6.7 Risk profile

Management of individual risk types is centralized both in PZU and PZU Życie. This principle applies to market risk, credit and concentration risk regarding investments and reinsurance and liquidity risk. Insurance and operational risk is managed on the level of individual companies depending on the nature of their operations.

Risk management in PZU and PZU Życie is focused on identifying and managing of material risks occurring in individual business areas through sufficient limiting (risk appetite defining), monitoring and clear defining of obligations and accountabilities regarding risk management in the given area.

PZU and PZU Życie control individual types of risks both by quantity analysis (eg. model based risk quantification) and by quality. On this basis, PZU and PZU Życie determine their risk profile and exposure to individual risks.

Defining of individual risks

Insurance risk - a risk of a loss or an unfavorable change in the value of insurance liabilities, resulting from incorrect assumptions regarding measurement and recognition of provisions.

Market risk - a risk of a loss or an unfavorable change in the financial position, resulting directly or indirectly from changes in the level or volatility of market prices of assets, liabilities and financial instruments.

Credit risk - a risk of a loss or an unfavorable change in the financial position, resulting from changes in the creditworthiness of issuers of securities, business partners and any debtors.

Concentration risk – a risk arising from lack of diversification in the portfolio of assets or from high exposure to counterparty risk including a single issuer of securities, contractor or debtor.

Operating risk – a risk of loss resulting from incorrect or erroneous internal processes, human actions, operation of systems or external factors.

Compliance risk – a risk of legal sanctions, financial loss or loss of reputation or credibility resulting from failure to comply by the Company’s employees or entities acting on its behalf with the provisions of law, internal regulations and the adopted standards of conduct, including ethical standards.

6.7.1 Insurance risk (non-life and life insurance)

Insurance risk in PZU and PZU Życie includes:

  • For non-life insurance (PZU):
    • premium risk – a risk of loss or unfavourable changes in the value of insurance liabilities resulting from volatility of occurrence, frequency and scale of insured events,
    • provision risk – a risk of loss or unfavourable change in the value of insurance liabilities resulting from volatility of occurrence, frequency and scale of claims paid and their amounts,
    • longevity risk - a risk of losses or unfavourable change in the value of insurance liabilities resulting from changes in the level, trend or volatility of the mortality rate if its decrease results in a rise in the value of insurance liabilities,
    • annuity revision risk - a risk of loss or unfavourable change in the value of insurance liabilities resulting from changes in the level, trend or volatility of annuity revision indicators related to changes in the legal environment or the health of the insured,
    • risk related to costs incurred - a risk of loss or unfavourable change in the value of insurance liabilities resulting from changes in the level, trend or volatility of costs incurred for insurance or reinsurance contract management,
    • catastrophe risk - a risk of loss or unfavourable change in the value of insurance liabilities resulting from significant uncertainty of the assumptions regarding measurement and creation of provisions for extreme or exceptional events.
  • For life insurance (PZU Życie):
    • mortality risk – a risk of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the mortality factor if its decrease results in a growth of insurance liabilities,
    • longevity risk – a risk of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the mortality factor if its increase results in a growth of insurance liabilities,
    • disability risk – a risk of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the disability factor and occurrence of illnesses/diseases,
    • risk related to the incurred cost amount – a risk of loss or unfavorable change in the amount of insurance liabilities resulting from changes in the level, trend or volatility of costs incurred in relation to insurance or reinsurance contracts,
    • risk related to contract withdrawal – a risk of loss or unfavorable change in the amount of insurance liabilities resulting from changes in the level, trend or volatility of indicators including withdrawal from contracts, termination or buyout of policies,
    • catastrophe risk - a risk of loss or unfavourable change in the value of insurance liabilities resulting from significant uncertainty of the assumptions regarding measurement and provisions for extreme or exceptional events.

PZU and PZU Życie manage their insurance risk using the following tools: 

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

Calculation and monitoring of adequacy of technical provisions

PZU and PZU Życie manage their adequacy risk of technical provisions through application of appropriate calculation technology and control of processes related to determining of provisions. The provisioning policy is based on:

  • prudent approach to determining technical provisions,
  • continuity principle stating that the technical provisioning methodology should not be modified unless important circumstances justify such modification.

For non-life insurance (PZU), the level of technical provisions is evaluated once a month and in specific circumstances (making a payment, obtaining new information from liquidators or lawyers) their amount is updated. PZU uses history of development and payments per balance sheet year to analyze the technical provisions amount. The analysis results in assessment of precision of actuarial methods used by PZU.

For life insurance products (PZU Życie), public statistics (life expectancy tables) made available by specialized entities supported by historic data derived from insurance portfolios provide the main source of data to estimate the projected frequency of claims. PZU Życie undertakes regular statistical analyses of claims frequency on the level of product group, insurance portfolio and pre-defined homogenous risk groups. These analyses allow determining relative frequency of claims compared to public statistics. Application of relevant statistical methods allows PZU Życie to determine materiality of data and where required, defining and applying appropriate security charges when creating technical provisions and measuring risk.

Estimating of technical provisions in PZU and PZU Życie is supervised by main actuaries. Additionally, each year an independent external expert calculates the provisions in order to check results provided by PZU or carries out valuation of PZU Życie life insurance portfolios within Embedded Value calculation.

Tariff strategy, monitoring of current estimates and premium adequacy assessment

The purpose of the tariff policy applied by PZU SA and PZU Życie SA is to ensure an adequate premium level, sufficient to cover the existing and future liabilities arising on concluded policies and expenses. Along with developing a tariff, simulations are carried out with regard to the projected insurance profit/loss in subsequent years. Additionally, regular premium adequacy and portfolio yield studies are regularly carried out for each insurance type based on various analyses and listings, including among others evaluation of the technical result on a product for a given reporting period. For selected products, profitability evaluation is carried out based on measurement of insurance portfolios under embedded value calculation. Frequency of analyses is adjusted to the size of product and possible result fluctuation. If the course of insurance is unfavorable, activities are undertaken to restore a defined profitability level, involving modification of premium tariffs or the insured risk profile through modifying of relevant provisions of general insurance terms.

Underwriting

As regards corporate customers and SME, a separate underwriting process independent from the sales function is carried out. The process of selling insurance for corporate clients is preceded with analysis and assessment of risk carried out by dedicated underwriting teams. The underwriting process includes a three-stage risk acceptance system depending on competency scopes and limits granted (Regional Branch Sales Team, Regional Branch Underwriting Team, Head Office).

Reinsurance

The objective of the reinsurance program in PZU is to secure its core business by mitigation of catastrophic risk that may negatively impact the financial standing of the PZU. The task is performed in the form of concluding obligatory reinsurance contracts with additional facultative reinsurance.

Concluded reinsurance contracts mitigate the risk of PZU – among others by a non-proportional reinsurance contract that protects the portfolio of PZU from catastrophic claims (such as floods or hurricanes), non-proportional reinsurance contracts protecting property, technical, marine transport and aviation TPL and MTPL insurance portfolios from effects of large individual claims. Additionally, a proportional reinsurance contract protects the financial insurance portfolio of PZU.

The Company has developed its own catastrophic claims model. The results of the model, as well as those produced by third party models, are used to optimize the reinsurance program in terms of protection against catastrophic claims.

Outward reinsurance contracts concluded by PZU Życie protect its portfolio from accumulation of risks (a catastrophic contract), as well as individual policies with higher sums insured and the group portfolio covering effects of serious illness of a child.

6.7.1.1 Exposure to insurance risk in non-life products

The following table presents the key costs ratios in PZU Group in property and personal insurance.

Ratio1 January - 31 December 20131 January - 31 December 2012
Expense ratio 25.94% 26.86%
Claims ratio net of reinsurance 61.90% 65.77%
Reinsurer’s retention ratio 2.93% 2.67%
Mixed ratio 87.84% 92.63%

The expense ratio is calculated by dividing the total acquisition costs, administrative expenses, reinsurance commissions and share in reinsurers’ profits by the net premiums earned.

The claims ratio net of reinsurance is calculated by dividing claims and the net change in technical provisions by the net premiums earned.

The reinsurer's retention ratio is calculated by dividing a reinsurer’s share in gross written premiums by the gross written premiums.

Combined ratio is defined as the ratio of the total of acquisition costs, administrative expenses, reinsurance commissions and share in reinsurers’ profits, claims and changes in the status of net technical provisions to the net earned premiums.

The following tables present development of technical provisions and payments in subsequent reporting periods (in PLN million).

Claims development in direct property and personal insurance, gross (by reporting year)2004200520062007200820092010201120122013
Provision at the end of the reporting year 7 247 7 458 7 541 7 898 8 293 8 699 9 381 9 870 10 989 11 783
The provision and the 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 a year later 6 868 6 916 7 300 7 698 8 382 8 561 9 681 10 298 11 286  
- calculated two years later 6 387 6 815 7 287 7 833 8 410 8 856 10 192 10 753    
- calculated three years later 6 355 7 014 7 437 7 852 8 758 9 346 10 719      
- calculated four years later 6 560 7 113 7 443 8 141 9 215 9 874        
- calculated five years later 6 659 7 120 7 661 8 600 9 724          
- calculated six years later 6 700 7 307 8 103 9 077            
- calculated seven years later 6 868 7 703 8 523              
- calculated eight years later 7 228 8 058                
- calculated nine years later 7 536                  
Total provision and 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) 7 536 8 058 8 523 9 077 9 724 9 874 10 719 10 753 11 286  
The 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) 3 579 3 727 3 734 3 769 3 794 3 293 3 395 2 457 1 665  
Provision recognized in the statement of financial position 3 957 4 331 4 789 5 308 5 930 6 581 7 324 8 296 9 621  
Difference between the first year provision and the run-off result estimated at the end of reporting year (289) (600) (982) (1 179) (1 431) (1 175) (1 338) (883) (297)  
The above difference as a percentage of the first year provision (4%) (8%) (13%) (15%) (17%) (14%) (14%) (9%) (3%)  
         
Claims development in direct property and personal insurance, gross (by reporting year)2004200520062007200820092010201120122013
Provision at the end of the reporting year 5 980 6 246 6 356 6 916 7 433 7 973 8 639 9 305 10 413 11 453
The provision and the 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 a year later 5 630 5 651 6 146 6 791 7 568 7 844 8 838 9 731 10 722  
- calculated two years later 5 175 5 605 6 202 6 969 7 598 8 092 9 345 10 185    
- calculated three years later 5 200 5 839 6 396 6 991 7 910 8 558 9 873      
- calculated four years later 5 405 5 979 6 405 7 246 8 344 9 106        
- calculated five years later 5 529 5 984 6 589 7 683 8 875          
- calculated six years later 5 568 6 146 7 009 8 189            
- calculated seven years later 5 712 6 515 7 458              
- calculated eight years later 6 050 6 882                
- calculated nine years later 6 380                  
Total provision and 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) 6 380 6 882 7 458 8 189 8 875 9 106 9 873 10 185 10 722  
The 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) 2 607 2 737 2 856 3 069 3 142 2 733 2 788 2 137 1 391  
Provision recognized in the statement of financial position 3 773 4 145 4 602 5 120 5 733 6 373 7 085 8 048 9 331  
Difference between the first year provision and the run-off result estimated at the end of reporting year (400) (636) (1 102) (1 273) (1 442) (1 133) (1 234) (880) (309)  
The above difference as a percentage of the first year provision (7%) (10%) (17%) (18%) (19%) (14%) (14%) (9%) (3%)  
       

Motor insurance products (MTPL and casco insurance) account for the major part of PZU portfolio. Both types of policies are usually concluded for a year, during which a claim must occur to be covered. The casco insurance policy is based on claim-made principle, so there is no uncertainty, unlike MTPL, which is an occurrence policy (up to 30 years for making a claim). The amount of property claims is particularly sensitive to the number of court claims made and court decisions regarding individual cases. In case of MTPL contracts, new types of claims emerge along with additional deferred claims, which add to the complexity of estimating the technical provisions amount.

Risk concentration in non-life insurance

For each branch, a percentage share of flood and hurricane claims paid was calculated in the accumulated amount of claims paid in the years when catastrophes (floor or hurricane) occurred, based on individual data for each property group. Depending upon the share size, branches were classified into three categories. Next, for each branch, relevant sum insured and number of policies was defined and grouped in line with the assumed classification, thus arriving at flood and hurricane risk concentration for non-life products.


Risk concentration in non-life insurance: flood claims exposure

Risk concentration in non-life insurance: flood claims exposure by level as at 31 December 2013   Sum insuredTotal   
PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand
A class regions: branches where flood claims account for 0 to 5% of total claims Sum insured 2.3% 2.8% 1.3% 00.7% 8.2% 15.3%
  Number of policies 11.0% 2.7% 00.6% 00.2% 00.2% 14.7%
B class regions: branches where flood claims account for 5 to 15% of total claims Sum insured 3.1% 3.8% 1.7% 1.1% 9.4% 19.1%
  Number of policies 15.5% 3.7% 00.8% 00.2% 00.3% 20.5%
C class regions: branches where flood claims account for over 15% of total claims Sum insured 9.9% 14.5% 5.3% 2.7% 33.2% 65.6%
  Number of policies 47.2% 14.1% 2.4% 00.6% 00.5% 64.8%
Total Sum insured 15.3% 21.1% 8.3% 4.5% 50.8% 100.0%
  Number of policies 73.7% 20.5% 3.8% 1.0% 1.0% 100.0%
 
Risk concentration in non-life insurance: flood claims exposure by level as at 31 December 2012   Sum insuredTotal 
PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand
A class regions: branches where flood claims account for 0 to 5% of total claims Sum insured 3.6% 4.0% 1.8% 1.2% 10.9% 21.5%
  Number of policies 18.1% 4.0% 00.8% 00.2% 00.3% 23.4%
B class regions: branches where flood claims account for 5 to 15% of total claims Sum insured 2.8% 3.2% 1.5% 1.0% 9.0% 17.5%
  Number of policies 14.7% 3.2% 00.7% 00.2% 00.2% 19.0%
C class regions: branches where flood claims account for over 15% of total claims Sum insured 8.7% 12.2% 4.4% 2.3% 33.4% 61.0%
  Number of policies 42.4% 12.1% 2.0% 00.5% 00.6% 57.6%
Total Sum insured 15.1% 19.4% 7.7% 4.5% 53.3% 100.0%
  Number of policies 75.2% 19.3% 3.5% 00.9% 1.1% 100.0%
 


Risk concentration in property and personal insurance: hurricane claims exposure

Risk concentration in non-life insurance: hurricane claims exposure by level as at 31 December 2013   Sum insuredTotal 
PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand
A class regions: branches where hurricane claims account for 0 to 5% of total claims Sum insured 7.9% 11.6% 4.6% 2.3% 26.4% 52.8%
  Number of policies 38.1% 11.2% 2.1% 00.5% 00.5% 52.4%
B class regions: branches where hurricane claims account for 5 to 15% of total claims Sum insured 6.4% 7.9% 3.1% 1.9% 18.8% 38.1%
  Number of policies 30.4% 7.8% 1.4% 00.4% 00.4% 40.4%
C class regions: branches where hurricane claims account for over 15% of total claims Sum insured 1.0% 1.5% 00.6% 00.4% 5.6% 9.1%
  Number of policies 5.3% 1.4% 00.3% 00.1% 00.1% 7.2%
Total Sum insured 15.3% 21,0% 8.3% 4.6% 50.8% 100.0%
  Number of policies 73.8% 20.4% 3.8% 1.0% 1.0% 100.0%
 
Risk concentration in non-life insurance: hurricane claims exposure by level as at 31 December 2012 Sum insuredTotal
  PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand 
A class regions: branches where hurricane claims account for 0 to 5% of total claims Sum insured 12.3% 16.3% 6.7% 3.8% 47.7% 86.8%
  Number of policies 61.9% 16.0% 3.0% 00.8% 00.9% 82.6%
B class regions: branches where hurricane claims account for 5 to 15% of total claims Sum insured 1.0% 1.2% 00.4% 00.2% 3.0% 5.8%
  Number of policies 4.8% 1.2% 00.2% 00.1% 00.1% 6.4%
C class regions: branches where hurricane claims account for over 15% of total claims Sum insured 1.9% 1.9% 00.6% 00.4% 2.6% 7.4%
  Number of policies 8.5% 2.0% 00.3% 00.1% 00.1% 11.0%
Total Sum insured 15.2% 19.4% 7.7% 4.4% 53.3% 100.0%
  Number of policies 75.2% 19.2% 3.5% 1.0% 1.1% 100.0%


Risk concentration in non-life insurance: non-motor TPL

Risk concentration in property and casualty non-motor TPL insurance measured by the gross written premium amount is presented sorted by guarantee amount and type of coverage.

Gross written premium in non-life insurance – TPL as at 31 December 2013 Sum insuredTotal 
PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand
General TPL in personal life and other 16.1% 3.3% 2.4% 2.9% 14.2% 38.9%
Medical TPL 00.6% 1.0% 1.2% 6.2% 31.9% 40.9%
Professional TPL except from medical and agricultural (legal, consulting, etc.) 5.7% 3.0% 1.3% 1.2% 3.4% 14.6%
TPL of farmers and their movable property 00.0% 00.0% 00.0% 5.3% 00.0% 5.3%
Product TPL 00.1% 00.0% 00.1% 00.0% 00.1% 00.3%
Total 22.5% 7.3% 5.0% 15.6% 49.6% 100.0%
 
Gross written premium in non-life insurance – TPL as at 31 December 2012 Sum insuredTotal 
PLN 0-200 thousandPLN 200-500 thousandPLN 500-1000 thousandPLN 1000-2000 thousandover PLN 2000 thousand
General TPL in personal life and other 15.2% 3.4% 2.4% 2.7% 17.5% 41.2%
Medical TPL 00.8% 1.6% 1.4% 5.9% 21.6% 31.3%
Professional TPL except from medical and agricultural (legal, consulting, etc.) 13.2% 2.9% 1.2% 1.2% 3.6% 22.1%
TPL of farmers and their movable property 00.0% 5.0% 00.0% 00.1% 00.0% 5.1%
Product TPL 00.0% 00.0% 00.1% 00.0% 00.2% 00.3%
Total 29.2% 12.9% 5.1% 9.9% 42.9% 100.0%

Sensitivity analysis

Capitalized annuity amount

Presented below is an analysis of sensitivity of the net profit/loss as well as equity to changes in the assumptions used while calculating the provision for capitalized value of annuity claims. The analysis does not present the effect of changes in the measurement of investments on the net financial profit/loss or equity, which are taken into consideration while determining the value of the provision.

Change in the assumptions for the provision for gross capitalized annuity amount in non-life insurance (PLN million)Effect of changes in the assumptions on the net financial profit/lossEffect of changes in the assumptions on equity
 31 December 201331 December 201231 December 201331 December 2012
Technical interest rate – rise by 0.5 p.p. 422 415 422 415
Technical interest rate – drop by 1.0 p.p. (1 092) (1 076) (1 092) (1 076)
Mortality – 110% of the currently assumed level 130 125 130 125
Mortality – 90% of the currently assumed level (145) (140) (145) (140)
 
Change in the assumptions for the provision for capitalized annuity amount net of reinsurance in non-life insurance (PLN million)Effect of changes in the assumptions on the net financial profit/lossEffect of changes in the assumptions on equity
 31 December 201331 December 201231 December 201331 December 2012
Technical interest rate – rise by 0.5 p.p. 411 397 411 397
Technical interest rate – drop by 1.0 p.p. (1 064) (1 028) (1 064) (1 028)
Mortality – 110% of the currently assumed level 126 119 126 119
Mortality – 90% of the currently assumed level (141) (133) (141) (133)

6.7.1.2 Exposure to insurance risk in life products

Risk concentration in this class is related to the concentration of contracts or sums insured. For traditional individual insurance products, where risk of concentration is related to occurrence probability of the covered event or to potential claims amounts arising on a single event, risk assessment is based on case by case approach referring both to medical risk and – in justified cases – financial risk evaluation. Such an approach allows selection of risks (evaluation of an individual concluding an insurance contract) and defining of the maximum acceptable risk level.

In group products, concentration risk occurrence is limited by the contract portfolio size, which allows significant reduction of the level of distraction resulting from random insurance course. Additionally, the form of a contract,

under which all the insured have the same sum insured and coverage is a material risk-mitigating factor. Therefore, some risks are not concentrated within a portfolio.

In case of group insurance contracts, allowing adjusting of coverage on the level of each group contract, a simplified risk assessment is applied based on information about the industry of a given employer, having assumed relevant participation limits for the insured compared to the total employment. In such cases, premium and charges are based on statistical analyses carried out by PZU Życie in relation to frequency of claims on the level of defined homogenous risk classes, including relativel frequency of events compared to public statistics.

Please note that for most contracts offered by PZU Życie, the claim amount is clearly defined in the contract. Therefore, compared to typical non-life insurance contracts, the concentration risk decreases, i.e. occurrence of single events necessitating large claims is relatively low.

Sensitivity analysis

Annuity insurance products in life insurance

Changes in the annuity insurance in life insurance portfolio (PLN million)Effect of change in the assumptions on the net financial profit/lossEffect of change in the assumptions on equity
 31 December 201331 December 201231 December 201331 December 2012
Technical interest rate – drop by 10.0 p.p. (36) (38) (36) (38)
Mortality – 90% of the currently assumed level (13) (13) (13) (13)

Assumptions regarding liabilities arising from insurance and investment contracts with DPF in life insurance excluding annuity insurance

Change in assumptions regarding provisions for insurance and investment contracts with DPF in life insurance excluding annuity products (PLN million)Effect of change in the assumptions on the net financial profit/lossEffect of change in the assumptions on equity
 31 December 201331 December 201231 December 201331 December 2012
Technical interest rate – drop by 1 p.p. (2 221) (2 296) (2 221) (2 296)
Mortality – 110% of the currently assumed level (937) (954) (937) (954)
110% of incidence proportion (195) (199) (195) (199)

Effects of clients’ withdrawing from life insurance products

Calculation of technical provisions for life insurance does not include the risk of the insureds’ withdrawal. Below please find the effects of hypothetical withdrawal of 10% of total insureds with life insurance products in PZU Życie.

Financial statements item  (PLN million)31 December 201331 December 2012
Change in technical provisions 2 026 1 926
Claims paid (726) (648)
Change in deferred acquisition costs (6) (6)
Gross financial profit/loss 1 294 1 272
Net financial profit/loss 1 048 1 031
Equity 1 048 1 031

6.7.2 Market risk

Market risk in PZU and PZU Życie originates from two key sources:

  • matching of assets and liabilities (ALM portfolio),
  • strategic allocation of assets, i.e. determining of an optimum medium-term structure of assets (AA portfolios).

The organization in charge of the market risk management uses a process which comprises risk identification, its measurement, monitoring, reporting and management actions. Funds investment principles approved by the Supervisory Board (PZU and PZU Życie) are the basis for all investment activities. Detailed standards and principles of market risk management are defined in internal investment regulations, Market risk management policy, Market risk management strategy, Investment objectives and guidelines and Additional mitigation of market risk.

Based on the Investment objectives and guidelines and Additional mitigation of market risk, approved by ALCO, PZU AM manages the AA portfolios of PZU SA and PZU Życie SA.

Apart from the portfolios managed by TFI PZU, the market risk at PZU and PZU Życie is also managed at the Treasurer’s Office and the Structured Investment Office. The former manages the portfolios of debt securities (ALM portfolio) in order to match the maturity and amount of liabilities. The latter manages long-term stake in quoted shares and invests in structured debt.

Risk Office (RO) takes part in risk identification process, performs ongoing control of investment risk assessment. Market risk is measured by the RO using the Value at Risk method (VaR). The value at risk for the market risk is calculated using an internal model. The total market risk value is determined by aggregated amounts of individual risks based on a pre-defined correlation matrix. Risk measurement complies with the requirements laid down in the Solvency II Directive. In order to effectively manage market risk, limits in the form of capital amounts allocated to each market risk, as well as limits for separate market risk factors are determined. The acceptable levels of market risk are defined by the Management Boards of PZU and PZU Życie and ALCO in the form of general exposure limits.

Market risk exposure

Value of financial assets exposed to market risk is presented below.

Carrying amount as at 31 December 2013Risk covering assets of the GroupUnit-linked assetsTotal
Financial assets exposed to interest rate risk 47 316 890 1 630 915 48 947 805
- Fixed interest debt securities 30 085 343 1 450 292 31 535 635
- Floating interest debt securities 4 521 641 99 512 4 621 153
- Term deposits with credit institutions 7 305 896 81 111 7 387 007
- Loans 1 722 208 - 1 722 208
- Cash 548 266 - 548 266
- Buy-sell-back transactions 2 918 343 - 2 918 343
- Derivatives 215 193 - 215 193
Financial assets exposed to other price risk 3 156 865 3 129 095 6 285 960
- Shares listed on a regulated market 2 804 970 576 046 3 381 016
- Participation units and certificates in investment funds 307 081 2 553 049 2 860 130
- Derivatives 44 814 - 44 814
Total  50 473 755 4 760 010 55 233 765
   
Carrying amount as at 31 December 2012Risk covering assets of the GroupUnit-linked assetsTotal
Financial assets exposed to interest rate risk 42 419 221 1 792 673 44 211 894
- Fixed interest debt securities 29 583 008 1 381 922 30 964 930
- Floating interest debt securities 4 888 157 76 512 4 964 669
- Term deposits with credit institutions 4 405 653 110 521 4 516 174
- Loans 1 021 121 - 1 021 121
- Cash 136 586 - 136 586
- Buy-sell-back transactions 2 242 439 223 718 2 466 157
- Derivatives 142 257 - 142 257
Financial assets exposed to other price risk 3 689 918 2 533 000 6 222 918
- Shares listed on a regulated market 1 862 359 541 282 2 403 641
- Participation units and certificates in investment funds 1 805 746 1 991 718 3 797 464
- Derivatives 21 813 - 21 813
Total 46 109 139 4 325 673 50 434 812

In its investing activities the PZU Group uses derivatives to manage various investment risks. Most of the aforesaid instruments reduce exposure to individual types of risks. In 2013 and 2012, the Company’s derivatives comprised interest rate and FX swaps and forwards, stock index futures and bond futures. The table below presents the PZU Group’s derivatives as at 31 December 2013 and 31 December 2012.

All the derivatives held by the PZU Group are classified as financial instruments held for trading.

Interest rate derivativesBase amount by maturity at 31 December 2013Assets at fair value as at 31 December 2013Liabilities at fair value as at 31 December 2013
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
OTC including: - 7 556 300 32 931 873 9 334 465 49 822 638 215 193 237 117
- FRA transactions - 300 000 2 250 000 - 2 550 000 1 142 1 986
- SWAP transactions - 7 256 300 30 681 873 9 334 465 47 272 638 214 051 235 131
Interest rate derivatives total - 7 556 300 32 931 873 9 334 465 49 822 638 215 193 237 117
 
Interest rate derivativesBase amount by maturity at 31 December 2012Assets at fair value as at 31 December 2012Liabilities at fair value as at 31 December 2012
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
OTC including: 3 671 220 2 014 407 16 151 261 1 489 867 23 326 755 142 257 123 389
- FRA transactions 1 250 000 1 000 000 8 176 400 - 10 426 400 22 260 1 128
- SWAP transactions 2 421 220 1 014 407 7 974 861 1 489 867 12 900 355 119 997 122 261
Interest rate derivatives total 3 671 220 2 014 407 16 151 261 1 489 867 23 326 755 142 257 123 389
     
Derivatives linked to currency exchange ratesBase amount by maturity at 31 December 2013Assets at fair value as at 31 December 2013Liabilities at fair value as at 31 December 2013
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
OTC including: 1 504 938 344 873 - - 1 849 811 22 456 632
- FRA transactions 340 136 344 873 - - 685 009 5 556 -
- SWAP transactions 1 164 802 - - - 1 164 802 16 900 632
Total derivatives linked to currency exchange rates 1 504 938 344 873 - - 1 849 811 22 456 632
   
Derivatives linked to currency exchange ratesBase amount by maturity at 31 December 2012Assets at fair value as at 31 December 2012Liabilities at fair value as at 31 December 2012
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
OTC including: 1 473 145 8 636 - - 1 481 781 9 284 6 532
- FRA transactions 332 281 - - - 332 281 310 2 598
- SWAP transactions 1 140 864 8 636 - - 1 149 500 8 974 3 934
Total derivatives linked to currency exchange rates 1 473 145 8 636 - - 1 481 781 9 284 6 532
 
Security price derivativesBase amount by maturity at 31 December 2013Assets at fair value as at 31 December 2013Liabilities at fair value as at 31 December 2013
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
Instruments listed on a regulated market including: 530 634 - - - 530 634 5 080 -
- futures 530 634 - - - 530 634 5 080 -
OTC including: 41 994 73 032 384 894 - 499 920 17 278 -
- call options 26 234 73 032 384 894 - 484 160 17 034 -
- forward transactions 15 760 - - - 15 760 244 -
Security price derivatives total 572 628 73 032 384 894 - 1 030 554 22 358 -
 
Security price derivativesBase amount by maturity at 31 December 2012Assets at fair value as at 31 December 2012Liabilities at fair value as at 31 December 2012
 Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal   
OTC instruments including: - 76 727 264 763 - 341 490 12 529 -
- call options - 76 727 264 763 - 341 490 12 529 -
Security price derivatives total - 76 727 264 763 - 341 490 12 529 -

Risk concentration

Exposure to treasury securities issued by State Treasury of Poland – as at 31 December 2013, exposure of PZU Group to treasury securities issued by Polish State Treasury along with contingent transactions on those securities amounted to PLN 32,667 million (PLN 32,399 million as at 31 December 2012), accounting for 59.7% of the total financial assets (64.3% as at 31 December 2012).

PZU Group’s exposure to WSE-listed stock - as at 31 December 2013, the Group's exposure to stock listed at WSE amounted to PLN 3,007 million (PLN 2,401 million as at 31 December 2012), which accounted for 5.5% of the financial assets value (4.8% as at 31 December 2012) and 99.8% of exposure in listed equity instruments (99.9% as at 31 December 2012).

Exposure to assets of PKO BP SA - exposure to assets of a single bank was the highest for PKO BP SA. As at 31 December 2013 total exposure to bank deposits, bonds and shares of that bank amounted to PLN 2,341 million (PLN 2,134 million as at 31 December 2012).

General exposure to bank deposits, debt securities issued by banks, their shares and derivatives amounted to PLN 10,153 million (PLN 9,199 million as at 31 December 2012), which accounted for 18.6% of financial deposits value (18.2% as at 31 December 2012).

Exposure to assets and liabilities denominated in PLN – financial assets denominated in PLN accounted for 93.9% of total financial assets as 31 December 2013 (95.7% as at 31 December 2012).

Unit-linked insurance and investment contract portfolio as at 31 December 2013 amounted to 8.7% of the total financial assets of the PZU Group (8,2% as at 31 December 2012).

6.7.2.1 Interest rate risk

Sensitivity analysis

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group.

Change in portfolio value (PLN million)31 December 201331 December 2012
 Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect on equity
Market interest rate drop by 100 b.p. 433 464 315 360
Market interest rate increase by 100 b.p. (403) (435) (295) (337)

The above sensitivity tests do not include effects of changes in interest rates for presented insurance and investment contract liabilities. Analysis of effects of a change in technical rate on measurement of insurance and investment contracts is presented in item 6.7.1.

6.7.2.2 FX risk

Degree of risk exposure

Information regarding exposure to FX risk by class of financial instruments is presented in item 14.

Sensitivity analysis

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group.

Change in portfolio value (PLN million)31 December 201331 December 2012
 Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect on equity
20% increase in FX to PLN rates 19 83 83 140
20% decrease in FX to PLN rates (19) (83) (83) (140)

Financial assets exposed to FX risk include deposit transactions and debt securities that hedge outlays for technical provisions denominated in foreign currencies, exposure to equity instruments listed at other exchanges than WSE, participation units and investment certificates of investment funds, to derivatives denominated in foreign currencies, as well as financial assets of Lithuanian and Ukrainian companies included in consolidation.

 

6.7.2.3 Other price risk

Degree of risk exposure

The value of available for sale and measured at fair value through profit or loss instruments portfolio is presented in items 14.2 and 14.3, respectively.

Sensitivity analysis

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group. Disclosed figures regard effect of change in prices of equity instruments.

Change in portfolio value (PLN million)31 December 201331 December 2012
 Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect on equity
Increase in measurement of listed equity instruments by 20% 396 456 234 304
Decrease in measurement of listed equity instruments by 20% (396) (456) (234) (304)

6.7.3 Credit risk

Exposure to credit risk in PZU and PZU Życie arises directly from investment, financial insurance and guarantee, reinsurance and bancassurance related activities. Three types of credit risk exposure occur in PZU and PZU Życie:

  • bankruptcy of an issuer of instruments (e.g. corporate bonds) in which PZU and PZU Życie invest, or which they trade, eg. corporate bonds,
  • risk of a PZU and PZU Życie contractor’s failure to meet its obligations, e.g. reinsurance or OTC derivatives, as well as bancassurance activities,
  • risk of a PZU client’s failure to meet its obligations to a third party, e.g. insurance of financial receivables, insurance guarantees.

Investment activity

Principles of managing credit risk resulting from investment activity have been defined in Regulations of investment activity, Credit and concentration risk management policy and Credit risk management strategy as well as in Methods of assigning internal ratings to banks, Methods of assigning internal ratings to the issuers of corporate bonds, Methods of assigning internal ratings to the issuers of municipal bonds.

Credit and concentration risk limits are set by Credit Risk Committee.

Limits for banks and other issuers of debt securities are determined based on the exposure. BRY gives an opinion for every limit application, before the acceptance. When determining the limits, the total exposure of PZU and PZU Życie is taken into account for the Investment Division of PZU and PZU Życie. The limits are exposure limits with respect to a single entity and/or capital group (both credit limits and concentration limits). Subsequently, Member of the Management Board in charge of the Investment Division and Member of the Management Board in charge of the RU allocate the limits to individual units within the structure of the Investment Division. The utilization of limits both with respect to the credit risk limits and the concentration risk limits is controlled by RO. An entity in which the excess occurred or the Management Board of the company is informed about the excess. Following such information, the entity is obliged to prepare and present a plan to lower the stake.

Credit risk assessment of an entity is based on internal credit ratings (rating approach differs depending on an entity type) derived from quality and quantity analysis. Ratings provide a basis for limit-setting. The ratings are updated for credit quality monitoring purposes.

 

Degree of risk exposure

The following table presents credit risk exposure of assets charged with credit risk in individual Fitch classes (in absence of these, Standard&Poors or Moody`s standards have been applied). The exposure to credit risk relating to repo transactions has been presented as an exposure towards the issuer.

Reports presenting assets exposed to credit risk does not include receivables, including receivables from investment contracts due to high dispersal of those assets, resulting among others in significant share of receivables from small enterprises and retail clients who do not have ratings.

     

Assets exposed to credit risk as at 31 December 2013AAAAAABBBBBNo ratingUnit-linked assetsTotal
Debt securities 128 757 7 648 31 702 962 1 927 331 703 453 136 832 1 549 805 36 156 788
- held to maturity - - 18 604 202 165 926 12 913 76 861 - 18 859 902
- available for sale 126 939 - 1 117 344 22 909 243 965 - - 1 511 157
- valued at fair value - 658 11 148 733 535 203 404 791 57 647 1 549 805 13 696 837
- loans 1 818 6 990 832 683 1 203 293 41 784 2 324 - 2 088 892
Bank deposits and repo transactions involving treasury securities 26 854 43 956 4 452 000 4 070 651 1 605 745 25 033 81 111 10 305 350
Other loans - - 675 770 305 164 95 142 646 132 - 1 722 208
Derivatives 22 114 21 834 136 028 40 759 - 39 272   260 007
Reinsurers’ share in net claims provisions - 125 409 125 504 16 666 - 48 976 - 316 555
Deposits with ceding undertakings - 87 - - - - - 87
Receivables from reinsurance - 751 3 938 655 - 13 484 - 18 828
Total 177 725 199 685 37 096 202 6 361 226 2 404 340 909 729 1 630 916 48 779 823
 
Assets exposed to credit risk as at 31 December 2012AAAAAABBBBBNo ratingUnit-linked assetsTotal
Debt securities 60 901 23 965 31 965 124 1 765 248 567 346 88 581 1 458 434 35 929 599
- held to maturity - - 20 856 351 253 464 7 744 - - 21 117 559
- available for sole 59 000 - 1 637 211 56 805 245 000 - - 1 998 016
- valued at fair value - - 8 656 044 636 110 314 602 - 1 458 434 11 065 190
- loans 1 901 23 965 815 518 818 869 - 88 581 - 1 748 834
Bank deposits and repo transactions involving treasury securities 14 862 55 309 4 281 661 1 837 300 314 945 144 015 334 239 6 982 331
Mortgage loans - - - - - 26 848 - 26 848
Other loans 23 528 2 147 51 - 991 524 - 994 273
Derivatives - 5 948 56 605 84 700 4 573 12 244 - 164 070
Reinsurers’ share in net claims provisions - 158 969 317 286 24 620 - 57 589 - 558 464
Deposits with ceding undertakings - 329 - - - - - 329
Receivables from reinsurance - 5 337 4 872 1 093 - 3 797 - 15 099
Total 75 786 250 385 36 627 695 3 713 012 886 864 1 324 598 1 792 673 44 671 013
     

The following table presents credit risk ratios used by PZU Group to calculate credit risk amount.

Standard&Poor’s ratingsAAAAAABBBBBNo rating 1
Ratio (%) for 2013 0.76 0.88 1.65 4.59 15.09 27.84
Ratio (%) for 2012 0.78 0.86 1.77 4.88 15.59 28.70

1) For exposure to mortgage loans without a rating, 2% ratio has been applied, which represents the ratio for the lowest investment rating BBB+.

The credit risk, to which the PZU Group was exposed as at 31 December 2012 amounted to PLN 1,523,259 thousand (PLN 1,343,503 thousand as at 31 December 2012; had ratios of 31 December 2013 been used, the risk would amount to PLN 1,273,222 thousand).

Financial insurance and guarantees

Credit risk related to the activities in the financial insurance and guarantee sector (mainly performance bonds and customs guarantees in accordance with the Civil Code) results from the risk that a client defaults under an agreement with a third party.

As regards risks assumed by the Company, the risk appetite is determined by the Credit Risk Committee, which approves the threshold exposure to credit risk by exposure type, portfolio, product lines, local PZU offices as well as individual risks and the capital group.

The risk monitoring function, independent from the sales function, operates at three levels. The first one applies to underwriting. The second is the portfolio level, for which the Financial Insurance Office is responsible. The Financial Insurance Office conducts an analysis of changes in the exposure value and claims related to the portfolio in terms of their value and volumes as well as analyses of concentration and exposure to one entity and capital group. The Risk Office receives information about the risk exposure in the portfolio to ensure adequate monitoring of the overall exposure on the Company level.The Credit Risk Committee is the third level.

The Financial Insurance Office is responsible for monitoring credit risk on an ongoing basis. Risk is managed at the level of the portfolio, product and at the individual level.

Degree of risk exposure

As at 31 December 2013, the maximum credit risk exposure relating to insurance guarantees and measured by the amount of sums insured was PLN 2,410 million (PLN 2,786 million as at 31 December 2012).

Reinsurance (from the credit risk perspective of the reinsurer)

With the objective to reduce the liabilities arising from the core business of PZU and PZU Życie, the Companies enter into proportional and non-proportional reinsurance contracts. The aforementioned activities are exposed to credit risk arising from reinsurers’ default on their obligations.

The assessment of reinsurers’ creditworthiness is conducted on the basis of market data, information obtained from external sources e.g. S&P as well as using an internal model. The model divides reinsurers into several classes, depending on the level of risk assessed. Only those entities whose risk is lower than the defined cut-off point are accepted. The acceptance process is not automatic and analyses are supplemented with assessments conducted by reinsurance brokers. In the credit risk monitoring process, an entity’s model-based assessment is updated on a quarterly basis. Additionally, stress tests are carried.

The tables below present the credit risk of reinsurers being parties to transactions concluded by the PZU Group companies.

ReinsurerReinsurers’ share
in (net) technical provisions
as at 31 December 2013
Rating assigned
by Standard&Poor’s
as at 31 December 2013
Reinsurer 1 59 295 AA-
Reinsurer 2 36 135 AA-
Reinsurer 3 35 419 no rating
Reinsurer 4 27 678 AA-
Reinsurer 5 24 579 AA-
Reinsurer 6 18 445 A+
Reinsurer 7 17 141 BBB+
Reinsurer 8 14 669 A+
Reinsurer 9 13 979 no rating
Reinsurer 10 13 465 no rating
Reinsurer 11 13 099 AA-
Reinsurer 12 10 412 A+
Reinsurer 13 9 483 AA+
Reinsurer 14 8 499 no rating
Reinsurer 15 7 223 no rating
Reinsurer 16 6 830 A
Other 1 210 254  
Total 526 605  

1) “Other” includes reinsurers’ share in technical provisions, whose carrying amounts are lower than those presented above.

 

ReinsurerReinsurers’ share
in (net) technical provisions
as at 31 December 2012
Rating assigned
by Standard&Poor’s
as at 31 December 2012
Reinsurer 17 184 816 A+
Reinsurer 1 56 600 AA-
Reinsurer 5 57 326 AA-
Reinsurer 2 40 812 AA-
Reinsurer 8 24 332 A+
Reinsurer 4 23 072 AA-
Reinsurer 6 17 726 A+
Reinsurer 7 19 780 BBB+
Reinsurer 9 12 622 no rating
Reinsurer 10 10 644 no rating
Reinsurer 18 10 612 A
Reinsurer 19 10 156 A+
Reinsurer 20 9 406 A+
Reinsurer 13 8 893 AA+
Reinsurer 14 8 327 no rating
Reinsurer 3 8 290 no rating
Other 1 245 920  
Total 749 334  

1) “Other” includes reinsurers’ share in technical provisions, whose carrying amounts are lower than those presented above.

6.7.4 Liquidity risk

Liquidity risk is the risk of encountering difficulties in fulfillment of obligations arising from financial liabilities.

Financial liquidity risk of PZU and PZU Życie may result from three types of events:

  • shortages of liquid funds in ongoing operations,
  • illiquidity of financial instruments held by each Company,
  • a structural gap between the maturity of assets and liabilities.

In the liquidity risk management process, PZU and PZU Życie control liquidity in the short, medium and long term.

As regards short-term liquidity risk management, the balance of funds in the liquidity and currency portfolios of PZU and PZU Życie is not greater than the limit defined. Moreover, both Companies have access to sell-buy-back transactions to manage the liquidity. As regards medium-term liquidity management, PZU and PZU Życie hold adequate liquid investment portfolios. As regards long-term liquidity management and structural mismatch between the maturity of assets and liabilities, PZU and PZU Życie apply Asset Liability Management (ALM), i.e. matching of the structure of financial investments which cover technical provisions to the nature of such provisions. Another objective of the ALM process is to ensure the capability to pay claims and benefits within the shortest possible time also in unfavourable economic conditions.The level of liquidity risk at PZU and PZU Życie is measured by estimating the shortages of cash required for liability payments. The estimate is made on the basis of a set of analyses, including among others, a liquidity gap analysis (a mismatch of net cash flows), an analysis of the distribution of expenditures relating to operating activities and incurred over short periods as well as currency gap analysis.

Degree of risk exposure

Future cash flows resulting from assets used as coverage of technical provisions have been presented as the nominal value of the projected future cash flows corresponding to the periods in which such cash flows are expected. As regards debt securities, loans and term deposits, all cash flows which are expected to occur by the date of redemption of such securities, withdrawal of investments or repayment of loans have been taken into consideration. Shares and participation units have been presented in the periods of their expected disposal or redemption.     

Non-life insurance

The table below presents the match between cash flows related to technical provisions in non-life insurance and the assets used as their coverage.

ItemProjected cash flows (in PLN million)
 up to 3 monthsover 3 months and up to 6 monthsover 6 months and up to 1 yearover 1 year and up to 5 yearsover 5 years
A. Projected net outflows resulting from insurance contracts concluded by the end of reporting year (I + II) (1 279) (993) (1 502) (4 492) (10 712)
I. Outflows (1 288) (1 000) (1 510) (4 521) (10 791)
II. Inflows 9 7 8 29 79
B. Inflows from assets covering technical provisions 2 072 1 037 1 544 4 544 12 436
I. Future inflows whose value is known as at the end of reporting year 2 072 819 273 4 163 5 545
- Treasury bonds 1 299 719 194 3 312 5 422
- Treasury bills - - - - -
- Other debt securities 8 9 6 522 87
- Term deposits with credit institutions 259 7 - - -
- Loans 2 2 3 197 -
- Receivables 500 38 20 10 -
- Other 4 44 50 122 36
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year - 218 1 271 381 6 815
- Treasury bonds - - 21 252 375
- Other debt securities - - 5 21 3
- Loans - 1 2 15 -
- Investment fund units - 217 1 243 93 4 810
- Investment certificates - - - - 1 627
III. Inflows from other assets - - - - 76
C. Balance of projected cash flows (A + B) 793 44 42 52 1 724
D. Balance of accumulated cash flows 793 837 879 931 2 655

For the purpose of the analysis, interest in investment funds (units and investment certificates) has not been consolidated, i.e. it has been presented as units and investment certificates and not as assets held by the funds, which reflects better the liquidity management prospects and ensures coverage of technical provisions with assets at the level of individual companies, taking into account statutory limits for type concentration of the aforesaid assets.

The projected net cash flows resulting from non-life insurance contracts concluded by the end of the reporting period have been determined using statistical and actuarial mathematical methods, taking into account historical data. Inflows have been calculated on the basis of the gross premium. Outflows include all projected costs to be incurred by the insurance company in connection with insurance contracts concluded.

The duration gap is the measure of a mismatch between the maturity dates of assets (investments) and liabilities (technical provisions). The duration of investments in non-life insurance was 4.9 (3.7 in 2012), whereas the duration of technical provisions was 5.1 (5.4 in 2012).

   

Life insurance

The table below presents the match between cash flows from technical provisions and liabilities under investment contracts as well as the assets used as their coverage for life products. The table does not present cash flows relating to unit-linked insurance products and investment contracts.

Itemup to 6 monthsover 6 months and up to 1 yearover 1 year and up to 5 yearsover 5 years and up to 10 yearsover 10 years and up to 20 yearsover 20 years
 Projected cash flows (in PLN million)
A. Projected net outflows resulting from insurance and investment contracts concluded by the end of reporting year (I + II) (1 421) (290) (1 528) (1 280) (3 435) (5 166)
I. Outflows (2 266) (1 112) (7 221) (6 673) (10 157) (9 093)
II. Inflows 845 822 5 693 5 393 6 722 3 927
B. Inflows from assets covering technical provisions 3 196 1 013 6 863 8 428 3 838 5 369
I. Future inflows whose value is known as at the end of reporting year 3 195 1 009 6 842 6 712 3 838 1 846
- Treasury bonds 1 930 483 6 232 6 673 3 838 1 846
- Other debt securities 9 1 140 39 - -
- Term deposits with credit institutions 968 81 330 - - -
- Loans 288 444 140 - - -
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year 1 4 21 1 716 - 3 523
- Treasury bonds - - - - - -
- Other debt securities - 2 11 1 - -
- Loans 1 2 10 - - -
- Investment fund units - - - - - 3 523
- Investment certificates - - - 1 715 - -
III. Inflows from other assets - - - - - -
C. Balance of projected cash flows (A + B) 1 775 723 5 335 7 148 403 203
D. Balance of accumulated cash flows 1 775 2 498 7 833 14 981 15 384 15 587

For the purpose of the analysis, interest in investment funds (units and investment certificates) has not been consolidated, i.e. it has been presented as units and investment certificates and not as assets held by the funds, which reflects better the liquidity management prospects and ensures coverage of technical provisions with assets at the level of individual companies, taking into account statutory limits for type concentration of the aforesaid assets.

The forecast of future claims and future net premiums in life insurance has been prepared based on assumptions regarding mortality, accident and birth rates, the insured’s resignation, projected claims and projected inflows from net premiums.

The duration gap is the measure of a mismatch between the maturity dates of assets (investments) and liabilities (technical provisions). The duration of investments in life insurance was 5.5 (4.7 in 2012), whereas the duration of technical provisions was 21.1 (20.4 in 2012).

6.7.5 Operational risk

In line with the definition adopted by the PZU Group, operational risk is defined as a possibility to incur a loss arising from incorrect or irrelevant internal processes, human errors, system operations or external events.

The objective of operational risk management is to optimize operational risk and operational effectiveness of the PZU Group and therefore to reduce losses and costs resulting from such risks. The process assumes ensuring adequate effective controls and applying appropriate organizational, procedural and technical solutions. Companies in the PZU Group manage operational risk in line with the guidelines defined by the PZU Group and taking into account the type and scale of a particular company.

Members of the Management and Supervisory Boards are provided with periodical operational risk reports.

6.7.6 Non-compliance risk

The business activities of the PZU Group are exposed to the non-compliance risk. Internal regulations impose a segregation of duties regarding on-going and systemic management of the non-compliance risk.

System management, which is mainly the responsibility consists in particular in formulating solutions ensuring that the rules of non-compliance risk management are followed, monitoring of the non-compliance risk management and promoting and monitoring the compliance of internal standards and approved compliance procedures.

Ongoing compliance risk management consists in identification, assessment and measurement as well as ensuring satisfaction of regulatory requirements.