7.5 Risk profile

Annual Report 2017 > 7.5 Risk profile
Reference Areas:
Health
Investments
Banking
Best Pratices in PZU

PZU Group is exposed to the following main types of risk: credit risk (in particular related to the banks’ credit portfolio), actuarial risk, market risk (in particular interest rate risk, foreign exchange risk and commodity risk), concentration risk, operational risk and compliance risk.

7.5.1. Credit and concentration risk

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.

Credit risk types in the PZU Group include:

  • counterparty default risk is the possibility of incurring loss as a result of default of the counterparties and debtors;
  • credit risk in banking activity is the credit risk arising from activity conducted in the banking sector, associated mainly with the possibility that a debtor or borrower defaults on its obligations;
  • credit risk in financial insurance is the credit risk arising from activity conducted in the financial insurance sector, associated mainly with the possibility that a client, debtor or borrower defaults on its obligations to a third party; the risk may result from a failure of a venture or adverse influence of the economic environment.  

Concentration risk is the risk stemming either from lack of diversification in the asset portfolio or from large exposure to default risk 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 and reinsurance and bancassurance operations. PZU Group distinguishes the following types of credit risk exposure:

  • risk of a customer’s default against PZU Group under contracted loans (in banking activity);
  • risk of bankruptcy of an issuer of financial instruments in which PZU Group invests or which it trades, e.g. corporate bonds;
  • counterparty default risk, e.g. reinsurance or OTC derivatives and bancassurance activity;
  • risk of default of a PZU Group’s customer against a third party, e.g. insurance of cash receivables, insurance guarantees.

7.5.1.1. 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:

  • rules of identifying the areas where concentration risk arises in credit activity;
  • process of setting and updating limit levels;
  • process of managing the limits and adopting the rules of conduct if the permitted limit level is exceeded;
  • concentration risk monitoring process, including reporting;
  • oversight over the concentration risk management process.

The following table presents the concentration of balance-sheet and off-balance-sheet exposures of Pekao and Alior Bank by industry, using the sections of the Polish Classification of Business Activity (PKD):

  • loan amount (balance-sheet and off-balance-sheet exposure without interest, collected fees and impairment losses) less security deposits paid in cash;
  • unauthorized overdrafts in current accounts;
  • treasury limits less security deposits paid in cash, including debt securities issued by an entity from each section.

Industry segment31 December 201731 December 2016
Wholesale and retail trade; repair of motor vehicles17.42%17.36%
Real estate activities13.47%13.85%
Public administration and defense4.69%0.01%
Production and supply of electricity, gas, steam, hot water1.99%6.19%
Construction11.04%15.29%
Transportation and storage5.06%2.77%
Manufacture of metals, fabricated metal products and machinery3.54%7.23%
Manufacture of chemicals, pharmaceuticals and petrochemicals1.31%1.38%
Manufacture of food products and beverages4.37%3.83%
Financial and insurance activities6.42%5.46%
Mining and quarrying1.39%0.66%
Other production7.34%1.45%
Other sectors21.96%24.52%
Total100.00%100.00%

The process of setting and updating concentration limits takes the following into account:

  • information on the level of credit risk of limited portfolio segments and their impact on realization of assumptions related to risk appetite in terms of credit portfolio quality and capital position;
  • sensitivity of limited portfolio segments to changes in the macroeconomic environment assessed in regular stress tests;
  • reliable economic and market information concerning each exposure concentration area, especially macroeconomic and industry ratios, information about economic trends, including the projection of the levels of interest rates, exchange rates, political risk analysis, ratings of governments and financial institutions;
  • reliable information about economic situation of companies, industries, branches, economic sectors, general economic information including news about economic and political situation of countries, as well as other information needed to evaluate concentration risk;
  • interactions between different kinds of risk, i.e. credit, market, liquidity and operational risk.

Risk analysis is performed, in individual and portfolio approach. Measures are undertaken to:

  • minimize credit risk for an individual loan with the assumed level of return;
  • reduce overall credit risk arising from a specific credit portfolio.

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:

  • reliability and creditworthiness, including detailed analysis of the source of repayment;
  • collateral, which entails review of the formal, legal and economic status, including loan to value adequacy.

In order to enhance control over the risk of individual exposures, clients are monitored regularly and appropriate measures are taken if increased risk is identified.

In order to minimize credit risk arising from a particular portfolio:

  • concentration limits are set and tracked;
  • early warning signals are monitored;
  • credit portfolio is monitored regularly, especially material credit risk parameters;
  • regular stress tests are carried out.

7.5.1.2. 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 rating 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 (e.g. CBD DZ, CBD BR, BIK, BIG databases) 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.

The following table presents the PZU Group’s credit risk exposures on account loan receivables from clients.

Loan receivables from clients31 December 201731 December 2016
Gross valueImpairment loss / IBNR charge1)Net valueGross valueImpairment loss / IBNR charge1)Net value
With recognized impairment13,514(8,175)5,3394,841(2,755)2,086
non past due2,493(624)1,869751(228)523
past due11,021(7,551)3,4704,090(2,527)1,563
up to 1 month225(88)137235(63)172
1 to 3 months395(194)201223(87)136
3 months to 1 year1,799(905)8941,090(570)520
1 to 5 years5,332(3,770)1,5622,340(1,619)721
over 5 years3,270(2,594)676202(188)14
Without recognized impairment164,782(664)164,11843,219(307)42,912
non past due159,566(451)159,11540,110(180)39,930
past due5,216(213)5,0033,109(127)2,982
up to 30 days3,523(67)3,4562,210(43)2,167
over 30 days1,693(146)1,547899(84)815
Total178,296(8,839)169,45748,060(3,062)44,998

1) Impairment loss recognized for a group of exposures used to cover losses incurred but not reported. It is recognized for exposures, for which signs of impairment have not been identified and which are grouped in accordance with the principle of homogeneity of risk profile.

Receivables from clients under impaired loans31 December 201731 December 2016
 Gross valueImpairment loss / IBNR charge1)Net valueGross valueImpairment loss / IBNR charge1)Net value
Assessed individually7,397(3,941)3,4561,835(761)1,074
Assessed collectively6,117(4,234)1,8833,006(1,994)1,012
Total13,514(8,175)5,3394,841(2,755)2,086

1) Impairment loss recognized for a group of exposures used to cover losses incurred but not reported. It is recognized for exposures, for which signs of impairment have not been identified and which are grouped in accordance with the principle of homogeneity of risk profile.

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.

Pekao

No comparative data is presented, as Pekao has been part of the PZU Group since 7 June 2017.

Non past due financial assets31 December 2017
Non past due receivables, without impairment 
Retail segment59,052
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 impairment79,486

Portfolio of specialized lending exposures within the meaning of CRR Regulation – unimpaired – by supervisory classes31 December 2017
High1,106
Good4,863
Satisfactory1,272
Poor7
Total7,248

The following table presents the breakdown of the portfolio of loans granted to Pekao clients into loans covered and not covered by internal rating models.

Exposure31 December 2017
Loans with no recognized impairment129,764
Loans to retail clients:62,073
Covered by an internal rating model:59,052
Mortgage loans48,725
Cash loans10,327
Other, not covered by an internal rating model3,021
Loans to businesses:67,691
Covered by an internal rating model20,434
Portfolio of specialized lending exposures within the meaning of CRR Regulation7,248
Debt securities not covered by an internal rating model12,658
Other, not covered by an internal rating model27,351
Loans with recognized impairment2,536
Total loans and advances to customers1)132,300

1) including finance lease receivables

Alior Bank

Non past due financial assets31 December 201731 December 2016
Non past due receivables, without impairment45,04833,681
Retail segment25,31818,966
Mortgage loans, cash loans, credit cards, current account overdraft (1 - best class, 6 - worst class)2,4612,825
Class 1507602
Class 2527604
Class 3648737
Class 4734828
Class 54248
Class 636
Loans, credit cards, current account overdraft – standard process (K1 - best class, K10 - worst class)10,8417,899
Class K1-K22,5141,304
Class K3-K43,8682,638
Class K5-K63,5283,026
Class K7-K8913895
Class K9-K101836
Mortgage loans (M1 - best class, M10 - worst class)12,0168,242
Class M1-M23432
Class M3-M4747648
Class M5-M63,6373,008
Class M7-M82,7632,189
Class M9-M10543428
No scoring4,2921,937
Business segment19,73014,715
Long-term products, car financing loans, current account overdraft limits (1 - best class, 5 - worst class)614
Class 111
Class 217
Class 333
Class 413
Class 5--

Non past due financial assets31 December 201731 December 2016
Models for microbusinesses without full accounting Models for businesses with full accounting, car dealers and developers (Q01 - best class, Q25 - worst class) 19,724 14,701
Class Q01-Q05239345
Class Q06-Q104,6073,099
Class Q11-Q157,8306,554
Class Q16-Q204,3042,938
Class Q21-Q25772661
Unrated1,9721,104
Non past due receivables, with recognized impairment988297
Retail segment6860
Business segment920237
Total non past due receivables from clients46,03633,978

Bank BPH’s Core Business, acquired by Alior Bank, uses a different rating model, the 31 December 2016 figures for this part are presented separately.

31 December 2016Average PDRetail segmentBusiness segmentTotal
 0.10%5184189
 0.50%1459041,049
 1.30%7371,3502,087
 3.20%2,4976953,192
 8.20%502159661
 over 20%14918167
 Portfolio with signs of impairment-9696
 Unrated196483
Non past due receivables, without impairment 4,0543,4707,524
Non past due receivables, with impairment 47153200
Total non past due receivables from clients 4,1013,6237,724

7.5.1.3. Application of forbearance and related practices

The forbearance practices are used if a threat arises that a client may default on the terms of a contract because of the financial difficulties. In such circumstances, contract terms may be amended in a way that allows a borrower to service or refinance the debt in full or in part. Changes in terms and conditions of contracts may include: reductions of interest rates, principal installment amounts, accrued interest, rescheduling of principal or interest payments.

Assessment of impairment of exposures subject to forbearance practices

Stricter criteria for identifying signs of impairment are applied to exposures subject to forbearance practices. In addition to the standard catalogue of signs of impairment, additional criteria are applied, which are defined as occurrence of one of the following situations when the forbearance decision is made:

  • more than 30 days past due;
  • analyst’s assessment that timely service is at risk (for retail clients);
  • economic and financial standing assessed as sub-standard or worse (for business clients).
  • other evidence of impairment.

Loans granted to clients subject to forbearance31 December 201731 December 2016
Retail segment543184
without recognized impairment21266
with recognized impairment628294
IBNR(6)(1)
impairment losses(291)(175)
assessed by the individual method(6)-
assessed by the portfolio method(285)(175)
Business segment2,317616
without recognized impairment797189
with recognized impairment3,315636
IBNR(8)(2)
impairment losses(1,787)(207)
assessed by the individual method(1,735)(157)
assessed by the portfolio method(52)(50)
Total net receivables2,860800

Loans granted to clients subject to forbearance31 December 201731 December 2016
With recognized impairment1,865547
of which value of collateral1,253340
Without recognized impairment995253
of which value of collateral885143
non past due760109
past due235144
Total net receivables2,860800

Movement in net carrying amount of forborne exposures31 December 201731 December 2016
Opening balance800356
Value of exposures recognized in the period974236
Value of exposures excluded in the period(569)(46)
Movements in impairment losses(28)(35)
Change in the composition of the Group2,051-
Other changes(368)289
Total net receivables2,860800

7.5.1.4. 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 and concentration risk limits are set by dedicated committees.

Limits for banks and other issuers of debt securities are set in reference to exposure levels. The limits take the form of exposure limits to a single entity or a group of entities (this applies to both credit limits and concentration limits). The use of credit risk and concentration risk limits is monitored. Exceeding a limit entails an obligation to prepare and  present an exposure reduction plan.

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 provide the basis for setting the limits. Ratings are updated for credit quality monitoring purposes.

Information on the credit quality of assets related to investing activity is presented in section 33.7.

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 as at 31 December 2017NoteAAAAAABBBBBUnratedAssets at client’s riskTotal
Debt securities 56072565,8972,71259824,6121,29096,394
- held to maturity33.2--20,9415958179-21,237
- available for sale33.3-72534,8652894111,935-47,855
- at fair value through profit or loss33.4560-9,9649624994041,29013,679
- loans33.6--1271,402-12,094-13,623
Term deposits with credit institutions and buy-sell-back transactions33.6-89609038759882,726
Other loans33.6----2823,416-3,698
 Derivatives 1)33.433.57.5.3 - 127 952 212 - 1,020 40 2,351
Reinsurers’ share in claims provisions38-156452--167-775
Reinsurance receivables34-9258-26-68
Total 5601,02568,2863,83588830,0001,418106,012

1) including derivatives of PLN 347 million designated as cash flow or fair value hedges.

Credit risk assets as at 31 December 2016NoteAAAAAABBBBBUnratedAssets at client’s riskTotal
Debt securities 149539,1002,9305831,0051,23945,011
- held to maturity33.2--16,99120649100-17,346
- available for sale33.3-510,55229711353-11,218
- at fair value through profit or loss33.4149-10,7281,2075231381,23913,984
- loans33.6--8291,220-414-2,463
Term deposits with credit institutions and buy-sell-back transactions33.6--4,330519-992175,165
Other loans33.6--33-761,599-1,708
 Derivatives 1)33.433.57.5.3 - 10 505 62 - 354 22 953
Reinsurers’ share in claims provisions38-3042311-77-613
Reinsurance receivables34-2531--20-76
Total 14934444,2303,5126593,1541,47853,526

1) including derivatives of PLN 72 million designated as cash flow hedges.

Standard&Poor’s ratingsAAAAAABBBBBUnrated 1)
2017 coefficient0.72%0.77%1.41%3.76%13.33%25.43%
2016 coefficient0.72%0.79%1.48%3.89%13.45%25.37%

1) In the case of exposure to unrated mortgage loans, a 2% coefficient was assumed, which corresponds to the lowest investment-grade rating of BBB+.

The credit risk level attributable to the assets where the risk is carried by the PZU Group as at 31 December 2017 was PLN 8,866 million (as at 31 December 2016 it was PLN 1,684 million; if the coefficients of 31 June 2017 were used, the value would be PLN 1,649 million).

7.5.1.5. 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.

ReinsurerReinsurers’ share in technical provisions (net) as at 31 December 2017Standard&Poor’s rating as at 31 December 2017
Reinsurer 1139unrated
Reinsurer 2131A+
Reinsurer 376AA-
Reinsurer 458AA-
Reinsurer 558unrated
Reinsurer 650AA-
Reinsurer 748A-
Reinsurer 836AA-
Reinsurer 930A+
Reinsurer 1029A+
Others, including: 1)595 
With investment-grade rating555BBB- or better
With sub-investment grade rating or unrated40BB+ or worse or unrated
Total1,250 

1) “Others” includes reinsurers’ shares in technical provisions if their carrying amounts are lower than those presented above. A.M. Best ratings were used if Standard&Poor’s rating was missing

ReinsurerReinsurers’ share in technical provisions (net) as at 31 December 2016Standard&Poor’s rating as at 31 December 2016
Reinsurer 169AA-
Reinsurer 265AA-
Reinsurer 356A+
Reinsurer 455A+
Reinsurer 553unrated
Reinsurer 639AA-
Reinsurer 738AA-
Reinsurer 837AA-
Reinsurer 930AA-
Reinsurer 1025A+
Others, including: 1)523 
With investment-grade rating445BBB- or better
With sub-investment grade rating or unrated78BB+ or worse or unrated
Total990 

Counterparty risk related to reinsurance is mitigated by the fact that the PZU Group cooperates with numerous reinsurers with reliable credit ratings.

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 insuranceLife 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.XX
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/AX
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/AX

PZU Group manages its actuarial risk among others through:

  • calculation and monitoring of adequacy of technical provisions;
  • tariff strategy, monitoring of the current estimates and evaluation of premium adequacy;
  • underwriting;
  • reinsurance.

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:

  • prudent approach to the calculation of technical provisions;
  • continuity principle, which entails making no changes in the technical provisioning methodology if no significant circumstances occur to justify such changes.

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.

Underwriting

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.

Reinsurance

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:

  • non-proportional excess of loss treaties, which protect the portfolios against catastrophic losses (e.g. flood, cyclone);
  • non-proportional excess of loss treaties, which protect property, technical, marine, aviation, TPL (including motor TPL) portfolios against the effects of large single losses;
  • a proportional treaty, which protects the financial insurance portfolio.

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.

7.5.2.1. Exposure to actuarial risk – non-life and life insurance

Key cost ratios in non-life insurance1 January – 31 December 20171 January – 31 December 2016
Expense ratio25.91%28.70%
Net loss ratio63.51%65.66%
Reinsurer’s retention ratio4.29%3.53%
Combined ratio89.42%94.36%

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)2008200920102011201220132014201520162017
Provision at the end of the reporting period8,2938,6999,3819,87010,98911,78313,31213,16313,18113,988
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 later8,3828,5619,68110,29811,28612,24113,03212,90813,353 
- calculated 2 years later8,4108,85610,19210,75311,95812,18012,71912,922  
- calculated 3 years later8,7589,34610,71911,59011,97312,08012,822   
- calculated 4 years later9,2159,87411,57411,73811,91012,172    
- calculated 5 years later9,72410,71211,73511,70212,067     
- calculated 6 years later10,55810,87511,79511,871      
- calculated 7 years later10,74710,97112,017       
- calculated 8 years later10,90711,201        
- calculated 9 years later11,152         
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) 11,152 11,201 12,017 11,871 12,067 12,172 12,822 12,922 13,353 
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)6,4706,1956,6336,0505,7355,2474,9524,0062,759 
Provision recognized in the statement of financial position4,6825,0065,3845,8216,3326,9257,8708,91610,594 
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)(2,859)(2,502)(2,636)(2,001)(1,078)(389)490241(172) 
The above difference as % of provision at the end of the first year-34%-29%-28%-20%-10%-3%4%2%-1% 

Claims development in direct non-life insurance, net of reinsurance (by reporting year)2008200920102011201220132014201520162017
Provision at the end of the reporting period7,4337,9738,6399,30510,41311,45312,81412,65312,55912,880
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 later7,5687,8448,8389,73110,72211,78712,52512,35512,576 
- calculated 2 years later7,5988,0929,34510,18511,28211,70412,20112,278  
- calculated 3 years later7,9108,5589,87310,94711,27811,59912,224   
- calculated 4 years later8,3449,10610,67211,07111,21511,642    
- calculated 5 years later8,8759,89210,81811,04711,326     
- calculated 6 years later9,65710,03710,88411,167      
- calculated 7 years later9,82710,14511,032       
- calculated 8 years later10,00010,311        
- calculated 9 years later10,180         
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) 10,180 10,311 11,032 11,167 11,326 11,642 12,224 12,278 12,576 
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)5,6835,4925,8555,5545,2805,0474,7663,8292,602 
Provision recognized in the statement of financial position4,4974,8195,1775,6136,0466,5957,4588,4499,974 
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)(2,747)(2,338)(2,393)(1,862)(913)(189)590375(17) 
The above difference as % of provision at the end of the first year-37%-29%-28%-20%-9%-2%5%3%0% 

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

Due to the climate conditions of the region where PZU Group operates, concentration risk may occur in the case of catastrophic losses, such as floods or cyclones. Accordingly, the PZU Group’s exposure to such losses is presented broken down by voivodeships (for operations conducted in Poland) and countries (for foreign operations).

Risk concentration in non-life insurance – exposure to flood and cyclone losses as at 31 December 2017Sum insured Total
0-0,20.2 - 0.50.5 -22 - 1010 - 50over 50
m PLNm PLNm PLNm PLNm PLNm PLN
DolnośląskieSum insured1.1%1.5%1.2%1.0%0.7%2.8%8.3%
Number of policies6.8%1.6%0.5%0.1%0.0%0.1%9.1%
Kujawsko-PomorskieSum insured0.6%0.7%0.5%0.4%0.4%1.2%3.8%
Number of policies4.0%0.8%0.2%0.0%0.0%0.0%5.0%
LubelskieSum insured0.7%0.6%0.3%0.2%0.2%2.1%4.1%
Number of policies3.5%0.7%0.1%0.0%0.0%0.0%4.3%
LubuskieSum insured0.3%0.3%0.2%0.2%0.2%0.3%1.5%
Number of policies1.3%0.3%0.1%0.0%0.0%0.0%1.7%
ŁódzkieSum insured0.8%1.1%0.8%0.4%0.4%5.6%9.1%
Number of policies5.0%1.2%0.3%0.0%0.0%0.0%6.5%
MałopolskieSum insured0.9%1.6%0.8%0.5%0.5%1.6%5.9%
Number of policies5.0%1.7%0.4%0.0%0.0%0.0%7.1%
MazowieckieSum insured1.7%2.8%2.1%1.0%1.4%8.8%17.8%
Number of policies11.0%3.2%1.0%0.1%0.0%0.1%15.4%
OpolskieSum insured0.3%0.4%0.3%0.2%0.1%0.9%2.2%
Number of policies1.6%0.4%0.1%0.0%0.0%0.0%2.1%
PodkarpackieSum insured0.7%0.8%0.3%0.2%0.2%0.5%2.7%
Number of policies3.5%1.0%0.1%0.0%0.0%0.0%4.6%
PodlaskieSum insured0.4%0.5%0.3%0.2%0.2%0.3%1.9%
Number of policies1.9%0.5%0.1%0.0%0.0%0.0%2.5%
PomorskieSum insured0.7%1.0%0.8%0.5%0.7%3.5%7.2%
Number of policies4.2%1.0%0.3%0.0%0.0%0.0%5.5%
ŚląskieSum insured1.2%1.5%0.9%0.6%0.4%1.9%6.5%
Number of policies7.8%1.6%0.4%0.0%0.0%0.1%9.9%
ŚwiętokrzyskieSum insured0.4%0.5%0.2%0.1%0.1%0.6%1.9%
Number of policies2.2%0.6%0.1%0.0%0.0%0.0%2.9%
Warmińsko- MazurskieSum insured0.4%0.4%0.3%0.3%0.2%0.5%2.1%
Number of policies2.0%0.5%0.1%0.0%0.0%0.0%2.6%
WielkopolskieSum insured1.2%1.7%1.3%0.7%0.6%2.1%7.6%
Number of policies7.5%1.9%0.5%0.1%0.0%0.1%10.1%
ZachodniopomorskieSum insured0.4%0.4%0.4%0.5%0.5%3.5%5.7%
Number of policies2.1%0.5%0.2%0.0%0.0%0.0%2.8%
Lithuania and EstoniaSum insured0.7%1.7%2.6%1.0%0.6%0.8%7.4%
Number of policies2.3%1.9%1.0%0.1%0.0%0.0%5.3%
LatviaSum insured0.2%0.7%0.7%0.5%0.6%0.9%3.6%
Number of policies1.1%0.8%0.3%0.0%0.0%0.0%2.2%
UkraineSum insured0.1%0.0%0.1%0.2%0.2%0.1%0.7%
Number of policies0.4%0.0%0.0%0.0%0.0%0.0%0.4%
TotalSum insured12.8%18.2%14.1%8.7%8.2%38.0%100.0%
Number of policies73.2%20.2%5.8%0.4%0.0%0.4%100.0%

Risk concentration in non-life insurance – exposure to flood and cyclone losses as at 31 December 2016Sum insured Total
m PLNm PLNm PLNm PLNm PLNm PLN
0-0,20.2 - 0.50.5 -22 - 1010 - 50over 50
DolnośląskieSum insured1.1%1.6%1.2%1.9%1.2%2.1%9.1%
Number of policies6.6%1.4%0.4%0.1%0.0%0.0%8.5%
Kujawsko-PomorskieSum insured0.7%0.9%0.6%0.4%0.5%1.2%4.3%
Number of policies4.5%0.8%0.2%0.0%0.0%0.0%5.5%
LubelskieSum insured0.8%0.7%0.3%0.2%0.2%1.2%3.4%
Number of policies4.2%0.7%0.1%0.0%0.0%0.0%5.0%
LubuskieSum insured0.3%0.3%0.3%0.4%0.3%0.3%1.9%
Number of policies1.8%0.3%0.1%0.0%0.0%0.0%2.2%
ŁódzkieSum insured0.7%1.2%0.7%0.3%0.4%2.9%6.2%
Number of policies4.7%1.0%0.3%0.0%0.0%0.0%6.0%
MałopolskieSum insured0.9%1.9%0.8%0.5%0.5%1.4%6.0%
Number of policies5.2%1.7%0.3%0.0%0.0%0.0%7.2%
MazowieckieSum insured1.9%4.0%2.6%1.1%1.5%8.6%19.7%
Number of policies12.0%3.3%0.9%0.1%0.0%0.0%16.3%
OpolskieSum insured0.3%0.6%0.4%0.3%0.3%0.7%2.6%
Number of policies2.0%0.5%0.1%0.0%0.0%0.0%2.6%
PodkarpackieSum insured0.8%1.0%0.3%0.3%0.3%0.4%3.1%
Number of policies4.0%0.9%0.1%0.0%0.0%0.0%5.0%
PodlaskieSum insured0.4%0.5%0.4%0.2%0.2%0.1%1.8%
Number of policies2.2%0.5%0.1%0.0%0.0%0.0%2.8%
PomorskieSum insured0.7%1.2%0.9%0.6%0.9%1.9%6.2%
Number of policies4.7%1.1%0.3%0.0%0.0%0.0%6.1%
ŚląskieSum insured1.1%1.7%0.9%0.5%0.5%1.5%6.2%
Number of policies6.8%1.5%0.3%0.0%0.0%0.0%8.6%
ŚwiętokrzyskieSum insured0.4%0.5%0.1%0.1%0.1%0.1%1.3%
Number of policies1.8%0.4%0.0%0.0%0.0%0.0%2.2%
Warmińsko- MazurskieSum insured0.4%0.5%0.4%0.3%0.2%0.6%2.4%
Number of policies2.3%0.5%0.1%0.0%0.0%0.0%2.9%
WielkopolskieSum insured1.1%1.9%1.4%0.8%0.6%1.5%7.3%
Number of policies7.2%1.7%0.5%0.1%0.0%0.0%9.5%
ZachodniopomorskieSum insured0.3%0.4%0.4%0.5%0.6%1.7%3.9%
Number of policies2.5%0.4%0.1%0.0%0.0%0.0%3.0%
Lithuania and EstoniaSum insured0.7%1.6%2.9%1.5%1.3%2.0%10.0%
Number of policies2.2%1.4%0.9%0.1%0.0%0.0%4.6%
LatviaSum insured0.2%0.8%0.9%0.6%0.7%1.4%4.6%
Number of policies0.7%0.7%0.3%0.0%0.0%0.0%1.7%
UkraineSum insured0.0%0.0%0.0%0.0%0.0%0.0%0.0%
Number of policies0.3%0.0%0.0%0.0%0.0%0.0%0.3%
TotalSum insured12.8%21.3%15.5%10.5%10.3%29.6%100.0%
Number of policies75.7%18.8%5.1%0.4%0.0%0.0%100.0%

Concentration of risk in non-life insurance – TPL insurance

Due to the considerable dispersion of the motor TPL insurance portfolio, the concentration risk in this insurance group is not significant from PZU Group’s perspective.

The concentration of risk in non-life non-motor liability insurance, measured by the level of gross written premiums, is presented by guaranteed amounts and types of insurance cover.

 Gross written premium in non-life insurance – liability insurance as at 31 December 2017Sum insured Total
0-0,2 m PLN0,2-0,5 m PLN0,5-1 m PLN1-2 m PLNover 2 m PLN
General, private and other liability16.8%4.6%2.1%2.4%16.0%41.9%
Professional liability for medical personnel and health care business1.3%1.7%1.0%4.6%18.6%27.2%
Professional liability other than medical and farmer’s (legal, consulting and other)10.3%4.0%1.9%1.9%8.0%26.1%
Farmers’ liability and farmers’ movable asset TPL0.0%0.0%0.0%4.7%0.0%4.7%
Product liability0.0%0.0%0.0%0.0%0.1%0.1%
Total28.4%10.3%5.0%13.6%42.7%100.0%

 Gross written premium in non-life insurance – liability insurance as at 31 December 2016Sum insured Total
0-0,2 m PLN0,2-0,5 m PLN0,5-1 m PLN1-2 m PLNover2 m PLN
General, private and other liability20.0%3.3%2.3%2.8%15.1%43.5%
Professional liability for medical personnel and health care business0.6%1.1%1.1%6.0%21.1%29.9%
Professional liability other than medical and farmer’s (legal, consulting and other)8.6%4.1%2.0%2.4%4.6%21.7%
Farmers’ liability and farmers’ movable asset TPL0.0%0.0%0.0%4.8%0.0%4.8%
Product liability0.0%0.0%0.0%0.0%0.1%0.1%
Total29.2%8.5%5.4%16.0%40.9%100.0%

Capitalized annuities

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 gross provision for the capitalized value of annuities in non-life insurance on the net financial result and equity31 December 201731 December 2016
Technical rate - increase by 0.5 p.p.424414
Technical rate - decrease by 1.0 p.p.(1,094)(1,071)
Mortality at 110% of currently assumed rate131128
Mortality at 90% of currently assumed rate(146)(143)

Change in assumptions regarding the net provision for the capitalized value of annuities in non-life insurance on the net financial result and equity 31 December 2017 31 December 2016
Technical rate - increase by 0.5 p.p.407398
Technical rate - decrease by 1.0 p.p.(1,051)(1,030)
Mortality at 110% of currently assumed rate127124
Mortality at 90% of currently assumed rate(141)(138)

7.5.2.2. 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

Changes in assumptions regarding provisions in annuity products in life insuranceImpact of changes in assumptions on net financial result and equity
31 December 201731 December 2016
Technical rate - decrease by 1.0 p.p.(27)(29)
Mortality at 90% of currently assumed rate(11)(11)

Life insurance products excluding annuity products

Change in assumptions regarding provisions in life insurance excluding provisions in annuity productsImpact of changes in assumptions on net financial result and equity
31 December 201731 December 2016
Technical rate - decrease by 1.0 p.p.(2,092)(2,112)
Mortality at 110% of currently assumed rate(881)(891)
Morbidity and accident rate at 110% of currently assumed rate(148)(153)

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 statements31 December 201731 December 2016
Movement in technical provisions2,1672,098
Claims and benefits paid(843)(791)
Movement in deferred acquisition costs(8)(7)
Profit/loss before tax1,3161,299
Net profit/loss1,0661,052
Equity1,0661,052

Facebook Twitter Google Plus All