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.
| Ratio | 1 January - 31 December 2013 | 1 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) | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|---|---|---|---|---|
| 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) | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|---|---|---|---|---|
| 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 insured | Total | |||||
|---|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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 insured | Total | |||||
|---|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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 insured | Total | |||||
|---|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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 insured | Total | |||||
|---|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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 insured | Total | ||||
|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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 insured | Total | ||||
|---|---|---|---|---|---|---|
| PLN 0-200 thousand | PLN 200-500 thousand | PLN 500-1000 thousand | PLN 1000-2000 thousand | over 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/loss | Effect of changes in the assumptions on equity | ||
|---|---|---|---|---|
| 31 December 2013 | 31 December 2012 | 31 December 2013 | 31 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/loss | Effect of changes in the assumptions on equity | ||
|---|---|---|---|---|
| 31 December 2013 | 31 December 2012 | 31 December 2013 | 31 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/loss | Effect of change in the assumptions on equity | ||
|---|---|---|---|---|
| 31 December 2013 | 31 December 2012 | 31 December 2013 | 31 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/loss | Effect of change in the assumptions on equity | |||
|---|---|---|---|---|---|
| 31 December 2013 | 31 December 2012 | 31 December 2013 | 31 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 2013 | 31 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 2013 | Risk covering assets of the Group | Unit-linked assets | Total |
|---|---|---|---|
| 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 2012 | Risk covering assets of the Group | Unit-linked assets | Total |
|---|---|---|---|
| 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 derivatives | Base amount by maturity at 31 December 2013 | Assets at fair value as at 31 December 2013 | Liabilities at fair value as at 31 December 2013 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 derivatives | Base amount by maturity at 31 December 2012 | Assets at fair value as at 31 December 2012 | Liabilities at fair value as at 31 December 2012 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 rates | Base amount by maturity at 31 December 2013 | Assets at fair value as at 31 December 2013 | Liabilities at fair value as at 31 December 2013 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 rates | Base amount by maturity at 31 December 2012 | Assets at fair value as at 31 December 2012 | Liabilities at fair value as at 31 December 2012 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 derivatives | Base amount by maturity at 31 December 2013 | Assets at fair value as at 31 December 2013 | Liabilities at fair value as at 31 December 2013 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 derivatives | Base amount by maturity at 31 December 2012 | Assets at fair value as at 31 December 2012 | Liabilities at fair value as at 31 December 2012 | ||||
|---|---|---|---|---|---|---|---|
| Up to 3 months | Over 3 months and up to 1 year | Over 1 year and up to 5 years | Over 5 years | Total | |||
| 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 2013 | 31 December 2012 | ||
|---|---|---|---|---|
| Effect on net financial profit/loss | Effect on equity | Effect on net financial profit/loss | Effect 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 2013 | 31 December 2012 | ||
|---|---|---|---|---|
| Effect on net financial profit/loss | Effect on equity | Effect on net financial profit/loss | Effect 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 2013 | 31 December 2012 | ||
|---|---|---|---|---|
| Effect on net financial profit/loss | Effect on equity | Effect on net financial profit/loss | Effect 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 2013 | AAA | AA | A | BBB | BB | No rating | Unit-linked assets | Total |
|---|---|---|---|---|---|---|---|---|
| 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 2012 | AAA | AA | A | BBB | BB | No rating | Unit-linked assets | Total |
|---|---|---|---|---|---|---|---|---|
| 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 ratings | AAA | AA | A | BBB | BB | No 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.
| Reinsurer | Reinsurers’ 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.
| Reinsurer | Reinsurers’ 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.
| Item | Projected cash flows (in PLN million) | ||||
|---|---|---|---|---|---|
| up to 3 months | over 3 months and up to 6 months | over 6 months and up to 1 year | over 1 year and up to 5 years | over 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.
| Item | up to 6 months | over 6 months and up to 1 year | over 1 year and up to 5 years | over 5 years and up to 10 years | over 10 years and up to 20 years | over 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.