The main types of risk to which the PZU Group is exposed includes credit risk (in particular risk related to bank credit portfolio), actuarial risk, market risk (in particular interest rate risk, foreign exchange risk, and risk related to financial instruments and commodities), concentration risk, operational risk, compliance risk and models risk.
When managing each type of risk, the PZU Group identifies, measures and monitors risk concentration; for the banking sector, these processes occur on the entity level, according to requirements in the sector. To meet the regulatory obligations imposed on capital groups identified as financial conglomerates, intensive adjustment is pending to extend the current risk concentration management model.
7.5.1. Credit and concentration risk
Credit risk is the risk of a loss or adverse change in the financial situation resulting from fluctuations in the trustworthiness and creditworthiness of issuers of securities, counterparties and all debtors, materializing through a counterparty’s default on a liability or an increase in credit spread. This definition also includes credit risk in financial insurance.
Credit risk in the PZU Group includes:
Concentration risk, a risk stemming from the failure to diversify an asset portfolio or from large exposure to the risk of default by a single issuer of securities or a group of related issuers.
Exposure to credit risk in the PZU Group arises directly from banking, investment activities, activity in the financial insurance and guarantee segment, reinsurance agreements, and bancassurance operations. The PZU Group distinguishes the following kinds of credit risk exposure:
18.104.22.168. Concentration risk arising out of lending activity
This section presents information related to lending activity of PZU Group’s banks.
To prevent adverse events that could result from excessive concentration, both Pekao and Alior Bank mitigate the concentration risk by setting limits and applying concentration standards arising from both external and internal regulations. They include the following:
In the process of setting and updating concentration limits, the following information is taken into account:
Risk analysis is performed using both an individual and a portfolio approach. Measures are undertaken to:
In order to minimize the risk level of a single exposure, the following is assessed every time when a loan or other credit product is granted:
In order to enhance control over the risk of individual exposures, customers are monitored regularly and appropriate measures are taken if increased risk factors are identified.
In order to minimize credit risk arising from a particular portfolio:
22.214.171.124. Credit risk arising out of lending activity
Risk assessment in credit process
The provision of credit products is accomplished in accordance with loan granting methodologies appropriate for a given client segment and type of product. The internal rating process in both banks constitutes a significant part of assessing credit risk of both the client and the transaction. It is an important step in the credit decision-making process for new loans and for changes of lending terms, and in monitoring loan portfolio quality. Each bank has developed its own models used in the client creditworthiness assessment process, which must be completed before a credit decision is made. The models are based on external information and on internal data. Credit products are granted in the banks in accordance with the operating procedures, whose purpose is to set out the proper steps that must be taken in the credit process, identify the units responsible for those activities and the tools to be applied.
Credit decisions are made in accordance with the existing credit decision system (with decision-making powers at specific levels matching the risk level of a particular client and transaction).
In order to conduct regular assessment of accepted credit risk and to mitigate potential losses on credit exposures, the client’s standing is monitored during the lending period by identifying early warning signals and by conducting regular individual reviews of credit exposures.
To minimize credit risk, security interests are established in line with the level of exposure to credit risk and in accordance with the client’s ability to provide the required collateral. The establishment of a security interest does not waive the requirement to examine the client’s creditworthiness.
Collateral is taken to secure repayment of the loan amount with due interest and costs if the borrower fails to settle its due debt within the dates stipulated in a loan agreement and restructuring activities are not successful. Accepted forms of collateral include: guarantees, sureties, account freezes, registered pledges, transfers of title, assignments of receivables, assignment of credit insurance, promissory notes, mortgages, powers of attorney to bank accounts and security deposits (as special forms of collateral). The assets constituting collateral are reviewed in the credit process in terms of their legal capacity to establish effective security interest and also the recoverable amount in a possible enforcement procedure.
Scoring and credit rating
The rating scale differs by bank, client segment and transaction type. The following tables present the quality of credit portfolios for exposures covered by internal rating models. Because of the different rating models employed by Pekao and Alior Bank, the data are presented for each of the banks separately.
Permanent protection of credit portfolio quality is provided by continuous monitoring of timely service of loans and regular reviews of the financial and economic standing of clients and the value of accepted collateral. This process is applied to all credit exposures of individual and business clients.
|Individual client portfolio (unimpaired) covered by the rating model – gross carrying amount||31 December 2018|
|Mortgage-backed residential loans (1 - best class, 7 worst class)||53,967|
|Class 1 (0.00% <= PD < 0.06%)||10,447|
|Class 2 (0.06% <= PD < 0.19%)||5,308|
|Class 3 (0.19% <= PD < 0.35%)||24,380|
|Class 4 (0.35% <= PD < 0.73%)||10,309|
|Class 5 (0.73% <= PD < 3.50%)||2,233|
|Class 6 (3.50% <= PD < 14.00%)||621|
|Class 7 (14.00% <= PD < 100.00%)||669|
|Consumer cash loans (1 - best class, 8 worst class)||11,174|
|Class 1 (0.00% <= PD < 0.09%)||798|
|Class 2 (0.09% <= PD < 0.18%)||1,643|
|Class 3 (0.18% <= PD < 0.39%)||2,740|
|Class 4 (0.39% <= PD < 0.90%)||2,567|
|Class 5 (0.90% <= PD < 2.60%)||1,802|
|Class 6 (2.60% <= PD < 9.00%)||1,001|
|Class 7 (9.00% <= PD < 30.00%)||399|
|Class 8 (30.00% <= PD < 100.00%)||224|
|Renewable limits (1 - best class, 7 worst class)||275|
|Class 1 (0.00% <= PD < 0.02%)||8|
|Class 2 (0.02% <= PD < 0.11%)||55|
|Class 3 (0.11% <= PD < 0.35%)||78|
|Class 4 (0.35% <= PD < 0.89%)||61|
|Class 5 (0.89% <= PD < 2.00%)||36|
|Class 6 (2.00% <= PD < 4.80%)||24|
|Class 7 (4.80% <= PD < 100.00%)||13|
|Total individual client segment||65,416|
|Corporate segment portfolio (unimpaired) covered by the rating model – gross carrying amount||31 December 2018|
|Corporate client (1 – best class, 9 – worst class)||23,336|
|Class 1 (0.00% <= PD < 0.15%)||511|
|Class 2 (0.15% <= PD < 0.27%)||2,001|
|Class 3 (0.27% <= PD < 0.45%)||3,708|
|Class 4 (0.45% <= PD < 0.75%)||5,070|
|Class 5 (0.75% <= PD < 1.27%)||4,443|
|Class 6 (1.27% <= PD < 2.25%)||3,953|
|Class 7 (2.25% <= PD < 4.00%)||1,512|
|Class 8 (4.00% <= PD < 8.50%)||1,922|
|Class 9 (8.50% <= PD < 100.00%)||216|
|Small and medium-sized enterprises (SMEs) (1 – best class, 10 – worst class)||4,230|
|Class 1 (0.00% <= PD < 0.06%)||19|
|Class 2 (0.06% <= PD < 0.14%)||291|
|Class 3 (0.14% <= PD < 0.35%)||913|
|Class 4 (0.35% <= PD < 0.88%)||1,083|
|Class 5 (0.88% <= PD < 2.10%)||874|
|Class 6 (2.10% <= PD < 4.00%)||429|
|Class 7 (4.00% <= PD < 7.00%)||256|
|Class 8 (7.00% <= PD < 12.00%)||168|
|Class 9 (12.00% <= PD < 22.00%)||92|
|Class 10 (22.00% <= PD < 100.00%)||105|
|Total corporate segment||27,566|
|Local government units (unimpaired) covered by the rating model – gross carrying amount||31 December 2018|
|Class 1 (0.00% <= PD < 0.04%)||1|
|Class 2 (0.04% <= PD < 0.06%)||345|
|Class 3 (0.06% <= PD < 0.13%)||337|
|Class 4 (0.13% <= PD < 0.27%)||348|
|Class 5 (0.27% <= PD < 0.50%)||637|
|Class 6 (0.50% <= PD < 0.80%)||686|
|Class 7 (0.80% <= PD < 1.60%)||33|
|Class 8 (1.60% <= PD < 100.00%)||18|
|Total local government units||2,405|
|Portfolio of specialized lending exposures within the meaning of CRR Regulation – unimpaired – by supervisory classes – gross carrying amount||31 December 2018|
|Pekao Portfolio – data as at 31 December 2018||Gross carrying amount||Write-off||Net carrying amount|
|Exposures without recognized impairment||127,375||-2,194||125,181|
|Portfolio covered by the rating model for the individual client segment||65,416||-1,429||63,987|
|Cash (consumer) loans||11,174||-248||10,926|
|Portfolio covered by the rating model for the corporate segment||27,566||-362||27,204|
|Small and medium-sized enterprises (SME)||4,230||-94||4,136|
|Portfolio covered by the rating model for the local government unit segment||2,405||12||2,417|
|Specialized lending exposures||6,092||-99||5,993|
|Exposures not covered by the rating model||25,896||-316||25,580|
|Exposures with recognized impairment||7,836||-5,197||2,639|
|Total receivables from clients on account of impaired loans 1)||135,211||-7,391||127,820|
1) Loan receivables from clients are measured at amortized cost or at fair value through other comprehensive income.
|Non past due financial assets||31 December 2017|
|Non past due receivables, without impairment|
|Mortgage-backed residential loans (1 - best class, 7 worst class)||48,725|
|Class 1 (0.00% <= PD < 0.06%)||10,308|
|Class 2 (0.06% <= PD < 0.19%)||5,220|
|Class 3 (0.19% <= PD < 0.35%)||21,829|
|Class 4 (0.35% <= PD < 0.73%)||8,464|
|Class 5 (0.73% <= PD < 3.50%)||1,553|
|Class 6 (3.50% <= PD < 14.00%)||628|
|Class 7 (14.00% <= PD < 100.00%)||723|
|Cash loans (1 - best class, 8 worst class)||10,327|
|Class 1 (0.00% <= PD < 0.34%)||763|
|Class 2 (0.34% <= PD < 0.80%)||1,597|
|Class 3 (0.80% <= PD < 1.34%)||2,555|
|Class 4 (1.34% <= PD < 2.40%)||2,424|
|Class 5 (2.40% <= PD < 4.75%)||1,603|
|Class 6 (4.75% <= PD < 14.50%)||855|
|Class 7 (14.50% <= PD < 31.00%)||336|
|Class 8 (31.00% <= PD < 100.00%)||194|
|Corporate client segment (1 - best class, 9 worst class)||20,434|
|Class 1 (0.00% <= PD < 0.15%)||618|
|Class 2 (0.15% <= PD < 0.27%)||1,401|
|Class 3 (0.27% <= PD < 0.45%)||2,803|
|Class 4 (0.45% <= PD < 0.75%)||6,073|
|Class 5 (0.75% <= PD < 1.27%)||3,468|
|Class 6 (1.27% <= PD < 2.25%)||2,494|
|Class 7 (2.25% <= PD < 4.00%)||1,245|
|Class 8 (4.00% <= PD < 8.50%)||2,247|
|Class 9 (8.50% <= PD < 100.00%)||85|
|Total non past due receivables from clients, without impairment||79,486|
|Portfolio of specialized lending exposures within the meaning of CRR Regulation – unimpaired – by supervisory classes||31 December 2017|
|Exposure||31 December 2017|
|Loans with no recognized impairment||129,764|
|Loans to retail clients:||62,073|
|Covered by an internal rating model:||59,052|
|Other, not covered by an internal rating model||3,021|
|Loans to businesses:||67,691|
|Covered by an internal rating model||20,434|
|Portfolio of specialized lending exposures within the meaning of CRR Regulation||7,248|
|Debt securities not covered by an internal rating model||12,658|
|Other, not covered by an internal rating model||27,351|
|Loans with recognized impairment||2,536|
|Total loans and advances to customers 1)||132,300|
|31 December 2018|
|PD < 0.18%||4,375|
|0.18% <= PD < 0.28%||2,672|
|0.28% <= PD < 0.44%||2,687|
|0.44% <= PD < 0.85%||2,643|
|0.85% <= PD < 1.33%||2,872|
|1.33% <= PD < 2.06%||3,106|
|2.06% <= PD < 3.94%||4,560|
|3.94% <= PD < 9.10%||1,737|
|PD => 9.1%||1,094|
|PD < 0.28%||20|
|0.28% <= PD < 0.44%||91|
|0.44% <= PD < 0.85%||1,035|
|0.85% <= PD < 1.33%||1,495|
|1.33% <= PD < 2.06%||3,479|
|2.06% <= PD < 3.94%||5,727|
|3.94% <= PD < 9.1%||4,267|
|PD => 9.1%||2,719|
|Total non past due receivables, without impairment||45,577|
|Non past due receivables, with impairment||853|
|Total non past due receivables from clients||46,430|
|Non past due financial assets||31 December 2017|
|Non past due receivables, without impairment||45,048|
|Mortgage loans, cash loans, credit cards, current account overdraft (1 - best class, 6 - worst class)||2,461|
|Loans, credit cards, current account overdraft – standard process (K1 - best class, K10 - worst class)||10,841|
|Mortgage loans (M1 - best class, M10 - worst class)||12,016|
|Long-term products, car financing loans, current account overdraft limits (1 - best class, 5 - worst class)||6|
|Models for microbusinesses without full accounting Models for businesses with full accounting, car dealers and developers (Q01 - best class, Q25 - worst class)||19,724|
|Non past due receivables, with recognized impairment||988|
|Total non past due receivables from clients||46,036|
126.96.36.199. Application of forbearance
Forbearance is used if a threat arises that a client may default on the terms of a contract because of the financial difficulties, including problems with the service of debt. In such a situation, the terms and conditions of the agreement can be modified to ensure that the borrower is capable of servicing debt. Changes in terms and conditions of contracts may include: reduction of interest rates, principal installment amounts, accrued interest, rescheduling of principal or interest payments.
Accounting policies for the assessment and determination of impairment losses for forborne exposures are broadly in line with the principles for determining impairment losses under IFRS 9.
The PZU Group identifies a significant increase in the credit risk of assets for which forbearance modifications have been applied for the purpose of assessing impairment in accordance with IFRS 9.
|Forborne exposures in the PZU Group’s portfolio||31 December 2018||31 December 2017|
|Basket 1||Basket 2||Basket 3||Purchased or originated credit- impaired (POCI)||Total||Total|
|Individual analysis||Group analysis|
|Loan receivables from clients measured at amortized cost|
|Gross forborne exposures||501||444||3,170||713||301||5,129||4,952|
|Net forborne exposures||495||437||1,506||405||221||3,064||2,860|
|Loan receivables from clients measured at fair value through profit or loss||-||-||-||-||2||2||n/a|
|Movement in net carrying amount of forborne exposures||31 December 2018||31 December 2017|
|Effect of implementing IFRS 9||(43)||n/a|
|Adjusted value of the opening balance||2,817||800|
|Value of exposures recognized in the period||1,105||974|
|Value of exposures excluded in the period||(334)||(569)|
|Movements in impairment losses||(204)||(28)|
|Change in the composition of the Group||-||2,051|
|Total net receivables||3,066||2,860|
188.8.131.52. Credit risk arising out of investing activity
The management principles for credit risk arising from investing activity in the PZU Group are governed by a number of documents approved by supervisory boards, management boards and dedicated committees.
Credit risk exposures to respective counterparties and issuers are subject to restrictions based on exposure limits. The limits are established by dedicated committees, based on the analyses of risks associated with a given exposure and taking into account the financial standing of entities or groups of related entities and the impact of such exposures on the occurrence of concentration risk. Qualitative restrictions on exposures established by individual committees in accordance with their powers form an additional factor mitigating the credit risk and concentration risk identified in investment activities.
The limits refer to exposure limits to a single entity or a group of affiliated entities (this applies to both credit limits and concentration limits). The use of credit risk and concentration risk limits is subject to monitoring and reporting. If the limit is exceeded, appropriate actions, as defined in internal regulations, are taken.
Credit risk assessment of an entity is based on internal credit ratings (the approach to rating differs by type of entity). Ratings are based on quantitative and qualitative analyses and form one of the key elements of the process of setting exposure limits. The credit quality of counterparties and issuers is regularly monitored. One of the basic elements of monitoring is a regular update of internal ratings.
Risk units identify, measure and monitor exposure to credit risk and concentration risk related to investment activity, in particular they give opinions on requests to set exposure limits referred to individual committees.
Information on the credit quality of assets related to investing activity is presented in section 36.
Exposure to credit risk
The following tables present the credit risk exposure of individual credit risk assets in respective Fitch rating categories (if a Fitch rating was missing, it was substituted by a Standard&Poor’s or Moody’s rating). Credit risk exposures arising from conditional transactions are presented as an exposure to the issuer of the underlying securities.
The tables do not include loan receivables from clients and receivables due under insurance contracts. This was because these asset portfolios are very dispersed and therefore contains a significant percentage of receivables from unrated entities and individuals.
|Credit risk assets at 31 December 2018||AAA||AA||A||BBB||BB||B||Unrated||Assets at the client’s risk||Total|
|Debt securities measured at fair value through other comprehensive income – carrying amount||970||671||23,563||1,304||362||-||11,345||-||38,215|
|- write-off for expected credit losses 1)||-||-||(7)||(3)||(1)||-||(29)||-||(40)|
|Debt securities measured at fair value through profit or loss – carrying amount||49||7||10,080||463||188||-||178||1,211||12,176|
|Debt securities measured at amortized cost – carrying amount||-||83||27,529||1,652||-||-||5,388||-||34,652|
|- gross carrying amount||-||83||27,537||1,653||-||-||5,455||-||34,728|
|- write-off for expected credit losses||-||-||(8)||(1)||-||-||(67)||-||(76)|
|Term deposits with credit institutions and buy- sell-back transactions – carrying amount||-||-||951||4,151||62||-||793||90||6,047|
|- gross carrying amount||-||-||951||4,151||62||-||804||90||6,058|
|- write-off for expected credit losses||-||-||-||-||-||-||(11)||-||(11)|
|Loans – carrying amount||-||-||-||-||612||-||3,923||-||4,535|
|- gross carrying amount||-||-||-||-||613||-||3,982||-||4,595|
|- write-off for expected credit losses||-||-||-||-||(1)||-||(59)||-||(60)|
|Reinsurers’ share in claims provisions||-||149||634||-||-||-||135||-||918|
1) The write-off is recognized in revaluation reserve and it does not lower the carrying amount of assets.
|Credit risk assets as at 31 December 2017||AAA||AA||A||BBB||BB||Unrated||Assets at the client’s risk||Total|
|- held to maturity||-||-||20,941||59||58||179||-||21,237|
|- available for sale||-||725||34,865||289||41||11,935||-||47,855|
|- at fair value through profit or loss||560||-||9,964||962||499||404||1,290||13,679|
|Term deposits with credit institutions and buy- sell-back transactions||-||8||960||903||8||759||88||2,726|
|Reinsurers’ share in claims provisions||-||156||452||-||-||167||-||775|
The table below presents credit risk coefficients used by the PZU Group to measure credit risk:
The credit risk level attributable to the assets where the risk is carried by the PZU Group as at 31 December 2018 was PLN 6,924 million (as at 31 December 2017 it was PLN 8,866 million; if the coefficients of 31 December 2018 were used, the value would be PLN 8,662 million).
184.108.40.206. Reinsurer’s credit risk in insurance activity
PZU Group enters into proportional and non-proportional reinsurance contracts aiming to reduce liabilities arising from its core business. Reinsurance is exposed to credit risk associated with the risk that a reinsurer default on its obligations.
Assessment of reinsurers’ creditworthiness is conducted based on market data, information obtained from external sources, such as Standard&Poor’s and also based on an internal model. The model divides reinsurers into several classes, depending on the estimated risk level. A reinsurer will not be accepted if its risk is higher than a pre-defined cut-off point. The acceptance is not automatic and the analysis is supplemented by assessments by reinsurance brokers. In the credit risk monitoring process, this assessment is updated on a quarterly basis.
The following tables present the credit risk of the reinsurers that cooperated with PZU Group companies.
|Reinsurer||Reinsurers’ share in technical provisions (net) as at 31 December 2018||Standard&Poor’s rating as at 31 December 2018 2)|
|Others, including: 1)||781|
|With investment-grade rating||669||BBB- or better|
|With sub-investment grade rating or unrated||112||BB+ or worse or unrated|
1) “Others” includes reinsurers’ shares in technical provisions if their carrying amounts are lower than those presented above.
2) A.M. Best ratings were used if Standard&Poor’s rating was missing.
|Reinsurer||Reinsurers’ share in technical provisions (net) as at 31 December 2017||Standard&Poor’s rating as at 31 December 2017 2)|
|Others, including: 1)||595|
|With investment-grade rating||555||BBB- or better|
|With sub-investment grade rating or unrated||40||BB+ or worse or unrated|
1) “Others” includes reinsurers’ shares in technical provisions if their carrying amounts are lower than those presented above.
2) A.M. Best ratings were used if Standard&Poor’s rating was missing
Counterparty risk related to reinsurance is mitigated by the fact that the PZU Group cooperates with numerous reinsurers with reliable credit ratings.
220.127.116.11. Risk concentration in credit risk
The following table presents the concentration of PZU Group’s balance-sheet and off-balance-sheet exposures using the sections of the Polish Classification of Business Activity (PKD):
|Industry segment||31 December 2018||31 December 2017|
|Public administration and defense||27.92%||30.28%|
|Financial and insurance activities||15.83%||14.46%|
|Wholesale and retail trade; repair of motor vehicles||9.88%||9.38%|
|Real estate activities||8.06%||8.44%|
|Transportation and storage||3.93%||3.53%|
|Production and supply of electricity, gas, steam, hot water||3.46%||3.75%|
|Information and communication||2.88%||2.68%|
|Professional, scientific and technical activity||2.29%||1.99%|
|Mining and quarrying||1.24%||1.40%|
7.5.2. Actuarial risk (non-life and life insurance)
Actuarial risk is the possibility of loss or of adverse change in the value of liabilities under the executed insurance agreements and insurance guarantee agreements, due to inadequate premium pricing and technical provisioning assumptions. Actuarial risk includes:
|Non-life insurance||Life insurance|
|Longevity risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance liabilities.||X||X|
|Expense risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of the expenses incurred in servicing insurance or reinsurance contracts.||X||X|
|Lapse risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level or volatility of the rates of policy lapses, terminations, renewals and surrenders.||X||X|
|Catastrophe risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and technical provisioning assumptions related to extreme or irregular events.||X||X|
|Premium risk – risk of inadequate estimation of tariff rates and possible deviations of written premiums from the expected level, resulting from fluctuations in the timing, frequency and severity of insured events.||X||n/a|
|Provisioning risk – risk of inadequate estimation of technical provisioning levels and the possibility of fluctuations of actual losses around their statistical average because of the stochastic nature of future claims payments.||X||n/a|
|Revision risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the level, trend, or volatility of the revision rates applied to annuities, due to changes in the legal environment or health of the person insured.||X||n/a|
|Mortality risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance liabilities.||n/a||X|
|Morbidity (disability) risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend or volatility of disability, sickness and morbidity rates.||n/a||X|
PZU Group manages its actuarial risk among others through:
Calculation and monitoring of adequacy of technical provisions
PZU Group manages its technical provisioning adequacy risk by using appropriate calculation methodology and by controlling provision calculation processes. The provisioning policy is based on:
For non-life insurance, the level of technical provisions is evaluated once a month and in specific circumstances (when a payment is made or new information obtained from adjusters or lawyers) their amount is updated. The historical developments and payments of technical provisions over the years are used in the current analyses of technical provisions. This analysis provides an assessment of precision of the current actuarial methods.
For life insurance products, the main sources of data used to estimate the expected frequency of claims include public statistical data (life expectancy tables) published by specialized statistical institutions and analysis of historical insurance portfolio data. Periodic statistical analysis of claim incidence are made at the level of product groups, individual insurance portfolios and properly defined homogeneous risk groups. These analyses form the basis for measuring relative incidence of events compared to publicly available statistical data. The use of appropriate statistical methodologies allows the Group to determine the significance of the statistics and where required – define and apply appropriate safety margins in the determination of technical provisions and risk measurement.
Estimation of technical provisions in the PZU Group is supervised by chief actuaries.
Tariff strategy, monitoring of current estimates and evaluation of premium adequacy
The objective of the tariff policy is to guarantee adequate level of premium (sufficient to cover current and future liabilities under in-force policies and expenditures). Along with developing a premium tariff, simulations are conducted with regard to the projected insurance profit/loss in subsequent years. Additionally, regular premium adequacy and portfolio profitability studies are carried out for each insurance type based on, among others, evaluation of the technical result on a product for a given financial year. The frequency of analyses is adjusted to the materiality of the product and possible fluctuations of its result. If the insurance history is unfavorable then measures are taken to restore the specified profitability level, which involves adjustments to premium tariffs or to the insured risk profile, through amendments to general terms of insurance.
For corporate and SME customers, the underwriting process is separate from the sales function. The insurance sales process to corporate customers is preceded by analysis and assessment of risk carried out by dedicated underwriting teams. The underwriting process consists of a risk acceptance system based on the assigned decision-making powers and limits.
The purpose of the PZU Group’s reinsurance program in non-life insurance is to secure its core business by mitigating the risk of catastrophic events that may adversely affect the its financial position. This task is performed through obligatory reinsurance contracts supplemented by facultative reinsurance.
PZU Group limits its risk among others by way of:
Optimization of the reinsurance program in terms of protection against catastrophic claims is based on the results of internal analyses and uses third-party models.
18.104.22.168. Exposure to actuarial risk – non-life and life insurance
|Key cost ratios in non-life insurance||1 January – 31 December 2018||1 January – 31 December 2017|
|Net loss ratio||61.61%||63.51%|
|Reinsurer’s retention ratio||4.98%||4.29%|
The expense ratio is the ratio of total acquisition expenses, administrative expenses, reinsurance commissions and profit participation, to the net earned premiums.
The net loss ratio is the ratio of claims and the net movement in technical provisions, to the net earned premiums.
The reinsurer’s retention ratio is the ratio of the reinsurer’s share in gross written premiums, to the gross written premiums.
The combined ratio is the ratio of the sum of acquisition expenses, administrative expenses, reinsurance commissions and profit participation, claims and net movement in technical provisions to the net earned premiums.
The following tables present the development of technical provisions and payments in successive reporting years.
|Claims development in direct non-life insurance, gross (by reporting year)||2009||2010||2011||2012||2013||2014||2015||2016||2017||2018|
|Provision at the end of the reporting period||8,699||9,381||9,870||10,989||11,783||13,312||13,163||13,181||13,990||14,975|
|Provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period):|
|- calculated 1 year later||8,561||9,681||10,298||11,286||12,241||13,032||12,908||13,353||14,251|
|- calculated 2 years later||8,856||10,192||10,753||11,958||12,180||12,719||12,922||13,500|
|- calculated 3 years later||9,346||10,719||11,590||11,973||12,080||12,822||12,983|
|- calculated 4 years later||9,874||11,574||11,738||11,910||12,172||13,089|
|- calculated 5 years later||10,712||11,735||11,702||12,067||12,439|
|- calculated 6 years later||10,875||11,795||11,871||12,340|
|- calculated 7 years later||10,971||12,017||12,184|
|- calculated 8 years later||11,201||12,309|
|- calculated 9 years later||11,503|
|Sum total of the provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period)||11,503||12,309||12,184||12,340||12,439||13,089||12,983||13,500||14,251|
|Total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period)||6,750||7,227||6,700||6,457||6,041||5,873||5,084||4,206||3,088|
|Provision recognized in the statement of financial position||4,753||5,082||5,484||5,883||6,398||7,216||7,899||9,294||11,163|
|Difference between the provision at the end of the first year and the provision estimated at the end of the reporting period (run-off result)||(2,804)||(2,928)||(2,314)||(1,351)||(656)||223||180||(319)||(261)|
|The above difference as % of provision at the end of the first year||-32%||-31%||-23%||-12%||-6%||2%||1%||-2%||-2%|
|Claims development in direct non-life insurance, net of reinsurance (by reporting year)||2009||2010||2011||2012||2013||2014||2015||2016||2017||2018|
|Provision at the end of the reporting period||7,973||8,639||9,305||10,413||11,453||12,814||12,653||12,559||12,880||13,484|
|Provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period):|
|- calculated 1 year later||7,844||8,838||9,731||10,722||11,787||12,525||12,355||12,576||13,066|
|- calculated 2 years later||8,092||9,345||10,185||11,282||11,704||12,201||12,278||12,664|
|- calculated 3 years later||8,558||9,873||10,947||11,278||11,599||12,224||12,473|
|- calculated 4 years later||9,106||10,672||11,071||11,215||11,642||12,481|
|- calculated 5 years later||9,892||10,818||11,047||11,326||11,891|
|- calculated 6 years later||10,037||10,884||11,167||11,581|
|- calculated 7 years later||10,145||11,032||11,449|
|- calculated 8 years later||10,311||11,321|
|- calculated 9 years later||10,601|
|Sum total of the provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period)||10,601||11,321||11,449||11,581||11,891||12,481||12,473||12,664||13,066|
|Total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period)||6,027||6,429||6,183||5,964||5,805||5,641||4,852||3,910||2,743|
|Provision recognized in the statement of financial position||4,574||4,892||5,266||5,617||6,086||6,840||7,621||8,754||10,323|
|Difference between the provision at the end of the first year and the provision estimated at the end of the reporting period (run-off result)||(2,628)||(2,682)||(2,144)||(1,168)||(438)||333||180||(105)||(186)|
|The above difference as % of provision at the end of the first year||-33%||-31%||-23%||-11%||-4%||3%||1%||-1%||-1%|
Motor insurance – motor own damage (autocasco) and motor TPL – is the core component of the PZU Group’s portfolio. Both types of insurance are generally concluded for one year, in which the loss must occur for the claim to be paid out. In the case of motor own damage, the time for reporting a loss is short and it is not the source of uncertainty. Motor TPL is a whole different situation – the period for reporting losses may be up to 30 years. The level of property losses is sensitive especially to the number of litigation claims reported and court rulings awarded in respective cases. In the case of TPL insurance contracts, new types of long-tail losses arise, which makes the process of estimating technical provisions much more complicated.
Risk concentration in non-life insurance
Within actuarial risk, the PZU Group identifies concentration risk with regard to possible losses caused by natural disasters, such as, in particular, floods and cyclones. The table below presents sums insured in the specified ranges, broken down by voivodeships (for operations conducted in Poland) and countries (for foreign operations). With regard to the exposure to the risk of floods and cyclones, the risk management system in the PZU Group allows to monitor it regularly and the reinsurance program in place reduces significantly the potential net catastrophic loss levels.
|Exposure to catastrophic losses in property insurance||Sum insured (PLN million) 31 December 2018||Sum insured (PLN million) 31 December 2017|
|0- 0.2||0.2 - 0.5||0.5 - 2||2 – 10||10 - 50||over 50||Sum||0- 0.2||0.2 - 0.5||0.5 - 2||2 – 10||10 - 50||over 50||Sum|
|Lithuania and Estonia||0.7%||1.7%||2.5%||0.9%||1.2%||2.3%||9.3%||0.7%||1.7%||2.6%||1.0%||0.6%||0.8%||7.4%|
The following results do not take into account the impact of changes in valuation of investments included in provision calculations.
|Impact of the change in assumptions regarding the provision for the capitalized value of annuities in non-life insurance on the net financial result and equity||31 December 2018||31 December 2017|
|Technical rate - increase by 0.5 p.p.||445||426||424||407|
|Technical rate - decrease by 1.0 p.p.||(1,155)||(1,105)||(1,094)||(1,051)|
|Mortality at 110% of the assumed rate||132||127||131||127|
|Mortality at 90% of the assumed rate||(148)||(142)||(146)||(141)|
22.214.171.124. Exposure to insurance risk – life insurance
The PZU Group has not disclosed information on the development of claims in life insurance, since uncertainty about the amount and timing of claims payments is typically resolved within one year.
Risk concentration is associated with the concentration of insurance contracts or sums insured. For traditional individual insurance products, where concentration risk is related to the possibility that an insurable event occurs or is related to the potential level of payouts arising from a single event, the risk is assessed on a case-by-case basis. The assessment includes medical risk and – in justified cases – also financial risk. Consequently, risk selection occurs (a person concluding an insurance agreement is evaluated) and the maximum acceptable risk level is defined.
In group insurance, concentration risk is mitigated by the sheer size of the contract portfolio. This significantly reduces the level of disturbances caused by the random nature of insurance history. Additionally, the collective form of a contract, under which all the persons insured have the same sum insured and coverage is an important risk-mitigating factor. Therefore, some risks within the contract portfolio are not concentrated.
In the case of group insurance contracts in which insurance cover may be adjusted at the level of individual group contracts, a simplified underwriting process is used. It is based on information about the industry in which the work establishment operates, assuming appropriate ratios of the insureds to employees in the work establishment. The insurance premiums used in such cases and appropriate mark-ups result from statistical analyses conducted by PZU Life on incidence of claims at the level of defined homogeneous risk groups, including relative frequency of events compared to public statistical data.
It should be noted that for most contracts, the claim amount is strictly defined in the insurance contract. Therefore, compared to typical non-life insurance contract, concentration risk is reduced, since single events with high claims payments are relatively rare.
Annuity products in life insurance
|Impact of the change in assumptions in annuity life insurance on the net financial result and equity||31 December 2018||31 December 2017|
|Technical rate - decrease by 1.0 p.p.||(25)||(27)|
|Mortality at 90% of the assumed rate||(11)||(11)|
Life insurance products excluding annuity products
|Impact of the change in assumptions in life insurance, excluding provisions in annuity products, on the net financial result and equity||31 December 2018||31 December 2017|
|Technical rate - decrease by 1.0 p.p.||(2,062)||(2,092)|
|Mortality at 110% of the assumed rate||(869)||(881)|
|Morbidity and accident rate – 110% of the assumed rate||(143)||(148)|
Effects of lapses in life insurance
Calculation of mathematical technical provisions for life insurance does not include the risk of lapses (resignations). The effects of hypothetical lapses 10% of all life insurance customers are presented below.
|Item in financial statements||31 December 2018||31 December 2017|
|Movement in technical provisions||2,142||2,167|
|Claims and benefits paid||(803)||(843)|
|Movement in deferred acquisition expenses||(8)||(8)|
|Profit/loss before tax||1,331||1,316|