4.4 Assumptions made in estimation of technical provisions for life insurance products

Technical rates in life insurance

The technical interest rate used for calculation of life insurance provisions was 3.0% both as at 31 December 2013 and 31 December 2012. 

An analysis of sensitivity of the net profit/loss as well as equity to changes in the technical interest rate used for determining the value of technical provisions for life insurance is presented in section 6.7.1.2.

Incidence of events covered by insurance

Key assumptions made when estimating technical provisions for life insurance products, referring among others to assumed frequency of events under insurance coverage are described in section 3.18.2.2.

Group insurance by employers and individually continued and family products cover both the insured individuals, referred to as „the key insured” and their family members. As the Company had only access to data on the main insured covered by continued insurance and due to a lack of complete information on the age, sex, marital and family status of the insured in group insurance, in 2004 a statistical survey was conducted with regard to the age structure and sex of the individuals covered by group insurance as well as their family members. The aforementioned survey also served as the basis for the assumptions regarding the family structure of the individuals covered by individually continued insurance.

The assumptions made on the basis of the statistical survey for the purpose of determining the group insurance provisions, in line with the theory of probability and statistical methods, allow to take into account the age structure and sex of the insured and their family members, estimate and the value of the provisions for the whole portfolio.

An analysis of sensitivity of the net profit/loss as well as equity to changes in the assumptions made for determining the value of technical provisions for life insurance is presented in section 6.7.1.2.

Provision for revaluation of old portfolio claims and for pending litigation in PZU Życie

In 1992, PZU transferred individual insurance policies (endowment and life) and annuity contracts (the so called “old portfolio”) to PZU Życie.

In the hyperinflationary period of the 1980s, investment activities of Państwowy Zakład Ubezpieczeń were limited, as a result of which investment income was below the inflation level. In effect, provisions created in relation to the old portfolio were not sufficient to cover claims adjusted for inflation. PZU Życie revalued partly the old portfolio policies. Claim revaluation programs were implemented for all claims paid on an ongoing basis. Some insured, whose benefits lost their real value, sued PZU Życie in order to obtain higher benefits.

PZU Życie creates a provision for revaluation of claims under individual insurance policies and annuity contracts taken over from PZU (i.e. the so called “old portfolio”), which may result from future disputes (court cases and settlements).

The value of the above provision has been determined based on the expected value of additional future claims resulting from court cases and settlements. The value of such claims has been determined by extrapolating the historical trends related to claims, estimated on the basis of the number of concluded court cases and settlements as well as the awarded amounts. If litigation and non-litigation trends or the old portfolio revaluation program changed substantially in the future, this could have a material impact on the level of provisions required to cover the old portfolio liabilities.

The amount of provisions recognized for the old portfolio has been presented in Section 26.2.

Provision adequacy tests

Provision adequacy testing principles in life insurance products are described in section 3.18.3.