3.18 Insurance contracts

3.18.1 Written premium and provision for unearned premiums

3.18.1.1 Non-life insurance

PZU, PZU Latvia and PZU Ukraine are party to insurance contracts in property and personal insurance and may be party to inward and outward reinsurance treaties.

Written premiums are recognized by date of underwriting the policy.

Written premiums are recognized under revenue in proportion to the period of insurance cover. Part of the written premium for the period of insurance cover after the balance sheet date is recognized under provision for unearned premiums. The provision for unearned premiums is determined individually as at the end of each reporting period, accurate to one day.

The provision for unexpired risks complements the provision for unearned premiums and covers future claims and costs relating to insurance contracts which do not expire on the last day of the reporting period. The provision for unexpired risks is calculated for insurance classes as at the end of each reporting period.

The overall provision for unexpired risks is determined for insurance classes with the claims ratio for the current year exceeding 100%, as the difference between the product of the provision for unearned premiums and the claims ratio for the current financial year and the provision for unearned premiums – for the same insurance period. The reinsurers’ share in the premium, provision for unearned premiums and provision for unexpired risks is determined in accordance with the terms and conditions of relevant reinsurance treaties.

The provision for unexpired risks is created in line with the minimum requirements of the provision adequacy test specified in point 16 of IRFS 4.

3.18.1.2 Life insurance

Written premiums in life insurance contracts include amounts due under insurance contracts concluded during the reporting period under insurance contracts concluded, whether the amounts have been paid or not, irrespective of the fact whether the amounts refer to the whole of the next reporting period or its part. The premiums are adjusted by the change in the provision for unearned premiums during the reporting period and reduced by the amount of premium due to the reinsurers. The provision for unearned premiums is created as a part of the written premium related to the future reporting periods proportionally to the period of the premium and is recognized under technical provisions.

3.18.2 Costs of claims and benefits paid and technical provisions

3.18.2.1 Non-life insurance

Costs of the reporting period include all costs of claims and benefits paid under the concluded insurance contracts, including direct and indirect claims handling costs and costs of recourses and a change in provisions for claims outstanding. The costs of claims and benefits are reduced by all received recoveries and recourses as well as by the change in expected recoveries and recourses.

The reinsurers’ share in claims and benefits is determined for the classes of insurance with reinsurance, in the amount of reinsurers’ share in claims, in line with relevant reinsurance treaties.

The provision for claims outstanding includes:

  • provision for outstanding claims and benefits due to losses and accidents which took place and were reported by the end of the reporting period;
  • provision for losses and accidents which were incurred by the end of the reporting period and were not reported;
  • provision for claims handling costs;
  • provision for capitalized value of annuity.

The provision for claims reported but not paid (hereinafter referred to as “RBNP” or “Provision I”) is determined using the individual method by the loss adjustment units or, if the available information is insufficient to estimate the provision, in the amount of the average claim determined using the actuarial method. Created provision includes the deductible, expected increase in the prices of goods and repair services and may not exceed the sum insured and the guaranteed sum. The provision is revalued immediately after receiving information which impact its amount by individual assessment or estimated losses and claims.

The provision for claims incurred but not reported (hereinafter referred to as “IBNR” or “Provision II”) is created for claims and benefits which have not been reported by the end of the reporting period, when the provision is recognized. IBNR is calculated using the loss triangle: the generalized Chain Ladder method, and if the number of claims or their value is insignificant – using the Bornhuetter-Ferguson method, broken down by the years during which losses were incurred. Basis for calculation are annual triangles for claims paid and claims reported.

The provision for direct claim handling costs for claims reported is calculated on a case-by-case basis for each claim by operating units, whereas for claims incurred but not reported is calculated using generalized Chain Ladder, based on loss triangles for the year of the claim.

The provision for indirect loss adjustment expenses is recognized using the actuarial method as the percentage (determined based on the share of indirect loss adjustment expenses in claims paid and direct loss adjustment expenses) of the provision for claims reported but not paid and the provision for claims incurred but not reported and the provision for direct loss adjustment expenses.

Provisions I and II and the provision for claims handling costs are recognized at the nominal value, i.e. they are not discounted.

The provision for capitalized value of annuity claims is calculated individually, as the present value of annuity (for life or periodic), paid in advance.

As at the end of each reporting period, using actuarial methods a provision for capitalized value of annuity claims is created for claims incurred after 31 December 1990 by the balance sheet date and not disclosed as annuity (annuity IBNR).

As at the end of each reporting period, the value of additional provision for liabilities resulting from increased annuity benefits from the so-called old portfolio is determined. Reassessment is carried out only for annuitants with the same provision calculated as at the end of 1997 whose benefit at the end of a given period did not reach a satisfactory amount. The satisfactory amount of claims is determined as a fixed percentage of the current average pay for the years 1960-1990. For the difference between satisfactory and actual claims, the capitalized annuity amount is calculated in line with the current principles.

The reinsurers’ share in provisions for claims outstanding is determined as the amount compliant with the terms and conditions of relevant reinsurance treaties.

3.18.2.2 Life insurance

Costs of the reporting period include all costs of claims paid under the concluded insurance contracts, including direct and indirect claims handling costs and a change in provisions for claims outstanding.

Costs of claims and benefits paid

Benefits paid include all payments and charges made in the reporting period due to benefits incurred during the reporting period and earlier (also annuity claims and surrenders), together with all direct and indirect, internal and external benefits handling costs. Handling costs include also the costs of litigation.

The value of benefits is recognized at the actually paid amount, following deduction of refunds (except for refunds due to outward reinsurance), increased by the change in provision for claims outstanding and reduced by the reinsurers’ share in claims and provisions.

Life insurance provision

The amount of provisions for life insurance corresponds to the value of liabilities under concluded insurance contracts and is determined as a difference between the current value of expected claims and the current value of expected premiums using the so-called net premium method.

This means that provision calculation includes all claims and premiums provided for in the contracts as contractual liabilities and receivables, irrespective of the fact whether the contract will be maintained by the insured until the end of the period or terminated. The assumptions for the frequency of events under insurance cover, i.e. mortality, incidence proportion and accident rate is determined based on publicly available statistics, such as: in Poland for example Polish Life Expectancy Tables (PLET) or based on own statistics developed on the basis of historical data for individual classes of products found in the portfolio.

The assumptions used in calculation of provisions for life insurance are calculated separately for individual insurance products at the time of determining premium rates and marketing a given product (the so-called lock-in assumptions). During preparation of financial statements the adequacy of assumptions is verified. Provisions for life insurance are determined based on actuarial methods in the following way:

  • group employee insurance and individually continued insurance: the provision is based on the prospective actuarial method involving determining of a provision separately for each insurance contract, based on specific statistical data; it corresponds to the present value of the claims expected in relation to insurance protection granted, less the present value of future premiums;
  • insurance related to an insurance capital fund: the provision is created in order to cover the current claims relating to insurance protection granted over the value of funds accumulated in the fund for individual insurance types, respectively, in line with general terms: its value corresponds to the portion of fees collected in relation to insurance protection granted corresponding to future reporting periods;
  • other - based on the prospective actuarial method, individually for each insurance contract and corresponds to the difference between the expected present value of guaranteed claims and the present value of premiums due under insurance contracts.

Provisions for life insurance are not reduced by deferred acquisition costs.

Provision for life insurance where risk is borne by the policyholders

Provisions life insurance products where risk is borne by the policyholders are created at the amount of the total value of shares in the fund on the accounts of the insured, measured at fair value as at the end of the reporting period.

 

Provision for outstanding claims and benefits

The provision for claims outstanding is created independently for:

  • claims reported but not paid - using the individual method or when the amount of claim cannot be assessed, if the claims are large-scale, using the average claim from the quarter immediately preceding the reporting period;
  • claims incurred but not reported - using the lump-sum method, as the percentage of claims paid for the period of the last twelve months.

Provision for unpaid claims and benefits includes a claim handling provision.

Provisions for bonuses and rebates for the insured

The provision corresponds to the expected profit sharing for the insurer recognized as at the end of the reporting period, which will be granted following the end of the settlement period.

Other technical provisions

Other technical provisions in life insurance include:

  • provision for revaluation of claims under individual life insurance and annuity assumed from Państwowy Zakład Ubezpieczeń (“old portfolio”);
  • provision for pending court proceedings and claims related to court decisions (based on Article 358.3 of the Civil Code of 23 April 1964 (Journal of Laws No. 16 of 1964, item 93 with subsequent amendments; the Civil Code) concerning the change in the amount and the manner of paying a cash performance;
  • the above provisions for litigations correspond to the forecasted value of additional benefits resulting from litigations based on the information about the trends in settlements and finished court proceedings.
  • provision in case of low interest rates - related to forecasted decrease in profitability of insurance fund investments in the case of individual life insurance, individual increasing term insurance and increasing premium term insurance, Firma group insurance and annuity insurance created with an actuarial method, individually for each insurance contract at the amount corresponding to the difference between:
    • amount of mathematical provisions calculated with relevant formulas and application of modified technical rates including their projected future decrease and
    • amount of mathematical provisions calculated in line with valid regulations regarding provisions with the original technical rate applied for other product pricing.

3.18.3 Provision adequacy tests

As at the end of each year for the life insurance portfolio forecasts are made for contracts in individual classes of products based on previous trends and extrapolation of identified trends for mortality, accident rate, resignation and forecasted costs of claims management and settlement. The test includes comparison of the present value of projected discounted cash flows with the amount of provision recognized at the end of each year. In the case when the provisions are found to be insufficient as compared to the value of discounted cash flows, the assumptions concerning provision creation and automatic adjustment of the amount of technical provisions are modified