection businesses, which represented respectively 76% and 24% of the total amount. Savings Savings gross written premiums amounted to 16.8 billion, up 11% compared to Gross written premiums in France, totaling 11.3 billion, increased by 13% compared to The unit-linked inflows represented 30% of the overall inflows (26% in 2016), sustained by the favorable stock market conditions. Italy recorded savings gross written premiums of 3.8 billion, down by 3% compared to The general fund inflows of the BNP Paribas Cardif Italian subsidiary have slowed down in line with its risk policy. The unit-linked inflows went on growing (+44% compared to 2016). In Asia, the inflows amounted to 1.8 billion in 2017 versus 1.3 billion in 2016 (+36%). Taiwan recorded gross written premiums of 1.6 billion, out of which 99% were generated by unitlinked inflows, an increase of 39% due to the introduction of new products and more favorable stock market conditions. South Korea gross written premiums increased by 15% in saving activities, and amounted to 196 million. Protection BNP Paribas Cardif is pursuing its development strategy in protection. This segment represented 24% of the activity and recorded a gross written premium of 5.4 billion, up 6% compared to Gross written premium in France amounted to 1.3 billion, up 4% compared to 2016, primarily due to creditor insurance which represented 60% of the protection business in France. This activity includes also personal protection, standing for 21% of the overall gross written premiums, payment instruction protection, home protection, car protection, and car extended warranty distributed by Icare Assurance. Gross written premium in Italy totaled 471 million, up 8% compared to 2016, due to the rise in creditor insurance premium, mainly issued from the BNL partnership. The gross written premium in protection generated in the other Europe area amounted to 1.3 billion (+4%). This growth stemmed from the development of the creditor insurance primarily in Germany, Spain and Belgium. Latin America gross written premiums amounted to 1.5 billion, up 10% compared to Chile, first historical market of BNP Paribas Cardif in Latin America, continued to grow and recorded a 10% increase in gross written premiums compared to the previous year. Colombia and Brazil gross written premiums were also in progress, up respectively by 7% and 13% compared to Asia gross written premiums in protection amounted to 604 million, registering a 10% growth. Japan is the most important contributor on this geographical area thanks to its creditor insurance activity. The gross written premiums were up 9% over the year. Taiwan recorded a 17% growth in its gross written premiums, in line with the growth of the mortgage creditor insurance.

11 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER A.2.b Evolution of the current operating income from insurance activities The consolidated current operating income from BNP Paribas Cardif's insurance business line is broken down as follows: Variation at historical rate % at historical rate in million Technical margin 3,552 3, % Financial Margin 2,048 2, % Other margins % Total margins from insurance activities 5,543 5, % Acquisition expenses -2,611-2, % Administration expenses -1,216-1, % Other expenses from insurance activities % Total expenses from insurance activities -4,272-4, % Current operating income from insurance activities 1,271 1, % Taking into account the current operating income of non-insurance activities ( 217 million), the current operating income of BNP Paribas Cardif amounted to 1,488 million in The operating income from insurance activities amounted to 1,271 million, 62% of which came from the savings activities, which showed a 4% growth. The operating income from the protection business amounted to 489 million, and remained stable compared to Savings The current operating income of the savings business amounted to 794 million as at 31 December 2017, up 4% compared to 2016, driven by a 3.5% margin growth compared to an evolution of costs limited to 3.2%. The current operating income from the insurance business in France amounted to 657 million, recording a 12% decrease mainly explained by a lower financial margin. The increase in the financial assets return made it possible to reinforce the general fund reserves by taking the policyholder participation benefit reserve to 4 billion. The operating income from Italy amounted to 95 million, up by 77 million over the year. Operating income from the savings business in Asia amounted to 48 million, up by 37 million in 2017, mainly explained by the increase in unit-linked in Taiwan, and the drop in 2017 rates in Korea. Protection In 2017, the income from the protection activities amounted to 489 million, stable compared with 2016, with a slightly rise of the technical margin (8%) and an evolution of the insurance costs in line with the development of the activity of this segment. The protection activities represented 39% of BNP Paribas Cardif's current operating income from insurance activities. The current operating income from the protection business in France amounted to 106 million in 2017 compared to 74 million in This increase is explained by the combined effect of the growth in creditor insurance earned premiums and the improvement in claims.

12 12 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Current operating income from the protection business in Italy was down by 11 million, amounting to 40 million at the end of 2017; as a result of higher acquisition costs partially offset an increased technical margin. The current operating income of countries from the Rest of Europe segment amounted to 137 million in 2017, versus 152 million in Latin America current operating income amounted to 117 million, to compare with 123 million in The technical margin increased by 14%, mainly explained by the business growth in Brazil, Chile and Argentina and the improvement of claims experience in Brazil and Colombia. Expenses from insurance activities increased by 15% in 2017, in line with the business development and the transformation projects initiated through the 2020 plan. Operating income of the Asia zone amounted to 63 million, against 66 million in 2016, due to the adverse exchange rates developments, especially in Japan.

13 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER A.2.c Financial investment management The market value of the financial investments of BNP Paribas Cardif as of December 31, 2017, excluding unit-linked investments, amounted to 155 billion, of which 125 billion for Cardif Assurance Vie and 21 billion for Cardif Vita. France Via its main general fund, Cardif Assurance Vie managed 111 billion 1 at market value, distributed as follows, according to Solvency II categories: exposure in millions of euros market value* December 31, 2017 December 31, 2016 Fixed rate 80,120 77,628 of which government bonds 42,682 42,281 Variable rates and inflation indexed 6,982 6,573 of which government bonds 1,130 1,294 Equity-linked notes and convertible bonds 2,032 2,567 Equities and UCIT equities 11,573 11,478 Alternative funds 1,693 1,770 Real estate 8,423 7,871 Hedging instruments TOTAL 111, ,113 * Accrued interest included, amount net of payables representative of securities sold under agreement At market value, the proportion of fixed rate investments in the portfolio of Cardif Assurance Vie s main general fund was slightly up and amounted to 72.1% at end 2017 versus 71.8% at end Variablerate bonds and inflation indexed bonds increased moderately from 6.1% at end 2016 to 6.3% at end At 31 December 2017, securities rated AA represented 36% of the value market of the bonds of Cardif Assurance Vie s main general fund. 28% were rated BBB, 25% were rated A, 8% were rated AAA and securities rated under BBB or non- rated securities represented 3%. French government bonds represented 52% of the total amount of the market value of government bonds of Cardif Assurance Vie s main general fund, Italy 13%, Belgium 8% and Spain 8%. Government bonds were favoured by their financial performance, liquidity and duration contribution to the portfolio. Most corporate bonds are invested in industrial and financial companies. The rate of return on financial assets was 3.53% in 2017, up 12 basis points compared to Mostly composed of bonds interests, the performance of Cardif Assurance Vie s general fund is impacted by the low rate environment. Nevertheless, the profit takings realized at the beginning of the year 2017 on European equities and the good level of the dividends issued from the equities portfolio have more than offset the decrease of the coupon return of interest rate products. As at 31 December, 2017, the policyholder participation benefit reserve amounted to 4 billion, representing 5% of mathematical reserves. 1 Accrued interest included, amount net of payables representative of securities sold under agreement

14 14 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Italy The BNP Paribas Cardif group managed, through its subsidiary Cardif Vita, 19.4 billion 2 in market value, distributed as follows, according to Solvency II categories: exposure in millions of euros market value* Decem ber 31, 2017 Decem ber 31, 2016 Fixed rate 15,694 15,413 of which government bonds 10,546 10,565 Variable rates and inflation indexed 1,313 1,251 of which government bonds Equity-linked notes and convertible bonds Equities and UCIT equities 1,546 1,382 Alternative funds Real estate TOTAL 19,409 18,746 * Accrued interest included, amount net of payables representative of securities sold under agreement At end 2017, the proportion of fixed-income securities decreased slightly to 81% of the total assets, compared to 82% at end The directly held bond portfolio comprised 64% of government and similar bonds, including close to 90% of Italian government bonds at market value. Variable rates and structured securities remained stable at 8.7%, the indexation on long-term rates, as CMS 10 years, have been favoured. At end 2017, equities and convertible bonds represented 8.9% of the portfolio at market value, up 7.8% compared to Overall, 60% of the equity risk positions are held in active management funds (equities, convertibles, alternative and Private equity), slightly up compared to 2016 (58%), 27% of the positions through ETF and the remaining 13% are direct ownership of European equities only. The proportion of short-term investments, with a less than one year maturity, was reduced from 1.9% to 1.5% of the portfolio. In addition to these movements, Cardif Vita maintained its diversification policy adding to the traditional rate instruments, high-yield bonds funds, loan funds and emerging countries debt funds. Those investments completed traditional assets as they benefit from a certain decorrelation while delivering attractive returns. The proportion of those investments in the portfolio increased from 0.5% to 5.1%. Cardif Vita s portfolio mainly consisted of BBB rated bonds given the high proportion of Italian government bonds. The portfolio contained no instruments with a rating lower than BB+. Cardif Vita s investments policy consisted, on one hand, of reducing the exposure to Italian government securities, which amounted to only 28% of net bond purchases in 2017, and on the other hand, of strengthening exposure to Investment Grade corporate paper with long maturities. The rate of return on financial assets of the main general fund of Cardif Vita is impacted by the low rate environment. It amounted to 3.06%, down by 16 basis points compared to Accrued interest included, amount net of payables representative of securities sold under agreement

15 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER B. System of governance B.1 General information on the system of governance BNP Paribas Cardif is a public limited company with a board of directors, within which the functions of Chairman and Chief Executive Officer are separated. It does, however, rely to a very large extent on the human, IT and operational shared resources of the Economic Interest Group (EIG) BNP Paribas Cardif. The chart below introduces the organisation set up as of 31 December 2017: B.1.a Board of directors The Board of directors defines the strategic orientations and supervises their implementation. It plays a major part in the controlling and supervision of the management of the company. The Board of directors closes the accounts and ensures the quality of the financial information delivered to the shareholders and the market. The Board of directors is involved in the process for the internal assessment of risks and solvency definition and validates the written policies submitted for approval. The Board of directors is responsible for appointing and removing executive directors whose acts it supervises. It may carry out or have carried out audits of the governance system which it deems appropriate and monitors the quality of information provided to shareholders. It approves the various reports required as well as written policies, pursuant to Article R of the French Insurance Code. The decisions of the Board of directors are implemented by the Executive Management or by any special delegate designated by the Board.

16 16 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 The Board meets at least three times a year and whenever the Company's circumstances or interest so require. Prior to Board meetings, the directors are provided with whatever information enables them to perform their duties under the appropriate conditions. During 2017, the Board of directors of BNP Paribas Cardif met on six occasions (with an average attendance rate of 90%). B.1.b Special committees of the Board of directors The Board of directors of BNP Paribas Cardif is assisted by special committees: the ALM and Insurance Risk Management Committee, the Accounting and Audit Committee, and the Appointments and Compensation Committee. Those Committees have a role of guidance and supervision. They issue suggestions, recommendations or opinion on their area of expertise, to the Board of directors of BNP Paribas Cardif and, as needed, to the Board of Directors of the French insurance subsidiaries. Each Committee reports on its actions periodically and at least once a year. The task of the ALM and Insurance Risk Management Committee of BNP Paribas Cardif is to ensure the efficiency of the risk management system. It reviews the general risk policy and monitors all of the risks of the BNP Paribas Cardif Group. It considers the assets allocation strategy of the main general funds and stays informed of the orientations set out for the asset management strategy. For financial management matters, the Committee examines each financing transaction project, which could significantly modify the financial structure of the BNP Paribas Cardif group and on a wider scale every matter impacting the solvency and the capital management. The Accounting and Audit Committee of BNP Paribas Cardif main task is to follow the preparation process of the financial information and the completion by the Auditors of their statutory auditing assignment The Committee also oversees their independence. In this respect, the Committee has adopted an independence policy in which the validation rules and the list of authorized and prohibited missions are defined. The Committee ensures the efficiency of the permanent control and operational risk management framework. The Committee monitors the activity of the Internal Audit and Compliance functions. In 2018, the overseeing of the efficiency of the permanent control and operational risk management framework, which was previously ensured by the Accounting and Audit Committee, has been added to the mission of the ALM and Insurance Risk Management Committee of BNP Paribas Cardif. The Appointments and Compensation Committee is in charge of recommending candidates suitable for serving as directors to the Board of directors. The Committee is involved in the considerations on recruitment, promotion and non-renewal of senior executives and more widely on questions about the appointment of executive directors and heads of key function. Its opinions are drawn up in accordance with the principles defined in the Fit and Proper policy and the director charter. Also falling within its remit are the study and approval of the remuneration policy (principles, scope, compensation components, conditions for allocation and payment methods) and the study of its implementation.

17 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER B.1.c Chair of the Board of directors and Executive Management With the appointment of three new executive directors, Pierre de Villeneuve is acting as non-executive chairman of the Board of directors since April As such, he oversees the proper functioning of the Board, the quality and the relevance of information communicated to the directors. Pierre de Villeneuve advises the Executive Management on strategic, financial or organizational matters. The Executive Management comprises the Chief Executive Officer and the Deputy Chief Executives, three of whom have been appointed executive directors on the 3 rd of April The Chief Executive Officer outlines strategic orientations to the Board of directors and implements the strategy to achieve those objectives. He defines an organization and decision-making processes and sets up a risk management and internal control system. He reports regularly to the Board of directors. The Deputy Chief Executives, each on their own scope of responsibility, carry on the strategic orientations, organize, manage and oversee teams and operations to achieve their objectives. They implement the risk management and internal control systems. The Deputy Chief Executives report to the Chief Executive Officer. The executive management is responsible for the efficiency of the operational governance, which it sets up to organize the flow of information, to shape the decision-making processes and to ensure the oversight of risks and internal control. An Executive Management Committee, comprised of the Chief Executive Officer and the Deputy Chief Executives, rounds off the governance of BNP Paribas Cardif since March 1 st,2018. This Committee makes strategic decisions. B.1.d Operational governance bodies The Executive Committee of BNP Paribas Cardif is involved in the elaboration of strategic orientations and in the decisions necessary to implement them. It oversees the company's results and financial balances, examines all major commercial operations, development and transformation projects, and matters relating to human resources. It pays particular attention to the monitoring of the internal control, internal audit and risk management systems efficiency, which are considered to be vital to the company's smooth internal governance. As at 31 December 2017, The Executive Committee comprises fourteen members, six of whom are women. Tactical and supervisory committees are now part of the Executive Committee. Tactical committees are decision-making bodies, carrying out technical analysis before risks are taken. Supervisory Committees monitor and coordinate internal control and risk management systems. The system for delegating general powers is structured around delegate bodies which can make thirdparty commitments on behalf of BNP Paribas Cardif for day-to-day operations, in other words, normal operations for the Company, entered into under normal market conditions. These delegations of powers do not concern operations falling within the management of assets or personnel in France, which are governed by dedicated powers.

18 18 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 B.1.e Key functions The Solvency II regulations as applied within the BNP Paribas Cardif Group define the four key functions as follows: the Risk Management Function, in the hands of the RISK Division, assists the Executive Management and other functions in implementing the risk management system, monitoring and controlling the adequation between risk profile and risk appetite as determined by the Board of directors. It reports on exposures to risks and assists the Board of directors in the taking of strategic decisions by shedding light on issues related to risk management. The Risk Management Function is also responsible for devising, maintaining and validating models, through close cooperation with the Actuarial function. the Compliance Function, in the hands of the Control and Compliance Division, specifically has the global responsibility to provide the Executive directors and the Board of directors with reasonable assurance that the risks of non-compliance, the risks of regulatory and reputation are duly identified, monitored, controlled and mitigated; the Audit Function, in the hands of the Internal Audit Division, is responsible for assessing the suitability and effectiveness of the internal control system as well as the other components of governance; the Actuarial Function, in the hands of Actuarial Division, has responsibility for co-ordinating the calculation of technical provisions, guaranteeing the appropriate nature of methodologies, the underlying models and assumptions used to calculate prudential technical provisions, assessing the suitability and the quality of the data used, supervising this calculation and comparing the best estimates with empirical observations, informing the Board of directors on the relevance and the adequacy of the technical provisions computation, expressing an opinion on the underwriting and reinsurance policies, and contributing to the risk management framework. As with executive directors, each of the officers heading these key functions must conform to a review of his or her integrity and competence and be notified to the French Prudential Supervision and Resolution Authority ("ACPR") when appointed or renewed. Pursuant to Solvency II regulations, the heads of key functions are entitled to direct access to the Board of directors in the event of a major risk or a serious malfunction of such nature as to jeopardise the directors' liability or the proper running of the Company. The heads of the RISK and Compliance and Internal Control functions of BNP Paribas Cardif report hierarchically both to the Executive Management of the BNP Paribas Cardif group and to the heads of the corresponding functions of the IFS operational division. The head of the Audit function of BNP Paribas Cardif reports hierarchically both to the Chief Executive Officer of BNP Paribas Cardif group and to the head of the corresponding BNP Paribas Group function. This organisation helps to strengthen the independence of these functions and the homogeneity of the organization of the insurance group. Should a disagreement arise between the Executive Management of BNP Paribas Cardif and the head of the Group function concerned, the Board of directors is called upon to arbitrate. At least once a year, the heads of key functions are also invited to attend a meeting of the Board of directors, or any of its special committee, on issues of risk related to their function.

19 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER B.1.f Remuneration policy The remuneration policy is based on the principles of fairness and non-discrimination and on an annual review process for fixed and variable compensation. It is in line with the BNP Paribas Group remuneration policy. The method used to determine individual variable compensation includes a quantitative and qualitative review of each individual sustainable performance measured relative to the objectives set, an appraisal of one s professional conduct in terms of respect for the Group s core values, team spirit, compliance rules, Code of Conduct, and procedures, as well as their contribution to risk management (including operational risks). The compensation of executive corporate officers is based on proposals forwarded by BNP Paribas Cardif Appointments and Compensation Committee. The compensation of executive corporate officers comprises: a fixed component; an annual variable component; and a long-term compensation component which forms a multi-annual variable component. The levels of these different elements are determined using market benchmarks based on surveys of executive remuneration established by specialised firms. BNP Paribas Cardif Executive Corporate officers are not remunerated for their social mandate within the Company and they benefit solely from the set-contribution supplemental pension system (article 83 of the French General Tax Code) provided for the benefit of all EIG BNP Paribas Cardif employees. The Chairman of the Board of directors also benefits from a supplemental pension scheme relating to his past functions within the Compagnie Bancaire group. The Chairman of the Board of directors and the Chief Executive Officer are entitled to the same flexible welfare benefits, namely death and disability cover together with the common healthcare benefit scheme, as all the other employees and corporate officers of EIG BNP Paribas Cardif. They also have the benefit of the applicable Work, Accident, Death and disability insurance plan which provides insurance cover for all employees of EIG BNP Paribas Cardif. The Chief Executive Officer is also entitled to the supplemental mechanism set up for members of the BNP Paribas Group's Executive Committee. B.1.g Director charter In 2016, the Board of directors has adopted a Director Charter which defines the principles and rules applicable to BNP Paribas Cardif directors. It is a complement to the Code of Conduct of BNP Paribas Group. The directors have committed to sign annually a statement of compliance with the Charter according to which they declare to act loyally in the best interest of the Company and the policyholders, to notify to the Chairman of the Board of directors and to the Head of Compliance any situation that could affect the valuation of their honourability and to declare any conflict of interest, real or potential. No conflict of interest was reported by the Directors in 2017.

20 20 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 B.2 Competency and integrity requirements The Board of directors is the body responsible for the appointment of directors and executive directors. It proposes to the General Assembly the names of candidates for the director function. It conducts deliberations on the basis of the advices communicated by the Appointment and Compensation Committee. The Chief Executive Officer appoints the heads of key functions. He takes into account the advice of the Appointment and Compensation Committee and informs the Board of directors. In case of disagreement with the Head of the integrated function of BNP Paribas Group (RISK, Compliance, Audit); the decision will be taken as a last resort by the Board of directors of the insurance organization. The competency and integrity of executive directors and heads of key functions are subsequently reviewed on an annual basis as part of the professional valuation process. Executive directors and heads of key functions are appointed in consideration of their qualities and skills, assessed on the basis of their diplomas and professional qualifications, their knowledge and their relevant experience in the insurance sector or in other financial or corporate sectors. Over and above competencies in their own field of expertise, the heads of key functions must have the people skills and managerial skills required for overseeing their function. In particular, they have every ability to clarify technical knowledge in order to pass on relevant information to executive directors and members of the Board of directors. The executive directors and heads of BNP Paribas Cardif key functions possess, both individually and collectively and in terms of professionalism and integrity, the expertise, experience, skills, understanding and personal qualities necessary to perform their duties in an efficient manner for each of the major activities of BNP Paribas Cardif by ensuring effective governance and supervision.

21 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER B.3 Risk management system B.3.a Risk management global framework Risk management is a process that allows to identify, gauge, monitor, manage and report on the risks arising from both outside BNP Paribas Cardif and intrinsically from within. The objective is to guarantee the solvency, the continuity of business and the development of BNP Paribas Cardif under satisfactory conditions of risk and profitability. The risk management framework is organised around the Risk Manager and his or her division (RISK). RISK continuously performs a second line control over the credit, market, underwriting and operational risks. As part of this role, it must ascertain the soundness and sustainability of the business developments and their overall alignment with the risk profile target set by Executive Management. RISK s remit includes formulating recommendation on BNP Paribas Cardif s risk policies (with regard to insurance underwriting and provisioning, asset and liability management, investments, liquidity, concentration, management of operational risks and reinsurance), in analysing the risk portfolio with a forward-looking perspective, in guaranteeing the quality and efficacy of monitoring procedures, and in determining or validating risk measurement methods. RISK is also responsible for ensuring that all the risk implications of new businesses or products have been adequately assessed. As of 2015, RISK is also responsible for these functions for operational risk. The Risk Director is responsible for advising Executive Management and the Board of directors over governance, policies and risk management strategy. He or she is a voting member of the risk or approval committees at Executive Management level and gives a prior opinion on decisions that have a significant impact on risks for the BNP Paribas Cardif, applying the "second pair of eye" principle. He or she is responsible for implementing Solvency II regulations and in this context is responsible for developing models, tools and internal and statutory reports on risk management and solvency. He or she is an integral part of the internal control system (cf. B.5). In particular, the risk management framework revolves around key processes for the RISK Division and around risk categories that may be operationally managed by other Divisions but for which RISK provides a second pair of eyes. Since 2017, data protection control is realized at BNP Paribas group level both by RISK and ETO division. A data protection officer has been appointed for BNP Paribas Cardif Group. He operates hierarchically under the authority of RISK and ETO and reports to those two functions. His/her role is to ensure the consistency between the first level of defense and the second level of defense. B.3.b Key risk management processes Risk strategy process RISK advises the Executive Committee and the Board of directors for risk management strategy. Through its risk policies, the division proposes a declination of the risk appetite. RISK determines the limits and thresholds for risk exposure and gauges the appropriate adequacy of the risk profile and the risk appetite. Every year, RISK draws up and presents to the Executive Committee a map chart of the major risks to which BNP Paribas Cardif is exposed.

22 22 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Independent review RISK checks the consistency of each function's governance system with the risk management framework. It provides an independent review at the assessment of risks and, if need be, proposes actions to lower risk exposure. This second pair of eyes is scrutinized whenever necessary for data, tools, methods and results. Risk modelling BNP Paribas Cardif has to have the necessary projection skills in order to assess risk and solvency indicators as per the Solvency II framework, to build its economic assessment, to study asset and liability management, and to conduct stress tests. RISK provides the main models and tools incorporated into a global technical architecture, with the help of a shared international platform. Specific committees for choosing and monitoring developments are set up and detailed documentation on the process is implemented in order to facilitate the understanding of results produced by models, and the identification and monitoring of limitations affecting choice of methodology. Stress tests To ensure dynamic risk supervision and management, the BNP Paribas Cardif group has developed a stress test mechanism. The stress test framework is an integral part of the risk management system. It aims at identifying the behaviour of statutory results, solvency and the value indicators in more or less favourable hypothetical contexts, at gaining a better understanding of the nature of the risks to which the BNP Paribas Cardif group is exposed, and at improving anticipation of critical situations. Stress tests are carried out at different stages of the risk management cycle: when setting the risk appetite level, when taking, assessing, reducing, controlling and reporting risks. Further to stress tests, action plans are drawn up in order to realign, if need be, risk exposure with risk strategy. Capital management BNP Paribas Cardif Group's capital management policy aims to ensure an optimised and sufficient capital structure, to satisfy prudential requirements and to guarantee adequate financial resilience. The Finance Function is responsible for capital management, with a strong interaction with RISK. To ensure it has sufficient capital, BNP Paribas Cardif applies the following principles: maintaining capital at an appropriate level geared to the Company's activity, its risk profile, growth, strategic initiatives and regulatory requirements; shaping an optimal prudential capital according to the different types of capitals, while abiding by the limits and levels laid down by regulations; forecasting capital requirements and ascertaining their allocation. Own Risk and Solvency Assessment, ORSA Within the framework of the provisions of Article L of the French Insurance Code, every year BNP Paribas Cardif conducts a forward-looking assessment of its solvency and risks, particularly:

23 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER the ascertaining and evaluation of capital requirement specific to the risk profile; the level of capital that BNP Paribas Cardif wishes to hold to cover this specific regulatory capital requirement; the forward-looking solvency ratios within the framework of the medium-term plan; the resilience of these ratios in the event of stress tests. Depending on the solvency ratio levels observed and the forecasts made under ORSA, remedial actions may be undertaken to adjust own capital. Solvency II reporting In accordance with the provisions of Article L355-1 of the French Insurance Code, every year the BNP Paribas Cardif Group sends the Supervisor the regular controller's report and the Solvency and Financial Condition report. Risk culture ure Robust risk management is an integral part of the BNP Paribas Group's makeup. A culture of risk management and risk control has always been one of its top priorities Within BNP Paribas Cardif, RISK thus fills a role of co-ordinating risk culture initiatives by editing the internal web page on Solvency II, by developing and maintaining a training programme for solvency together with the functions involved in the process, and by holding meetings and seminars with market players and universities. At the local level, training courses are run by permanent operational controllers to increase awareness of operational risks (in particular fraud, the detection and declaration of incidents, and also for risk mapping tools). Other risk reporting processes In addition to the systems concomitant to the activity of taking and monitoring risks, the prudential work carried out for the application of Solvency II rules has led to specific controls being put in place with special emphasis on evaluating the quality of data.

24 24 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 B.3.c Management of risk categories Management of insurance underwriting risk Underwriting Risk is the risk of a financial loss caused by a sudden, unexpected increase in insurance claims. Depending on the type of insurance business (life, non-life), this risk may be statistical, macroeconomic or behavioural, or may be related to public health issues or disasters. The governance set up to prevent and control insurance underwriting risks in France and internationally is based on the guidelines and tools that describe the principles, rules, methodologies and best practices to be followed by teams of actuaries throughout a policy's life cycle, together with the tasks to be performed and reports to be produced. It also states the practices that are proscribed or allowed only under certain conditions. The Risk underwriting process must comply with delegation limits set at various local and central levels, estimated maximum acceptable losses, estimated Solvency II capital requirements and estimated margins on the policies concerned. The experience acquired in managing geographically diversified portfolios is used to regularly update risk pricing databases comprising a wide range of criteria (such as the type of loan for creditor insurance, the type of guarantee, the population insured, etc.). Each contract is priced in reference to targets established for returns and for capital cost set by the Executive Management of BNP Paribas Cardif. Reinsurance is an additional component of the underwriting risk management system, particularly by limiting individual exposure and the outsourcing of risks that fall neither within the field of preferred risk for BNP Paribas Cardif, nor within its risk appetite. Risk exposures are monitored regularly by BNP Paribas Cardif s Executive Committee in Underwriting Risk Monitoring Committee and Risk Committees, based on a two-prong approach: quarterly monitoring of loss ratios at each accounts closing; and, in addition, the monitoring of the characteristics of the insured portfolio at intervals appropriate to the type of product (monthly, quarterly or yearly). Management of market risk and credit risk Market risk is the risk of a financial loss arising from adverse movements of financial markets. These adverse movements are notably reflected in prices (foreign exchange rates, bond prices, equity and commodity prices, derivatives prices, real estate prices ) and derived from fluctuations in interest rates, credit spreads, volatility and correlation. Liquidity risk is the risk of being unable to fulfil current or future foreseen or unforeseen cash requirements coming from insurance commitments to policyholders, because of an inability to sell assets in a timely manner. Credit risk is the risk of loss or of adverse change in the financial situation, resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which insurance and reinsurance undertakings are exposed, in the form of counterparty default risk, or spread risk, or market risk concentrations. Among the debtors, risks related to financial instruments and risks related to receivables generated by the underwriting activities (premium collection, reinsurance recovering ) are distinguished into two categories: asset credit risk and liabilities credit risk.

25 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Market risk and credit risk takes into account concentration risk, which corresponds to all risk exposures with a loss potential which is significant. The investment policy guides the investments in accordance with the prudent person principle provided for in Article 132 of the directive and L of the French Insurance Code, the Investment and Asset Management governance covers all the key processes for asset management and the monitoring of risks, thus guaranteeing compliance with cross-departmental requirements. Investment rules are formally presented in management agreements, and additional internal rules ensure that specific provisions are respected. Investments are made in compliance with the strategic allocation of assets determined within the scope of asset and liability management (ALM). This allocation, determined in accordance with liabilities undertaken, matches the risk appetite determined by Executive Management and the Risk Management function. Investment policy provides for dedicated committees under the responsibility of the Asset Management Division (DGA). The Asset Management Director is a member of the Company's Executive Committee and is Chief Operating Officer. These committees cover the full investment process. Managing operational risk Operational Risk is the risk of loss resulting from the inadequacy or failure of internal processes, IT failures or deliberate external events, whether accidental or natural. The external events mentioned in this definition include those of human or natural origin. This risk must be managed, in the sense that it must be contained within acceptable limits through avoidance, reduction or transfer actions. The objectives of operational risk management within BNP Paribas Cardif are: the reduction of the likelihood of the occurrence of operational risk events harming: the faith its customers, partners and employees have in BNP Paribas Cardif, the quality of the services and products it markets, the rate of return of its activities, the efficiency of the processes it manages; the establishment of a standardised system throughout BNP Paribas Cardif and its entities, with an adequate level of formalisation and traceability that provides reasonable assurance of risk control for management, the deliberative body and regulators. These processes are based in particular on the mechanism for reporting incidents deployed within the Group, together with risk mapping approaches that result in the identification of risks being more systematic and in such risks being addressed by appropriate controls or action plans.

26 26 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Managing strategic risk Strategic risk arises from the failure of strategic initiatives (including acquisition, mergers, new products, markets, etc.) leading to loss. Strategic risk is linked to: the external business environment: it is the risk of a financial loss due to fluctuations in volumes, margins and costs because of external, industry, or wider market factors; the improper implementation of the risk strategy on the business development. This risk is carried by the Company's Board of directors, in particular in the light of the risk mapping established by RISK. Managing ALM risk Asset Liability Management (ALM) risk is the risk of financial loss or of solvency issues resulting from incoherent investment policy on the one hand, underwriting and reinsurance policies on the other hand. This can concern for example, asset allocation, duration gaps, rates credited to policyholders, or offbalance sheet commitments. It materializes in differences between observed and expected cash flows (inflows and outflows) due to the inherent uncertainty of the modelling of interdependences between assets and liabilities. ALM risk can lead to strategic mistakes, reputation degradation, liquidity issues or insolvency. This risk is managed by producing studies that pave the way for establishing a strategic allocation, subsequently validated by committees at various levels. This strategic allocation is then used to manage investments. Managing compliance risk Compliance risk is the risk of legal, administrative or disciplinary sanctions, of significant financial loss or reputational damage that an insurance company may suffer as a result of failure to comply with laws and regulations, codes of conduct and standards of good practice applicable to insurance and financial activities, or instructions given by an executive body, particularly in application of guidelines issued by a supervisory body. This risk is covered by all the procedures, tools and methods put in place by BNP Paribas Cardif, and in particular by the work of the compliance function. Managing emerging risk Emerging risks are new or evolutionary risks which are difficult to quantify and for which the timing, the nature and the extent of the potential losses are particularly uncertain. Emerging risks are monitored and managed specifically by a dedicated committee. Managing reputational risk Reputational risk is the risk of financial loss arising from a damage of the trust placed in BNP Paribas Cardif by its customers, counterparties, suppliers, employees, shareholders, supervisors and any other stakeholder whose trust is an essential condition for the corporation to carry out its day-to-day operations.

27 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER This risk is primarily contingent on all the Group risks. It is covered by all the procedures, tools and methods put in place, and in particular by the work of the compliance function. B.4 Internal assessment of risks and solvency The ORSA process (Own RISK And Solvency Assessment) is a continuous risk management process coordinating and consolidating all the processes for the identification, quantification, management and steering of risks, and all related information. An annual report is prepared since B.4.a Process for determining the risk profile Ascertaining the BNP Paribas Cardif risk profile is based on the declaration of the risk appetite which lays down the limits as to the nature, quantity and quality of the risks that the Group is prepared to accept in the long-term as part of its strategy. Risk appetite determines the volatility threshold of the performance indicators that the company's shareholders would like to see respected. It is then developed in the finest detail in the form of operational objectives, called risk limits. The risk profile is the level of risk on undertakings taken by BNP Paribas Cardif according to two main metrics. First of all, the maximum deviation accepted in 90% of cases from generated net income before tax compared to budget. This metric consists in applying a shock deemed to have a 10-year intensity, determined from a recalibration of the shocks in the standard formula, and then in estimating the resistance of Net Income before Tax. The second risk metric relates to the monitoring of the target solvency ratio in the applicable prudential environment. It is measured at least once a year and must be updated should a significant event occur, such as a deterioration in market conditions or the launch of a new activity, in order to ensure the proper fit with risk appetite. B.4.b ORSA report The report prepared in 2017 was approved by the Board of directors after having been validated by the ALM and Insurance Risk Management Committee.

28 28 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 B.5 Internal Control System B.5.a Organisation of internal control BNP Paribas Cardif internal control reference The internal control principles and methods for insurance activities in France and internationally are at the centre of insurance and financial regulations, and are governed by a wide range of laws and regulations. As a subsidiary of the BNP Paribas banking group, BNP Paribas Cardif applies the major part of the provisions laid down by the ministerial decree of 3 November 2014, which superseded regulation No amended by the Consultative Committee of the Legislation and Financial Regulations (CCLRF) regarding the internal control of credit institutions and investment firms. This system is in compliance with the requirements laid down by the Solvency II Directive and its application decrees and, depending on the case, by general regulations from the AMF (French Securities Regulator), regulations applicable to branches abroad and, of course, regulations specific to insurance together with relevant recognised professional uses. Internal control definition, objectives and standards The Executive Management of the BNP Paribas Cardif Group has set up an internal control system, whose main aim is to ensure the overall control of risks and provide reasonable assurance that the Company s goals in this area are being achieved. The BNP Paribas Cardif's Internal Control and Operational risk management policy, used on the basis of the BNP Paribas Group's internal control charter, specifies the scope of this system and is the reference base for internal control. The policy initially recalls the objectives of internal control which aims at ensuring: the development of a risk culture among employees; the effectiveness and quality of the company's internal operations; the reliability of internal and external information; the security of transactions; compliance with applicable laws, regulations and internal policies. The policy then lays down the rules relating to the organisation, lines of responsibility and remit of the various players involved in internal control, and establishes the principle that the different control functions (primarily Compliance, Internal Audit, Legal and Risk Management) must operate independently. Scope of internal control One of the fundamental principles of internal control is that it must be exhaustive in scope: it applies to risks of all kinds, to all activities and to all entities for which BNP Paribas Cardif ensures the operational management. It also extends to core services or essential operational activities that have been outsourced, in accordance with regulatory requirements.

29 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Fundamental Principles of internal control Internal control at BNP Paribas Cardif is based on the following key principles: responsibility of the operational staff: the permanent control set-up must be incorporated within the operational organisation of the entities. Operational managers must set up an effective risk management framework for the activities for which they are responsible, and all employees are under a duty to blow the whistle on any problems or failings of which they are aware; exhaustiveness of internal control (see above, under scope of internal control); the proportionality to risks: the scope the number of controls must be proportional to the level of risk involved. These controls include, where appropriate, one or more controls performed by operational staff and if necessary by one or more independent permanent control functions. A control exercised by an independent function may take the form of a second set of controls, with a contradictory assessment. Any disagreements are referred to a higher level in the organisation (escalation process); appropriate governance: the system is the subject of governance involving the various players and covering all aspects of internal control, be they organisation, control or oversight; the head office insurance Internal Control Committees, and those at all entities, are key instruments of such governance; internal control traceability: this relies on written procedures and audit trails. In this respect, controls, results and exploitation, and information reported by entities to higher levels, must be documented and traceable. Organisation of internal control Internal control at BNP Paribas Cardif consists of permanent and periodic controls. While they are complementary, they are distinct and independent of one another: permanent control is an overall process for the ongoing implementation of risk management and monitoring of corrective actions. Permanent control is firstly carried out by operational staff, first level of defence, as well as their line managers, and secondly by independent permanent control functions, second level of defence; periodic control is an overall process for ex post verification of the operation of the Company, based on investigations that are conducted by the Internal Audit function, which performs these functions on an independent basis.; exchanges between permanent control and periodic control regularly takes place to enhance the flow of information, to coordinate each action and to improve the efficiency of internal oversight in full compliance with the independence of periodic control.

30 30 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Main parties involved in internal control Executive Management, under the supervision of the Board of directors, is responsible for the Company's overall internal control system. Operational staff, at all levels, and in particular those in the management line of command, have the primary responsibility for risk management and permanent control. They carry out first-level controls: controls of the transactions handled by them and for which they are responsible, controls on the operations or transactions handled by other operational staff or management controls on their teams. Independent permanent control functions carry out second-level controls: Compliance contributes to the ongoing monitoring of compliance with laws and regulations, and with professional and ethical standards. It also contributes to framing the overall strategy of the Board of directors and the directives issued by Executive Management. The system was reinforced by bringing the function under the sole authority of its manager. Its head reports to the Chief Executive Officer of BNP Paribas Cardif and the IFS Compliance Officer ; the Risk Management Function contributes with its second set of controls on risks related to underwriting, credit and the market, ensuring that they are compliant and compatible with internal policies and rate-of-return objectives. Since the end of 2015, the Risk Management Function has also contributed to the supervision of the permanent control of operational risks. The Function's duties are exercised independently of operational functions, a factor that further enhances the objectivity of the "second set of controls" process. Its head reports directly to the Chief Executive Officer and the IFS Risk Officer; the Finance Function is responsible for the preparation and control of qualitative financial management, control statements overseeing project management for information systems and ensuring the compliance of the financial structure of BNP Paribas Cardif. Its Head reports to the Chief Executive Officer; other functions play an important role in permanent control in their specific areas of responsibility: Legal, Actuarial, Operations, Information Systems, Overall Security and Outsourcing, as well as Human Resources. Periodic Control ("third-level" control) is carried out by the BNP Paribas Cardif internal audit Division, which has a team specialised in insurance activities, and by BNP Paribas General

31 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Inspection. Its head reports to the Chief Executive Officer of BNP Paribas Cardif and the Deputy Head of BNP Paribas General Inspection ; Lastly, the Board of directors reviews and approves strategies and policies for taking, managing, monitoring and reducing risks, and examines the governance mechanism. The heads of the Compliance, Risk Management, Actuarial and Internal Audit functions report on the performance of their duties to the Chief Executive Officer, and to the Board of directors. The Heads of the key functions may go directly to the Board whenever they consider that an event, liable to have a significant impact or that could engage the responsibility of the directors or the good conduct of the company, should be referred to them. B.5.b Key Internal Control procedures Procedures are one of the key components of the permanent control system, alongside identifying and assessing risks, running controls, verifying reporting processes and overseeing the monitoring system. BNP Paribas Cardif relies on the system implemented by the BNP Paribas Group, adapted if necessary to the specific nature of insurance business. Written guidelines are distributed throughout the BNP Paribas Group, setting out the organisational structures, procedures and controls to be applied. These procedures provide the basic framework for the Group s internal control. As part of its oversight of the permanent control framework, RISK ORC (Operational Risk and Control) monitors the coverage rate of procedures for function of each country (according to a declaratory mode, referring to the standard elaborated by each country). B.6 Internal Audit Function The Internal Audit Function is responsible for periodic control of all subsidiaries, branches and activities controlled by the BNP Paribas Cardif group. Its aim is to give Executive Management and the Board of directors an independent assessment of the quality and effectiveness of the governance and internal control system. It issues recommendations to improve quality and compliance. Internal Auditing missions at BNP Paribas Cardif are carried out by: the BNP Paribas Cardif Internal Audit Division, also called Hub Cardif, covers the activities of BNP Paribas Cardif in France. This team is comprised of internal auditors who are employed by the EIG BNP Paribas Cardif in general and report to the head of the Internal Audit key function at BNP Paribas Cardif; mobile inspectors in the BNP Paribas Group's General Inspection, also called Central Inspection, carry out assignments on all BNP Paribas Cardif activities, either at the request of the local audit teams, or on their own initiative mandated by BNP Paribas as the sole shareholder of BNP Paribas Cardif; local internal auditors (outside France) of the BNP Paribas Group's General Inspection, also called BNP Paribas Group's General Inspection Geographic Hubs, cover BNP Paribas Cardif s subsidiaries and activities outside France.. If needed, they can benefit from the support of the Internal Audit division of BNP Paribas Cardif to carry out their missions. Internal auditors and Inspectors work independently across the whole BNP Paribas Cardif scope up for auditing. They may deal with any subject and have free access to all documents, property and

32 32 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 personnel working directly or indirectly for BNP Paribas Cardif. Similarly, they are free to submit their own conclusions independently of Executive Management. They must remain independent, objective and impartial in their investigations, and cannot directly take any operational management action. They use a body of internal procedures maintained by the General Inspection of the BNP Paribas Group. The internal audit manager reports both to the Chief Executive Officer of BNP Paribas Cardif and to the General Inspector of the BNP Paribas Group (or to one of his/her direct deputies). This dual reporting system guarantees the independence of the key function and imposes joint decision-making by the Executive Management of BNP Paribas Cardif and the General Inspection Division of the BNP Paribas Group for all major issues concerning the Internal Auditing function such as appointing its manager, determining the budget, making decisions on compensation, etc. In addition, the head of the Internal Audit key function has right of access to the BNP Paribas Cardif Board of directors, which arbitrates on any disagreements between the BNP Paribas Cardif Executive Management and the BNP Paribas General Inspection Division. The head of the internal audit key function regularly reports to the Board of directors of BNP Paribas Cardif (or to the specific Committee which represents it) with the results of the key function's work concerning the whole Group. Furthermore, each year he or she submits a proposed audit plan with details of internal audit assignments to be conducted during the following calendar year. This draft audit plan is drawn up together with the Executive Management notably on the basis of an assessment of the risks carried by the various activities, ensuring that all the material activities are periodically reviewed. The mandate of the internal audit key function is determined by an audit policy dedicated to the insurance Group BNP Paribas Cardif, approved by the Board of directors of BNP Paribas Cardif. B.7 Actuarial Function The Actuarial Division at BNP Paribas Cardif performs the actuarial role of BNP Paribas Cardif in general. Its manager is appointed by the BNP Paribas Cardif Chief Executive Officer and reports directly to him or her. Within the framework of the actuarial function, for each of the product lines marketed by BNP Paribas Cardif local entities, the Actuarial Division is responsible for identifying, monitoring, quantifying and streamlining underwriting risks and asset and liability management risks. These tasks are carried out within the framework of underwriting, prudential and account closing, and portfolio management activities, for direct, accepted and ceded business. Consequently, the Actuarial Division, as part of its responsibilities, has an overview of both underwriting risks and asset and liability management risks throughout a product's full life cycle. The missions of the actuarial function are detailed through a governance that enables the Actuarial Division to locate the work of risk assessment and decision-making as closely as possible to local risktakers in a precisely formalised technical and decisional framework, all done under the control of local actuarial services. These actuarial services are themselves organised around an actuarial head, whose responsibilities are governed by the said governance. This technical and decision-making framework allows local actuarial services to independently manage scenarios over which the Actuarial Division in principle forms a favourable opinion.

33 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER For any insurance underwriting case-file (including direct business, ceded and accepted insurance) outside this scope, formal approval from the Actuarial Division is imposed by governance at the appropriate level, and also from the other divisions involved, depending on the issue. It decides which bodies should issue the approvals, and stipulates that the heads involved reach a consensus to obtain approval. The Actuarial Division co-ordinates the compilation of the case-file and ensures the successful execution of the process. With regard to the accounting and prudential closing processes together with risk monitoring, governance oversees the way in which the methods and models are to be used depending on the nature and extent of the risks, determines the relevant indicators, and sets the Actuarial Division s requirements for reporting by local entities. The Actuarial Division co-ordinates analysis work and consolidates results. It reports consolidated results and its own analysis through the Risk Committee according to the frequency laid down by governance. Depending on the results of its analysis or on economic factors (fluctuation of loss ratios, natural disaster, deterioration of the economic and financial environment, etc.), the Actuarial Division may have to carry out or organise specific studies that it submits to the Risk Committee or the Underwriting Risk Monitoring Committee. The half-yearly updating of governance makes it possible to change the framework of delegation, either in accordance with the decisions taken by the Actuarial Division as part of the underwriting process, or in accordance with the analyses conducted as part of the closing and risk monitoring processes. Changes in corporate governance are formally published at regular intervals. Depending on the extent and the issues involved with these changes, the reasons behind them are the subject of specific announcements as provided for by governance. The compliance of local actuarial services with governance is checked every half year or year depending on the points involved. It includes controls for exhaustiveness and random controls. The Actuarial Division submits every change in its governance to the Risk Director for approval prior to publication. The latter is one of the permanent members of the Underwriting Risk and Risk Committees. Consequently, he or she participates in approving the underwriting decisions and has access to all risk studies (underwriting risks and assets and liabilities management risk) carried out by the Actuarial Division. This collaboration provides visibility for the risk management function as to methods and models for risk assessment and also as to risk limits; it also inputs a global forwardlooking view of the risks. Since 2015, the Actuarial Division produced an actuarial report in compliance with the requirements of the Solvency II directive. This report is to be drawn up each year.

34 34 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 B.8 Sub-contracting B.8.a Sub-contracted activities The BNP Paribas Cardif Group has outsourced some of its activities that have been identified as important and/or critical, and that are part of key operational processes. Those sub-contracted activities are mainly related to administration and management services of insurance contract processing systems, continuity of operation activities, and archiving processes as well as asset management, back office and financial assets accounting. B.8.b Sub-contracting governance When the Solvency II Directive came into force on the 1 st of January 2016, it highlighted the risks in connection with managing outsourced Essential Services Provision (ESP). In compliance with the new requirements of these insurance regulations and the general guidelines of the BNP Paribas Group's Outsourcing Policy published in July 2015, BNP Paribas Cardif updated in 2016 its own Outsourcing Policy. The BNP Paribas Cardif's Outsourcing Policy gives more details and framing on managing ESP, particularly with: a definition of ESP by type and by risk; an explanation of the importance of risk management and of the control system; expectations as to the contractual securitisation of ESP; relations with internal governance bodies and control authorities; the guidelines for monitoring, control and command over outsourced activities during the production phase. Organisation of the sub-contracting function The sub-contracting function is organised around the Suppliers and Outsourced Services Risk Division, particularly responsible for: writing and updating the outsourcing policy (based on the BNP Paribas Group policy ); drawing up the policy on governances and procedures relating to outsourcing; permanent control of the outsourcing process and supervision of control campaigns; recommendation regarding the compliance of the outsourcing of critical or significant activities or functions ; training and facilitation of the Corporate Outsourcing Committees; consolidating Reference data on outsourced activities; contribution to regulatory reports. The Supplier and Outsourced Services Risk Division acts by delegation and under the controls of the Compliance key function. As the scope is cross-departmental and international, BNP Paribas Cardif opted to deploy, implement and monitor the outsourcing process, to use regional and/or local outsourcing correspondents along with expert functional correspondents for the BNP Paribas Cardif corporate functions.

35 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Supervisory body The Corporate Outsourcing Committee is tasked with managing the risks in connection with outsourcing, both at the local and corporate levels. The Compliance, ORC-Risk, Legal and Tax, Finance, Global Security, Human Resources, Procurement and IT Functions are involved. The Outsourcing Corporate Committee is chaired by the Deputy Chief Executive Officer, in charge of IT and Operations. The head of the Supplier and Outsourced Services Risk department acts as General Secretary to the committee. Delegation principles Production launch, significant changes made to the policies in force, and terminations, transfers and the "re-insourcing" of outsourced business, must comply with the rules of the outsourcing Policy at both regional and local levels. The monitoring of projects or of existing outsourcing services is therefore either delegated at the regional or local level, or monitored by the Supplier and Outsourced Services Risk department. B.8.c Control system A campaign to assess the risks connected with the Provision of External Services is carried out each year at all entities and is based on a common control plan. For countries where PSE is high and extensive, a sampling approach is used. The results of the campaign are used to calculate a risk indicator (KRI). This indicator helps to measure the risk appetite of the business line. Depending on its result, it may trigger feedback to the business line's Executive Committee or to the Board of directors. Monitoring sub-contracting is also on the agenda of the various Internal Control Committees of BNP Paribas Cardif and its subsidiaries. In 2017, more than 170 projects were studied and 14 of them were submitted for validation by the Corporate Outsourcing Committee. B.9 Suitability of the governance system The governance system of BNP Paribas Cardif is based on an organization adapted to the nature, scale and complexity of the risks inherent its business, and on an appropriate oversight of the Board of directors.

36 36 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 C. Risk profile The SCR (Solvency Capital Requirement) is the level of own funds required to absorb a full series of bicentenary impacts after accounting for the correlation between risks. It is calibrated to cover such an event with a return period of 200 years within a one-year timescale (Value at Risk at 99.5%). The BNP Paribas Cardif SCR is evaluated by means of the standard formula. It corresponds to the sum of the net BSCR (Basic SCR), of the operational SCR, and the tax adjustment. The BSCR is based on a bottom-up approach, in other words its calculation is divided into risk modules, themselves divided into sub-modules. The capital requirements for each of the various risks are aggregated by means of a correlation matrix. The information presented in this chapter deals with the nature of the risks to which BNP Paribas Cardif may be exposed, the evaluation techniques used, main risk exposure as well as the mitigation techniques set up, and the procedures for monitoring their effectiveness. The risk typology adopted by BNP Paribas Cardif is changing in pace with methodological work and regulatory requirements; it is presented according to the main categories as follows: underwriting risk; market risk; counterparty risk; liquidity risk; operational risk; other risks.

37 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER C.1 Underwriting risk C.1.a Definition Underwriting risk is the risk of a financial loss caused by a sudden, unexpected increase in insurance claims. Depending on the type of insurance business (life, non-life), this risk may be statistical, macroeconomic or behavioural, or may be related to public health issues or disasters. C.1.b Risk exposure The underwriting SCR for BNP Paribas Cardif group stood at 2,306 million as at 31 December 2017, up 5% compared to 31 December 2016 The insurance underwriting SCR is composed of Life, Health and Non-life modules and is broken down as follows: The Life module is the total of several risk sub-modules as determined by Solvency II such as redemptions risks, operating expenses and biometric for savings and death policies. The Life module, amounting to 1,898 million, increased by 132 million compared to 31 December The main risks are: the expenses risk that evaluates the impact of a 10% increase in costs and a 1% increase in inflation rate; the redemptions risk that evaluates the impact of a shift in redemptions taking the worst case between: a 50% increase or decrease of the lapse rate; a 40% mass lapse: BNP Paribas Cardif is exposed to mass lapse mainly on the protection policies. The disaster risk that evaluates the increase in mortality during the first year of projection. As in 2016, these three risk sub-modules account for 80% of the sum of the Life sub-modules before diversification. Nevertheless, the proportion of the disaster risk is lower compared to 2016 (4% as at 31 December 2017 against 13% as at 31 December 2016) due to the signing of a reinsurance treaty. The proportions of expenses risk and redemption risk are up and amount respectively to 45% and 31%. The Healthcare module is carried by protection insurance. It amounts to 638 million, up to 55 million, due to the combined effect of the following risk sub-modules: the disability/invalidity risk which aims at quantifying the capital requirement following a 35% rise in disability/invalidity during the first year, then 25% the following years for similar life policies (inability to work);

38 38 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 the premiums and reserves risk calculated according to a factor method which quantifies the impact of the premium or provisioning deficiency for policies similar to non-life policies (accidental death, hospitalisation, etc.); the redemption risk. The Non-life module mainly stems of the following sub-modules: the premium and reserving risk for non-life contracts ; the catastrophe risk. The Non-life module 70 million decrease compared to 2016 primarily due to the impact of a technical effect on the ranking of the Extended Warranty activity lines of Cardif Assurances Risques Divers and Cardif do Brasil Seguros e Garantias SA in Brazil, leading to different shocks. C.1.c Concentration From a geographic point of view, the insurance underwriting risk is concentrated in four countries: France, Japan, Brazil and Italy, which respectively contributed 37%, 14%, 13% and 7% of the sum of underwriting SCR as at 31 December The insurance underwriting risk shows very little individual concentration, on the one hand due to the nature of BNP Paribas Cardif's activity, the major part of which covers private persons and their assets, and on the other hand owing to a policy of reinsurance which limits the so-called "peak" risks (high individual exposures). C.1.d Risk management and monitoring Risk management and reduction The mechanism for monitoring and managing the underwriting risk is based on governance and documented processes. Risks underwriting must comply with delegation limits set at several local and central levels based on estimated maximum acceptable losses, estimated Solvency II capital requirements, and estimated margins on the policies concerned. The experience acquired in managing geographically diversified portfolios is used to regularly update risk pricing databases comprising a wide range of criteria (such as the type of loan for creditor insurance, the type of guarantee, the insured population, etc.) Each contract is priced in reference to the objectives for rate of return and return-on-own funds set by the Executive Management of BNP Paribas Cardif. Regulatory and commercial framework permitting, contractual clauses help keep the lid on this risk, clauses such as medical selection for products offering high insured amounts, or repricing clauses provided in the policy in the event of change in taxation or a fluctuation in the number of claims, and a limit to the length of the cover period. Partners are interested in the quality of the risks brought in to encourage observance of the good underwriting practices as defined by BNP Paribas Cardif.

39 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Reinsurance is an additional element of the underwriting risk management system. Its objective is to protect BNP Paribas Cardif from the main risks below, provided there is adequate market depth and pricing: the so-called peak risk linked to exposure to an individual risk exceeding a certain threshold, called full retention. In personal insurance, this threshold is usually set at respectively 2 million and 1 million per head for the disability/invalidity risk and the property and casualty risk; the disaster risk associated with exposure to a single low occurrence event, but with a very strong financial impact (concentration risk); the risk on new products, linked to insufficient mutualization, wrong definition of the technical basis or to uncertainty over the insured portfolio data; the table risk, linked to future guarantee commitments on annuities; the financial risk, linked to financial guarantees related to insurance products such as the guaranteed minimum benefit, which states that the capital paid to the beneficiaries in the event of the policyholder's death may not be less than the sum of the premiums invested in the policy, regardless of the situation of the financial markets at the time of death. In savings, the underwriting risk is managed by monitoring and managing the inflow of general funds so as to limit the dilution effects on the rate of return from assets. In France, Cardif Assurance Vie recorded in 2017 a near-zero inflows for the general funds, the switching and the claims offsetting the gross inflows. In Italy, the inflows of the general funds dropped in favour of the unit-linked which amounted to 60% of the net inflow versus 22% in 2016.Additionally, BNP Paribas Cardif limits the risk exposure linked to the presence of a minimum guarantee rate in its policies, a risk that stems from performance of the investments made to back the premiums received and lower than the contractual return payable to policy holders. As a general rule, in France, most marketed contracts limit the guarantee to one year, renewable annually and with an age limit of 80. In addition, the guarantee comes with an individual ceiling of 765,000 per insured person. Thus, 95% of the Cardif Assurance Vie engagements do not offer the minimum guarantee rate for more than one year, and in France the average guaranteed rate is less than 0.1%. In Italy, Cardif Vita offers a minimum guarantee rate less than 0.2% on average on Capital Vita, its primary general funds. Risk monitoring Underwriting risks are periodically monitored by the Executive Committee of BNP Paribas Cardif within the scope of the Monitoring Committees and Risk Committees, based on a dual mechanism: quarterly monitoring of exposure, technical provisions and claims rate at each accounting quarter end for protection; supplemented by monitoring of the insured portfolio characteristics according to a schedule based on the type of product (monthly, quarterly and annually) and defined during the technical approval of the product. C.1.e Stress tests and sensitivity analyses At the time of pricing, approval of a product requires systematic analysis of negative (stress test) or very negative (crash tests) scenarios. The stress tests and crash tests are carried out over the same period as the baseline scenario.

40 40 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 C.2 Market risk C.2.a Definition Market risk is the risk of a financial loss arising from adverse movements of financial markets. These adverse movements are notably reflected in prices (foreign exchange rates, bond prices, equity and commodity prices, derivatives prices, real estate prices ) and derived from fluctuations in interest rates, credit spreads, volatility and correlation. C.2.b BNP Paribas Cardif group financial investments The financial environment directly influences the financial investment valuation. The year 2017 was marked by a rise in the interest rate increase and a good performance of the equity market. The market value of general fund investments had slightly increased (1%) in relation with the net inflows, coupons and dividends income, and the evolution of financial markets, with a decrease of the bonds market value offset by the rise of collective equity funds market value and property funds. The subsidiaries Cardif Assurance Vie (France), Cardif Vita (Italy) and BNP Paribas Cardif Life Insurance Co (Korea) stood for 82%, 14% and 2% of the general fund investments respectively. The interest rate risk management for the general funds and the asset diversification policy lead to investment in property funds, equities and bonds, of which government bonds notably those issued by countries from the euro zone.

41 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Regarding government bonds by country, the exposure to peripheral countries under administration (Portugal, Greece and Cyprus) is very limited and solely constituted of Portugal, up to 0.4% of the total portfolio as at 31 December C.2.c Risk exposure The market SCR stood at 6,288 million as at 31 December 2017, up to 9% compared to 31 December It is composed of six modules. The equity risk module is the predominant risk for BNP Paribas Cardif. It represents 39% of the market SCR before diversification as at 31 December 2017, followed by the spread risk module at 29%. The increase in interest rates improves the absorption capacity of general funds for all risks, particularly for spread risk and property risk. The equity SCR reflects the risk of a loss of equities value. It totaled 2,993 million, a 16% increase as compared to 31 December The equity risk module is the most significant, given the shock level applied at 39% for equities listed in an EU or OECD member state and at 49% for other equities. To avoid pro-cyclical behaviour, this shock is corrected by a so-called "dampener" or symmetrical adjustment mechanism. It allows to soften the equity shock when markets are at the bottom of the cycle, and to increase it when they are at the top of the cycle and when the likelihood of a fall is high. As at 31 December 2017, the dampener was 1.90% (vs % in 2016), and the shocks applied were then respectively at 40.9% (i.e. 39%+1.9%) or 50.9% (i.e. 49%+1.9%). The increase of the equity SCR was mainly due to the dampener adjustment. The spread risk module aims to quantify the capital requirement corresponding to the risk of an upward trend in credit spreads (difference in actuarial rate between a bond and the rate of an equivalent risk-free government bond). The spread shock depends on the duration and the rating of the interest rate products and only concerns corporate bonds and bonds issued by non-european states, considering that the bonds issued by European states are not subjected to the spread risk. As with the rate risk, its evolution is linked to the breakdown of the bond portfolio.

42 42 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 The SCR of the credit spread risk amounted to 2,281 million, which increased by 3% compared to 31 December The property risk module measures the impact of a slump in property markets on the value of assets. It consists of instantaneously reducing the market value of property assets by 25%. The SCR amounted to 752 million as at 31 December 2017, up 7% compared to 31 December The increase of the SCR is mainly due to the appreciation of the value of real estate assets and to the investments made for the general funds in France. The rate risk module aims at quantifying the capital requirement needed to cope with the impact on the balance sheet value of an upward or downward change in the yield curve. The capital requirement is equal to the impact of the increase in the yield curve and the impact of the decrease in the yield curve. For each maturity, the shocks caused by the increase or decrease are expressed in proportion to the rates by duration. The SCR of the rate risk amounted to 770 million, slightly down compared to 31 December 2016 The capital requirement for this module is low (9% of the SCR before diversification) with regard to the exposure to fixed income instruments (79% of assets) owing to the implementation of ALM management. The interest rate shocks applied to assets are mainly absorbed by the adjustment of the discount rate of liabilities. Consequently, the difference in duration (shorter for the assets than for liabilities) generates the basic part of the module's SCR. Its origin may be found in the caution required when setting the investment term for assets, taking account of the option to redeem liabilities at any time. There is therefore a need to be able to cope with an acceleration in the outflow of liabilities. Furthermore, exposures to minimum guarantee risks are low and consequently only have a limited impact on the SCR for the rates module. The currency risk module aims to quantify the capital requirement of a 25% impairment of foreign currencies against the euro. The exposure of BNP Paribas Cardif stems on the one hand from securities denominated in foreign currencies and held by the general fund and, on the other, by the own funds of non-european branches and subsidiaries. The amount of SCR for currency risk was 970 million, up 9% compared to 31 December 2016 and is mainly related to the increase of the risk exposure base of Cardif Assurance Vie. The concentration risk module is explained below. C.2.d Concentration Due to the application of the standard formula, there is no exposure to concentration risk for BNP Paribas Cardif. The rules for the dispersion of assets, are laid down in the management agreements. They specify the dispersion ratios per issuer on fixed income instruments and rating category. The credit doctrine also specifies the dispersion rules at the consolidated level for the general funds of entities based within the euro zone, which are the most important. Furthermore, the concentration risk on the main general funds within the euro zone is specifically monitored through the Gini coefficient 3. 3 The Gini coefficient is a statistical dispersion measurement for dissemination within a specific population. The Gini coefficient is a number ranging from 0 to 1, where, in this case, 0 means there is no concentration and 1 means a high level of concentration.

43 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER C.2.e Risk management and monitoring Risk management and reduction BNP Paribas Cardif has the necessary management tools to calibrate its allocation of strategic assets and to measure its risks with the adjustment of assets - liabilities. The investment policy dictates the scope applicable to asset management. It defines the principles along which the structure of asset portfolios can be matched with the undertakings made to policy holders when they are sold insurance contracts, while optimising the expected return on investment in relation to the set risk limit. The implementation of the investment policy, assigned to the Asset Management Division, is regulated for each portfolio by a management agreement which specifies the investment limits geared to different classes of asset. Studies on assets and liabilities help provide a projection of the expected flows of both the assets and the liabilities of general funds. In particular, they provide the possibility to adjust the duration of assets in keeping with the profile of different liabilities. Exposure to market risk is also monitored through specific targeted studies such as the quarterly review of bond issuers, or the review of securities in an unrealised loss position. Furthermore, BNP Paribas Cardif is exposed to currency risk linked to its investments in foreign currencies. The currency position stems primarily from branch capital allocations and equity interests denominated in foreign currencies, financed by purchasing the investment currency. When a currency hedge is implemented, it is financed by borrowings amounts in the same currency as the foreign equity investment. Risk monitoring Market risk is monitored notably by way of dashboards created for each geographical area, and by controlling compliance with management agreements. Assets management committees participate in the market risk monitoring. C.2.f Stress tests and sensitivity analyses Stress tests are studied on a regular basis within the scope of ALM studies. These stress tests make it possible to check the ability of BNP Paribas Cardif to honour its commitments in negative financial market situations, by taking account of the impact of these situations on the behaviour of policyholders. Specific stress test can also be performed at the request of the regulator. Finally, sensitivity analyses are regularly performed on the market SCR, and more globally on the solvency ratio.

44 44 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 C.3 Counterparty risk C.3.a Definition Counterparty risk is the risk of loss or of adverse change in the financial situation, resulting from fluctuations in the credit standing of issuers of securities, counterparties and any debtors to which the company is exposed. Among the debtors, risks related to financial instruments (including banks in which the company holds deposits) and risks related to receivables generated by the underwriting activities (premium collection, reinsurance recovering ) are distinguished into two categories: asset credit risk and liabilities credit risk. C.3.b Risk exposure The counterparty SCR stood at 184 million as at 31 December 2017, stable compared to 31 December It concerns a default risk of 61% on exposures on receivables arising from intermediaries or policyholders. C.3.c Concentration Exposure on reinsurers as at 31 December 2017 mainly concerned one reinsurer. The technical reserves ceded under the contract amount to 2,259 million. The risk of default on this contract is reduced by a pledge on the portion of the unit-linked undertakings ceded and by a guarantee in the form of a cash deposit for the share of the commitments in euros. This latter guarantee is not recognised as collateral by the Solvency II standard. C.3.d Risk management and reduction The counterparty risk on reinsurers is managed through a stringent selection of counterparties, the negotiation of the guarantees provided, and regular monitoring of the main exposures. The Risk Transfer and the Credit Risk departments are responsible for this monitoring. The guarantees required may be actual guarantees, such as deposits in the form of a financial guarantee or pledged securities, or personal guarantees such as sureties or letters of guarantee. Monitoring of exposure to the reinsurance counterparty risk is formally redacted each year by way of a report issued by the Risk Transfer department to which an appendix from the Credit Risk department is added, whose objective is to document the quality of the portfolio of reinsurers. Partner counterparty risk comes under the credit governance for Partners and Reinsurers. The governance determines the delegated powers granted to local entities and provides for an agreement with the Credit Risk Department. As with the credit risk management system with issuers, the Credit Risk Department relies on the analyses, ratings and tools of BNP Paribas for counterparty risks shared between BNP Paribas and BNP Paribas Cardif, and on its own expertise for non-shared counterparty risks. In addition, similarly to a reinsurer, exposure on a partner may be the subject of a collateral or a personal guarantee. Depending on the quality of the counterparty, the following techniques may be used: parent company endorsements, bank guarantees payable at first demand, an account segregated from all other assets in the event of bankruptcy, etc.

45 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER C.4 Liquidity risk C.4.a Definition Liquidity risk is the risk of being unable to fulfil current or future foreseen or unforeseen cash requirements coming from insurance commitments to policyholders, because of an inability to sell assets in a timely manner. C.4.b Risk exposure Exposure to liquidity is appraised by way of studies carried out by the Actuarial Division on forecasted cash flows expected on the assets and liabilities of BNP Paribas Cardif general fund. As at 31 December 2017, the level of assets considered as liquid is deemed to be satisfactory. C.4.c Risk management and reduction The liquidity risk is centrally managed through reviews realized with a frequency adequate to the risk exposure. C.4.d Sensitivity Stress tests are regularly carried out as part of asset and liability management studies. These stress tests make it possible to check the ability of BNP Paribas Cardif to honour its undertakings in negative financial market situations, by taking account of the impact of these situations on the behaviour of policyholders The latest sensitivity reviews show that the three main general funds of BNP Paribas Cardif hold sufficiently liquid assets. C.5 Operational risk C.5.a Definition Operational risk is the risk of loss resulting from the inadequacy or failure of internal processes, IT failures or deliberate external events, whether accidental or natural. The external events mentioned in this definition include those of human or natural origin. Internal processes are specifically those that involve employees and IT systems. External events include, but are not limited to floods, fire, earthquakes and terrorist attacks. Credit or market events such as default or fluctuations in value do not fall within the scope of operational risk. Operational risk encompasses fraud, human resources risks, legal risks, non-compliance risks, tax risks, information system risks, risks related to the provision of inappropriate financial services (conduct risk), risk related to failures in operating processes including underwriting procedures; or the use of a model (model risk) along with any potential financial consequences resulting from the management of reputation risk.

46 46 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 C.5.b Risk exposure The amount of the SCR linked to the operational risk stood at 672 million at 31 December 2017, up 3% compared to 31 December C.5.c Risk management and reduction To manage operational, non-compliance and reputation risks, BNP Paribas Cardif relies on its general internal control and operational risk monitoring system, a twin-dimension system providing both periodic and permanent control. Governance of the internal control system at BNP Paribas Cardif is backed by two dedicated committees at the Executive Management level: an "operational risk" committee (CoRO) convenes at least twice a year. Its purpose is to present an overall view of all major operational risks to the BNP Paribas Cardif Executive Committee, and the action plans implemented to contain them. Any operational risk event with a real or major potential impact, whatever its origin, could be brought up during an operational risk committee. an Internal Control Committee convenes at least twice a year both at entity and BNP Paribas Cardif level. It will report on and monitor identified or feared risks, and also track all related control actions at every level.

47 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER D. Valuation for Solvency purposes BNP Paribas Cardif prepares its consolidated balance sheet under Solvency II pursuant to Article 75 of the Solvency II directive, i.e. mainly in market value. As of 1 st January 2017, the consolidated financial statements of BNP Paribas Cardif group are prepared under IFRS. D.1 Balance Sheet at 31 December 2017 Letters A to G refer to the assets assessment methods described at part D.3. Letters H to M refer to the other liabilities assessment methods described at part D.4.The other items do not call for any particular comments on the valuation methods used to prepare the financial statements.

48 48 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 D.2 Scope of consolidation As at 31 December 2017, the regulatory scope of consolidation is based on the accounting scope of consolidation used for the annual consolidated financial statements of the BNP Paribas Cardif group (prepared according to the International Financial reporting Standards (IFRS)). It includes one hundred and nineteen companies: ninety-three companies fully consolidated, and twenty-six consolidated under the equity method. Companies controlled by the BNP Paribas Cardif group are fully consolidated. The group controls a subsidiary when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Whenever the BNP Paribas Cardif group carries out an activity with one or more partners sharing control by virtue of a contractual agreement which requires unanimous consent on relevant activities (those that significantly affect the entity's return) be taken unanimously, the BNP Paribas Cardif group exercises joint control over the activity. The companies under joint control are accounted for by the equity method. Companies over which the group exercises significant influence (associates) are accounted for by the equity method. Significant influence is the power to participate in the financial and operating policy decisions of a company without exercising control. Significant influence is presumed to exist when the BNP Paribas Cardif group holds, directly or indirectly, 20% or more of the voting rights of a company. For the purposes of their financial management activity, insurance companies are required to invest in entities that correspond economically to investment entities such as mutual funds and other vehicles for collective investments in securities and real estate companies or funds. As provided for in ANC Recommendation No , real estate investment property companies (SCIs) and mutual funds consolidated under the equity method are reclassified as insurance activity investments. Controlled companies that are not significant based on their contribution to the consolidated financial statements are consolidated under the equity method, which is seen as a simplified consolidation method. The consolidated financial statements are prepared in euros. The financial statements of companies whose functional currency is not the euro are translated using the closing rate method. Under this method, all assets and liabilities, both monetary and non-monetary, are translated using the spot exchange rate at the closing date. Foreign exchange difference are recognised in reconciliation reserve for the group s share, and in minority interest for the third party s share.

49 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Consildated subsidiaries and equity-accounted associates INSURANCE Life Insurance Country % of interest 31 december 2016 Changes in the scope of consolidation % of interest 31 december 2017 % of control 31 december 2017 Consolidation method. BNP Paribas Cardif Levensverzekeringen NV Netherlands Fully consolidated. Cardif LivForsakring AB Sweden Equity*. Cardif Lux Vie Luxembourg Equity. Cardif Mexico Seguros de Vida SA Mexico Equity*. BNPP Cardif Seguros de Vida SA Chile Fully consolidated. SBI Life Insurance Company Ltd India Equity. Cardif Vita S.p.A. Italy Fully consolidated. Cardif Polska Poland Equity* Non-life Insurance. Cardif Assurance Risques Divers SA France Fully consolidated. Cardif Colombia Seguros Generales SA Colombia Fully consolidated. Cardif Forsakring Sweden Equity*. LLC Insurance Company Cardif Russia Fully consolidated. Cardif Mexico Seguros Generales SA Mexico Equity*. BNPP Cardif Schadeverzekeringen NV Netherlands Fully consolidated. Cardif do Brasil Seguros e Garantias SA Brazil Fully consolidated. BNPP Cardif Seguros Generales Chile Fully consolidated. Luizaseg Brazil Equity. Natio Assurance France Equity. Icare Assurance SA France Fully consolidated. BNPP Cardif General Insurance Co Ltd Korea 77.5 (1) Equity*. CARGEAS Assicurazioni S.p.A Italy Fully consolidated. Cardif EL Djazair Algeria Equity*. Cardif Cardif Osiguranje Croatia Unconsolidated. Cardif IARD France (2) Equity* Mixed Insurance (Life and Non-life). BNPPA Cardif TCB Life Insurance Company Ltd Taiwan Equity. Cardif Seguros Argentina Fully consolidated. Cardif Assurance Vie SA France Fully consolidated. Cardif Do Brasil Vida e Previdencia S.A Brazil Fully consolidated. BNPP Cardif Pojistovna AS Czech Republic Fully consolidated. BNPP Cardif Emeklilik A.S Turkey Fully consolidated. Pinnacle Insurance PLC United Kingdom Fully consolidated. Poistovna Cardif Slovakia Slovakia Equity*. BNPP Cardif Life Insurance Co. Korea Fully consolidated. BoB Cardif Life Insurance Company Chine Equity. Cardif hayat Sigorta Anonim Sirketi Vie Turkey (2) Equity*. Cardif Compania de Seguros Peru (2) Equity* OTHER ACTIVITIES. BNP Paribas Cardif Servicios y Asistencia Limitada Chile Equity*. GIE BNP Paribas Cardif France Fully consolidated. Cardif I Services France Equity*. Cardif Pinnacle Insurance Management Services United Kingdom Fully consolidated. Cardif serbicio SA Argentina (2) Equity*. OPPCI POWERHOUSE France (2) Equity. Powerhouse Habitat France (2) Equity. SAFRAN France (2) Equity HOLDINGS. BNP Paribas Cardif SA France Consolidating company. BNP Paribas Cardif BV Netherlands Fully consolidated. Cardif Nordic AB Sweden Fully consolidated. CB (UK) - Fond C United Kingdom Fully consolidated. NCVP Participacoes SA Brazil Fully consolidated. Cardif Pinnacle Insurance Holdings PLC United Kingdom Fully consolidated. Icare Holding SA France Fully consolidated The percentage of voting indicates the Group's direct and indirect holding in the company concerned (1) Capital increase: relution (2) Incoming entities : Cardif thresholds (*) Fully controlled companies consolidated through simplified consolidation by the equity method

50 50 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Consildated subsidiaries and equity-accounted associates INSURANCE INVESTMENTS Country % of interest 31 december 2016 Changes in the scope of consolidation % of interest 31 december 2017 % of control 31 december 2017 Consolidation method SCI Carma Grand Horizon SARL France Fully consolidated SCI Reumal Investissements France Fully consolidated SCI Corosa France Fully consolidated SCI 68/70 rue de Lagny-Montreuil France Fully consolidated SCI BNPP Pierre II France Fully consolidated SCI Bobigny Jean Rostand France Fully consolidated SCI Cardif Logement France Fully consolidated SCI Citylight Boulogne France Fully consolidated SCI Etoile du Nord France Fully consolidated SCI Fontenay Plaisance France Fully consolidated SCI Le Mans Gare France Fully consolidated SCI Nanterre Guilleraies France Fully consolidated SCI Nantes Carnot France Fully consolidated SCI Pantin les Moulins France Fully consolidated SCI Paris Batignolles France Fully consolidated SCI Paris Cours de Vincennes France Fully consolidated SCI Porte d'asnieres France Fully consolidated SCI Rue Moussorgski France Fully consolidated SCI Rueil Caudron France Fully consolidated SCI Saint Denis Landy France Fully consolidated SCI Saint Denis Mitterrand France Fully consolidated SCI Villeurbanne Stalingrad France Fully consolidated SCI BNPP Pierre I France Fully consolidated SCI Défense Etoile France Fully consolidated SCI DEFENSE VENDOME France Fully consolidated SCI Odyssée France Fully consolidated Valeur Pierre Epargne France Fully consolidated Rueil Ariane France Fully consolidated Opéra Rendement France Fully consolidated Cardimmo France Fully consolidated Capital France Hôtel France Fully consolidated CFH Montmartre France Fully consolidated Hibernia France Fully consolidated CFH Bercy France Fully consolidated HVP France Fully consolidated CFH Cap d'ail France Fully consolidated CFH Montparnasse France Fully consolidated CFH Boulogne France Fully consolidated CFH Bercy Intermédiaire France Fully consolidated CFH Bercy Hotel France Fully consolidated S.A.P.A - CFH Algonquin Management Partners Franc France (2) Fully consolidated PEH Milan Holdco SRL France (2) Fully consolidated Fundamenta Italy Fully consolidated Assuvie France Equity SCI SCOO France Equity SCI Porte de Clayes France Equity STRUCTURED ENTITIES BNPP CP Cardif Alternative France Fully consolidated BNPP CP Cardif Private Debt France Fully consolidated BNPP France Crédit France Fully consolidated Camgestion Obliflexible France Fully consolidated CARDIF ALTERNATIVES PART I France Fully consolidated Cardif BNPP IP Convertibles World France Fully consolidated CARDIF BNPP IP EQUITY FRONTIER MARKETS U France Fully consolidated Cardif BNPP IP Signatures France Fully consolidated Cardif BNPP IP Smid Cap Euro France Fully consolidated Cardif BNPP IP Smid Cap Europe France Fully consolidated CARDIF CPR BASE CREDIT France Fully consolidated CARDIF EDRAM SIGNATURES France Fully consolidated CARDIF VITA CONVEX FUND EUR France Fully consolidated CEDRUS CARBON INITIATIVE TRENDS France Fully consolidated FP CARDIF CONVEX FUND USD France Fully consolidated G C THEMATIC OPPORTUNITIES II ( IRELAND ) France Fully consolidated Natio Fonds Athenes Investissement N 5 France Fully consolidated Natio Fonds Colline International France Fully consolidated Natio Fonds Collines Investissement N 3 France Fully consolidated NATIO FONDS COLLINES INVESTISSEMENT N1 France Fully consolidated NEW ALPHA CARDIF INCUBATOR FUND France Fully consolidated PERMAL CARDIF CO-INVESTMENT FUND France Fully consolidated TIKEHAU CARDIF LOAN EUROPE France Fully consolidated VALTITRES FCP France Fully consolidated

51 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER D.3 Assets valuation methods Pursuant to Article 75 a) of the Directive, assets are valued "at the amount for which they could be exchanged between knowledgeable willing parties in an arm s length transaction. Letters A to G refer to the lines of BNP Paribas Cardif balance sheet presented at part D.1. A. Deferred Acquisition Costs The share of expenses incurred when acquiring insurance contracts that do not relate to the current period are recorded as an asset on the face of the group s balance sheet. These acquisition costs are not deferred under Solvency II. B. Other intangible assets Intangible assets are recognised at nil value unless there is an active market for similar identifiable assets. They are then assessed at market value. C. Deferred tax assets Deferred taxes are determined by the method described in paragraph D.6 (Other information). Deferred tax assets are recognised for all deductible temporary differences and tax-losses carryforwards only to the extent that the entity in question will in all probability generate future taxable profits against which these temporary differences and tax losses can be offset. D. Property held for own use Buildings for own use are assessed at their economic value, which is based on the value determined by an independent assessor. E. Financial investments Financial assets are listed on the asset side of the balance sheet in accordance with the Complementary Identification Codes (CIC) determined by EIOPA. The fair value of the financial assets is determined by using either the prices directly obtained from market data, or from prices stemming from valuation techniques. These valuation techniques are primarily market and income approaches encompassing generally accepted models (e.g. discounted future cash flows, Black-Scholes model, and interpolation techniques). They maximise the use of observable inputs and minimise the use of unobservable inputs. These techniques are calibrated to reflect current market conditions.

52 52 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Equities (other than investments 4 ), bonds and collective funds are primarily valued using prices on active markets, for identical assets "Quoted Markets Price (QMP)" or for similar assets "Quoted Markets Price for similar assets (QMPS)". Characteristics of an active market include the existence of a sufficient frequency and volume of activity and of readily available prices. Equities issued by investments are primarily unlisted equities, which are valued at the share of the net adjusted situation (in accordance with the method "IFRS own funds methods (IEM)". Deposits (other than those similar to cash) are valued at a notional value. Breakdown of investments by the valuation method is as follows as at 31 December 2017 (excluding investments representing unit-linked undertakings): Real estate investments are mainly investment property as well as shares in unlisted real investment funds. F. Share of reinsurers and retrocessionnaires in the technical reserves The method for assessing the ceded technical provisions follows the same principles as those of the technical provisions described in paragraph D.4.a. At 31 December 2017, the ceded technical provisions amounted to 2,747 million. G. Receivables from insurance and reinsurance transactions These receivables have a contractual maturity of less than one year. They are assessed at their notional value, possibly corrected by a provision to take into account the credit quality specific to each counterparty. At 31 December 2017, the receivables from reinsurance transactions mainly correspond to the current accounts of reinsurers. 4 i.e. "other than the equities issued by companies that are shareholdings in the meaning of the Solvency II Directive"

53 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER D.4 Valuation methods for liabilities D.4.a Valuation methods for technical provisions At end 2017, the BEL, gross of reinsurance, was 178,569 million. It increased by 10% compared to 31 st December The evolution of the BEL is primarily due to the increase of the unit-linked engagements, in line with the level of inflows in 2017 and the effect of revaluation related to the equity markets performance. Reconciliation with the financial statements The difference between the IFRS accounting technical provisions ( 184,230 million) and Solvency II ( 180,203 million) is primarily explained by discounted future profits, unrealised gains assigned to policies and to a lesser extent by the integration of the risk margin.

54 54 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 Valuation principles for technical provisions Pursuant to Article 75 b) of the Directive, the liabilities are valued "at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm s length transaction." Technical provisions represent the sum of the Best Estimate of the Liabilities ("BEL"), and the Risk Margin ("RM"). The BEL corresponds to the expected value of portfolio cash-flows as at 31 December 2017, discounted with the risk free curve without any risk reduced by the credit risk and increased by volatility adjustment. The risk margin is calculated using the "Method 2" of the simplifications proposed in guideline 61 of the Guidelines for the valuation of technical provisions (EIOPA-BoS-14/166). This methodology is based on the sub-modules' risk forecast in proportion to certain indicators called "drivers". Valuation method for technical provisions Projection models Cash-flows are projected for a period of up to 40 years based on deterministic or stochastic models, either at group or at local level. Contract boundaries The contract boundary is defined as the date at which the insurer has the unilateral right to terminate the contract, to refuse premiums or to modify premiums in order to reflect the risk. To determine the boundary of each risk and contract generation, an analysis must be performed of the general terms and conditions of contracts, agreements with the partner, and local regulations. Level of uncertainty related to the value of technical provisions The valuation of technical provisions relies on cash-flows being projected on a long term horizon, which requires assumptions and the use of projection models. This supposes the exercise of judgment and the use of information available at the date of computation. As a consequence, the value of technical reserves is subject to uncertainty. Yield curve BNP Paribas Cardif uses the risk-free yield curve less the credit risk obtained from EIOPA, to which the Volatility Adjustment (VA) is added. However, the group has opted not to adopt the following transitional metrics: matching adjustment; transitional measure on the risk free interest rates; transitional measure on technical provisions. Other economic assumptions The table below shows the underlying economic assumptions: tax rates used for the computation of deferred tax relating to the Solvency II balance sheet restatements and the SCR deferred tax adjustment. Those rates are based on the rates used for

55 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER the current year accounting closing and the rates subsequently voted. The tax rates are then assumed to remain constant over the projection horizon; exchange rates against euros; inflation rates used for the overheads evolution over the projection horizon. D.4.b Valuation methods for other liabilities Pursuant to Article 75 of the Directive, the other liabilities are valued "at the amount for which they could be exchanged between knowledgeable and willing parties in an arms-length transaction". Letters H to M refer to the lines of BNP Paribas Cardif balance sheet presented at part D.1. H. Provision for pensions Employee benefit obligations are made up of post-employment benefits (retirement benefits and pension plans) and other long-term benefits (annual leave, bonuses relating to long service, etc.) Pension liabilities are evaluated on the basis of the present value of the benefit with respect to future services rendered, lowered by the fair value of plan assets. I. Liabilities for re-insurers' cash deposits As at 31 December 2017, the line item "Liabilities for cash deposits received from re-insurers" for an amount of 2,062 million mainly corresponds to the cash deposits set up within the scope of Cardif Assurance Vie reinsurance. J. Deferred tax liabilities Deferred tax liabilities are tax liabilities. They are determined in accordance with the method described in paragraph D.6., Other information.

56 56 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 K. Financial liabilities other than those owed to credit institutions Securities with repurchase agreement are kept as assets in BNP Paribas Cardif balance sheet. The sum received from the reinsurer in return for security lending operations is entered as a financial liability in BNP Paribas Cardif balance sheet. At 31 December 2017, financial liabilities other than those with credit institutions were 8,688 million, primarily made up of repurchase agreement for Cardif Assurance Vie ( 8,617 million) L. Liabilities from insurance and reinsurance transactions These liabilities have a contractual maturity of less than one year. In principle, they are valued at notional value. M. Subordinated liabilities in basic own funds Subordinated debts are assessed at their fair value by discounting their future financial cash-flows at risk-free rate increased by the original issuer's spread. The subordinated securities issued by BNP Paribas Cardif are presented in E.1.c. D.5 Alternative valuation methods The following are the valuation methods applied to investments: property assets (other than for own use) are re-evaluated at the market value of the buildings determined on the basis of a five-year assessment carried out by an independent assessor approved by the ACPR. Between two assessments, this five-year assessment is reviewed yearly and certified by an assessor; the hedge funds are assessed on the basis of the last net asset value published by the management company, possibly adjusted for significant movements occurring since its calculation date; deposits (other than those similar to cash) are assessed at a notional value, which corresponds to the fair value for this type of asset. D.6 Other information Deferred taxes are calculated on the basis of the temporary differences between the carrying amount of assets and liabilities in the Solvency II balance sheet and their tax base. Tax credits and tax loss carry-forwards are recognised and assessed in compliance with IFRS. Deferred tax assets and liabilities are measured using the liability method, using the tax rate which is expected to apply to the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been or will have been enacted before the balance sheet closing date of that period. They are not discounted. Deferred tax assets are recognised in the balance sheet if it can be shown that they can be absorbed by future taxable profits within a reasonable period.

57 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER Deferred tax assets and deferred tax liabilities may be offset if, and only if: they relate to the taxes collected by the same tax authority and from the same taxable entity; there is a legally enforceable right to offset the payable tax assets with the payable tax liability. Each BNP Paribas Cardif branch and subsidiary calculates its deferred tax on the basis of the local tax required and according to the principles described above. The position of deferred tax in the Solvency II balance sheet is offset by each entity. At 31 December 2017, deferred tax liabilities were 1,409 million and deferred tax assets were 54 million.

58 58 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER 2017 E. Capital management E.1 Own funds E.1.a Objectives and policy for own funds management to cover the SCR and the SCR Group Minimum BNP Paribas Cardif capital management aims to ensure an optimised and sufficient capital structure, to satisfy prudential requirements and to guarantee adequate financial resilience BNP Paribas Cardif adopts the transitional arrangements with regard to the qualification of own funds but has chosen to take a target position for calculating the SCR. The Capital Management Policy of BNP Paribas Cardif aims notably to ensure the prudential solvency requirement are met, to cover at least at 100% the SCR defined within the scope of the ORSA assessment and to structure own funds so that the best balance can be found between the share capital, subordinated debt and other own funds elements, complying with the limits and levels laid down by regulations. Depending on the levels of solvency ratios observed and the forecasts made under ORSA, remedial actions to adjust the capital may be initiated. E.1.b Highlights of financial year 2017 During the year 2017, BNP Paribas Cardif group issued and redeemed several subordinated debts during the third and the fourth quarters, leading to a 100 million reduction of own funds Tier 2 and an increase of 750 million own funds Tier 3. The operations are as follows : a redeemable subordinated debt (TSR), with a 10-year maturity, amounting to 753 million, ending on 23 December 2021, Tier 2 grand-fathered was redeemed on 25 September 2017 ; a redeemable subordinated debt (TSR), with a 30-year maturity (first call date on 26 September 2027), with a nominal value of 760 million issued by BNP Paribas Cardif and subscribed by BNP Paribas on 26 September This issuance is eligible for Tier 2 own funds in target measures. The issuance and its terms have been decided by the Chief Executive Officer in accordance with the credentials received by the Board of Directors on 29 march 2017 ; a subordinated perpetual notes which amounts to 710 million Tier 2 issued in 2012 in target measures was replaced by the issuance of a redeemable subordinated debt (TSR) by BNP Paribas Cardif with a 30-year maturity (first call date on 29 September 2027) with the same amount and the same tier. This TSR was subscribed by BNP Paribas. This issuance and its terms have been decided by the Chief Executive Officer in accordance with the credentials received by the Board of Directors on 28 September 2017 ; a TSR, with a 7-year maturity (first call date on 29 November 2022) was externally issued on 29 November 2017 by BNP Paribas Cardif on the Luxembourg Stock Exchange with a 750 million nominal value. This issuance is eligible for Tier 3 own funds in target measures ; a 170 million TSR with a 30-year maturity (first call date on 14 December 2027) was issued by BNP Paribas Cardif and subscribed by BNP Paribas on 14 December This issuance is eligible for Tier 2 own funds in target measures ;

59 SFCR - SOLVENCY AND FINANCIAL CONDITION REPORT - 31 DECEMBER a TSR of 277 million with a 10-year maturity, ending on 17 December 2022, Tier 2 grandfathered, was redeemed on 18 December BNP Paribas Cardif proceeded with the payment of a 345 million interim dividend on 8 december E.1.c Structure, amount and quality of own funds Available own funds stood at 12,061 million as at 31 December 2017 and comprised the following elements: The ordinary share capital and the share premiums stood at 3,138 million, same amounts as at 31 December The reconciliation reserve is comprised primarily of the present value of future profits, retained earnings and statutory reserves. The subordinated debt amounts to 4,812 million in market value, of which 4,579 million at par value and 233 million of revaluation. BNP Paribas Cardif does not have any ancillary own funds. Thus, own funds from the consolidated balance sheet under Solvency II stand at 12,178 million, of which 117 million are trimmed representing the subsidiaries consolidated reserves that are not transferrable as well as the adjustment of the Cardif Assurance Vie guarantee fund, ineligible under Solvency II.