7.3 Risk appetite, risk profile and risk tolerance

A process of determining the risk appetite and risk limits for each risk category consistent with the Group’s process has been implemented in the PZU Group insurance entities. The Management Board of each entity determines the risk appetite, risk profile and tolerance limits reflecting its financial plans, business strategy and the objectives of the entire PZU Group.

Risk appetite is defined as the level of risk that a company is prepared to accept in pursuit of its business objectives. The measure of risk appetite is the level of potential financial losses, the decline in asset value or the growth in the amount of liabilities within one year. The risk appetite level is defined as the minimum capital requirements coverage ratio. Risk appetite defines the maximum level of permissible risk while setting limits and restrictions for the various partial risks and the level above which remedial actions are taken to curtail further risk expansion.

The risk profile involves quantitative limits which offer a more precise definition of the risk appetite. Tolerance limits are additional limits for individual risk types to limit potential risk exposure.

This approach ensures the adequacy and effectiveness of the risk management system in the PZU Group and prevents acceptance of risk levels that could jeopardize the financial stability of individual companies and the entire PZU Group. The Management Board is responsible for setting the appropriate level of risk in each entity, whereas a review of the risk appetite values is conducted once a year by the unit responsible for risk. All actions are coordinated at the PZU Group level.

Risk appetite is determined at least once a year in the PZU Group’s banking sector entities. This process is carried out based on the applicable regulatory requirements (including those arising from remedial plans) and best practices. This process is tailored to both banks to reflect their business strategy and capital structure. Risk appetite in banking entities is a topic for consultation with the PZU Group’s parent company and the subject matter of opinions issued by the PZU Group Risk Committee with a view to ensuring consistency between the activities carried out by the banks and the strategic plans and business objectives of the entire PZU Group while maintaining an acceptable level of risk at the PZU Group level. Once agreed, the level of risk appetite is then approved by the banking entities’ supervisory boards.