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7.5.2. Actuarial risk (non-life and life insurance)

PZU AR 2021 > Results > Supplementary information and notes > 7. Risk management > 7.5 Risk profile > 7.5.2. Actuarial risk (non-life and life insurance)
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Actuarial risk is the possibility of loss or of adverse change in the value of liabilities under the executed insurance agreements and insurance guarantee agreements, due to inadequate premium pricing and technical provisioning assumptions. Actuarial risk includes:


Non-life insurance Life insurance
Longevity risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance liabilities. X X
Expense risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of the expenses incurred in servicing insurance or reinsurance contracts. X X
Lapse risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level or volatility of the rates of policy lapses, terminations, renewals and surrenders. X X
Catastrophe risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and technical provisioning assumptions related to extreme or irregular events. X X
Premium risk – risk of inadequate estimation of tariff rates and possible deviations of written premiums from the expected level, resulting from fluctuations in the timing, frequency and severity of insured events. X n/a
Provisioning risk – risk of inadequate estimation of technical provisioning levels and the possibility of fluctuations of actual losses around their statistical average because of the stochastic nature of future claims payments. X n/a
Revision risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the level, trend, or volatility of the revision rates applied to annuities, due to changes in the legal environment or health of the person insured. X n/a
Mortality risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance liabilities. n/a X
Morbidity (disability) risk – the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend or volatility of disability, sickness and morbidity rates. n/a X

PZU Group manages its actuarial risk among others through:

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

Calculation and monitoring of adequacy of technical provisions

PZU Group manages its technical provisioning adequacy risk by using appropriate calculation methodology and by controlling provision calculation processes. The provisioning policy is based on:

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

For non-life insurance, the level of technical provisions is evaluated once a month and in specific circumstances (when a payment is made or new information obtained from adjusters or lawyers) their amount is updated. The historical developments and payments of technical provisions over the years are used in the current analyses of technical provisions. This analysis provides an assessment of precision of the current actuarial methods.

For life insurance products, the main sources of data used to estimate the expected frequency of claims include public statistical data (life expectancy tables) published by specialized statistical institutions and analysis of historical insurance portfolio data. Periodic statistical analysis of claim incidence are made at the level of product groups, individual insurance portfolios and properly defined homogeneous risk groups. These analyses form the basis for measuring relative incidence of events compared to publicly available statistical data. The use of appropriate statistical methodologies allows the Group to determine the significance of the statistics and where required – define and apply appropriate safety margins in the determination of technical provisions and risk measurement.

Estimation of technical provisions in the PZU Group is supervised by chief actuaries.

Tariff strategy and monitoring of premium adequacy

The objective of the tariff policy is to guarantee adequate level of premium (sufficient to cover current and future liabilities under in-force policies and expenditures). Along with developing a premium tariff or tariff changes, simulations are conducted with regard to the projected impact of the changes on the future results. Additionally, regular premium adequacy and portfolio profitability studies are carried out for each insurance type based on, among others, evaluation of the technical result on a product for a given financial year. The frequency and level of detail of analyses is adjusted to the materiality of the product and possible fluctuations of its result. If the insurance history is permanently unfavorable then measures are taken to restore the specified profitability level, which involve e.g. adjustment of the premium tariffs, change of the underwriting rules, modification of reinsurance contracts or change of the insured risk profile, through amendments to general terms of insurance.

Underwriting

In the case of corporate clients the underwriting area functions regardless of the sales area, which means that the risk assessment and acceptance rules and the authority levels are defined in the area of underwriting. The process of selling insurance to corporate clients is preceded by a risk analysis and assessment carried out by the sales teams, within the powers they hold. For risks lying beyond the powers of the sales area, underwriting decisions are made by dedicated underwriting teams.

Reinsurance

The purpose of the PZU Group’s reinsurance program in non-life insurance is to secure its core business by mitigating the risk of catastrophic events that may adversely affect the its financial position. This task is performed through obligatory reinsurance contracts supplemented by facultative reinsurance.

PZU Group limits its risk among others by way of:

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

Optimization of the reinsurance program in terms of protection against catastrophic claims is based on the results of internal analyses and uses third-party models.

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

Key cost ratios in non-life insurance 1 January –
31 December 2021
1 January –
31 December 2020
Expense ratio 27,33% 26,27%
Net loss ratio 61,15% 61,31%
Reinsurer’s retention ratio 8,06% 6,78%
Combined ratio 88,48% 87,58%

The expense ratio is the ratio of total acquisition expenses, administrative expenses, reinsurance commissions and profit participation, to the net earned premiums.

The net loss ratio is the ratio of claims and the net movement in technical provisions, to the net earned premiums.

The reinsurer’s retention ratio is the ratio of the reinsurer’s share in gross written premiums, to the gross written premiums.

The combined ratio is the ratio of the sum of acquisition expenses, administrative expenses, reinsurance commissions and profit participation, claims and net movement in technical provisions to the net earned premiums.

The following tables present the development of technical provisions and payments in successive reporting periods.

Claims development in direct non-life insurance, gross (by reporting year) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Provision at the end of the reporting period 10 989 11 783 13 312 13 163 13 181 13 990 14 975 15 627 16 540 17 303
Provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period):









– calculated 1 year later 11 286 12 241 13 032 12 908 13 353 14 251 14 929 15 833 16 048
– calculated 2 years later 11 958 12 180 12 719 12 922 13 500 14 281 15 008 15 542

– calculated 3 years later 11 973 12 080 12 822 13 135 13 518 14 438 14 839


– calculated 4 years later 11 910 12 172 13 089 13 183 13 686 14 366



– calculated 5 years later 12 067 12 439 13 172 13 353 13 677




– calculated 6 years later 12 340 12 536 13 356 13 398





– calculated 7 years later 12 421 12 713 13 308






– calculated 8 years later 12 598 12 785







– calculated 9 years later 12 691








Sum total of the provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period) 12 691 12 785 13 308 13 398 13 677 14 366 14 839 15 542 16 048
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) 7 796 7 553 7 524 6 972 6 524 6 132 5 344 4 217 2 544
Provision recognized in the statement of financial position 4 895 5 232 5 784 6 426 7 153 8 234 9 495 11 325 13 504
Difference between the provision at the end of the first year and the provision estimated at the end of the reporting period (run-off result) -1 702 -1 002 4 -235 -496 -376 136 85 492
The above difference as % of provision at the end of the first year -15% -9% 0% -2% -4% -3% 1% 1% 3%

Claims development in direct non-life insurance, net of reinsurance (by reporting year) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Provision at the end of the reporting period 10 413 11 453 12 814 12 653 12 559 12 880 13 484 13 933 14 545 15 053
Provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period):









– calculated 1 year later 10 722 11 787 12 525 12 355 12 576 13 066 13 362 13 952 14 089
– calculated 2 years later 11 282 11 704 12 201 12 278 12 664 13 005 13 393 13 646

– calculated 3 years later 11 278 11 599 12 224 12 473 12 615 13 112 13 227


– calculated 4 years later 11 215 11 642 12 481 12 463 12 758 13 048



– calculated 5 years later 11 326 11 891 12 515 12 623 12 781




– calculated 6 years later 11 581 11 938 12 689 12 679





– calculated 7 years later 11 624 12 109 12 750






– calculated 8 years later 11 794 12 198







– calculated 9 years later 11 884








Sum total of the provision and total claim payments (from the end of the first reporting period to the end of the current reporting period, excluding payments made before the end of the first reporting period) 11 884 12 198 12 750 12 679 12 781 13 048 13 227 13 646 14 089
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) 7 253 7 255 7 232 6 663 6 119 5 543 4 664 3 665 2 202
Provision recognized in the statement of financial position 4 631 4 943 5 518 6 016 6 662 7 505 8 563 9 981 11 887
Difference between the provision at the end of the first year and the provision estimated at the end of the reporting period (run-off result) -1 471 -745 64 -26 -222 -168 257 287 456
The above difference as % of provision at the end of the first year -14% -7% 0% 0% -2% -1% 2% 2% 3%

Motor insurance – motor own damage (autocasco) and motor TPL – is the core component of the PZU Group’s portfolio. Both types of insurance are generally concluded for one year, in which the loss must occur for the claim to be paid out. In the case of motor own damage, the time for reporting a loss is short and it is not the source of uncertainty. Motor TPL is a whole different situation – the period for reporting losses may be up to 30 years. The level of property losses is sensitive especially to the number of litigation claims reported and court rulings awarded in respective cases. In the case of TPL insurance contracts, new types of long-tail losses arise, which makes the process of estimating technical provisions much more complicated.

Risk concentration in non-life insurance

Within actuarial risk, the PZU Group identifies concentration risk with regard to possible losses caused by natural disasters, such as, in particular, floods and cyclones. The table below presents sums insured in the specified ranges, broken down by voivodeships (for operations conducted in Poland) and countries (for foreign operations). With regard to the exposure to the risk of floods and cyclones, the risk management system in the PZU Group allows to monitor it regularly and the reinsurance program in place reduces significantly the potential net catastrophic loss levels.

Exposure to catastrophic losses in property insurance Sum insured (PLN million) 31 December 2021 Sum insured (PLN million) 31 December 2020
0 - 0.2 0.2 - 0.5 0.5 - 2 2 – 10 10 - 50 over 50 Sum 0 - 0.2 0.2 - 0.5 0.5 - 2 2 – 10 10 - 50 over 50 Sum
Dolnośląskie 0,8% 1,4% 1,4% 0,5% 0,4% 2,0% 6,5% 0,9% 1,3% 1,2% 0,5% 0,4% 1,7% 6,0%
Kujawsko- Pomorskie 0,5% 0,7% 0,6% 0,3% 0,2% 1,1% 3,4% 0,5% 0,6% 0,5% 0,3% 0,3% 1,1% 3,3%
Lubelskie 0,5% 0,7% 0,3% 0,1% 0,1% 1,6% 3,3% 0,5% 0,6% 0,2% 0,1% 0,1% 1,6% 3,1%
Lubuskie 0,2% 0,3% 0,2% 0,1% 0,1% 0,5% 1,4% 0,2% 0,3% 0,2% 0,1% 0,1% 0,5% 1,4%
Łódzkie 0,6% 1,0% 0,7% 0,3% 0,2% 3,9% 6,7% 0,6% 0,9% 0,6% 0,3% 0,2% 5,3% 7,9%
Małopolskie 0,7% 1,5% 1,0% 0,4% 0,4% 1,4% 5,4% 0,7% 1,4% 0,8% 0,4% 0,4% 1,4% 5,1%
Mazowieckie 1,6% 3,1% 2,6% 0,9% 1,0% 9,1% 18,3% 1,5% 2,4% 2,0% 0,8% 0,9% 9,4% 17,0%
Opolskie 0,2% 0,4% 0,3% 0,1% 0,1% 1,6% 2,7% 0,2% 0,4% 0,3% 0,1% 0,1% 1,4% 2,5%
Podkarpackie 0,8% 1,1% 0,4% 0,2% 0,1% 1,4% 4,0% 0,5% 0,8% 0,3% 0,2% 0,2% 1,3% 3,3%
Podlaskie 0,3% 0,4% 0,3% 0,2% 0,2% 0,4% 1,8% 0,3% 0,4% 0,3% 0,1% 0,2% 0,5% 1,8%
Pomorskie 0,5% 1,0% 0,9% 0,5% 0,5% 4,8% 8,2% 0,5% 0,9% 0,8% 0,4% 0,5% 6,0% 9,1%
Śląskie 1,0% 1,5% 1,2% 0,5% 1,2% 3,9% 9,3% 1,0% 1,4% 0,9% 0,5% 0,3% 4,3% 8,4%
Świętokrzyskie 0,3% 0,5% 0,2% 0,1% 0,1% 0,6% 1,8% 0,3% 0,4% 0,2% 0,1% 0,1% 1,1% 2,2%
Warmińsko- Mazurskie 0,3% 0,5% 0,3% 0,2% 0,1% 1,2% 2,6% 0,3% 0,4% 0,3% 0,2% 0,1% 1,2% 2,5%
Wielkopolskie 1,0% 1,8% 1,4% 0,6% 0,5% 2,4% 7,7% 1,0% 1,6% 1,2% 0,6% 0,5% 2,0% 6,9%
Zachodniopomor skie 0,3% 0,5% 0,5% 0,4% 0,3% 2,2% 4,2% 0,3% 0,4% 0,4% 0,3% 0,3% 5,2% 6,9%
Lithuania and Estonia 0,6% 1,8% 2,5% 0,8% 1,0% 2,1% 8,8% 0,6% 1,7% 2,5% 0,8% 1,0% 2,1% 8,7%
Latvia 0,1% 0,6% 0,8% 0,4% 0,4% 0,6% 2,9% 0,1% 0,6% 0,8% 0,4% 0,4% 0,5% 2,8%
Ukraine 0,0% 0,0% 0,0% 0,1% 0,1% 0,6% 0,8% 0,0% 0,0% 0,0% 0,1% 0,1% 0,5% 0,7%
Norway 0,0% 0,0% 0,0% 0,0% 0,0% 0,2% 0,2% 0,0% 0,0% 0,0% 0,0% 0,0% 0,4% 0,4%
Total 10,3% 18,8% 15,6% 6,7% 7,0% 41,6% 100,0% 10,0% 16,5% 13,5% 6,3% 6,2% 47,5% 100,0%

Capitalized annuities

The following results do not take into account the impact of changes in valuation of investments included in provision calculations.

Impact of the change in assumptions regarding the provision for the capitalized value of annuities in non-life insurance on the net financial result and equity 31 December 2021 31 December 2020
gross net gross net
Technical rate – increase by 0.5 p.p. 457 425 457 427
Technical rate – decrease by 1.0 p.p. -1 173 -1 090 -1 180 -1 104
Mortality at 110% of currently assumed rate 139 134 134 129
Mortality at 90% of currently assumed rate -157 -149 -151 -143

7.5.2.2. Exposure to insurance risk – life insurance

The PZU Group has not disclosed information on the development of claims in life insurance, since uncertainty about the amount and timing of claims payments is typically resolved within one year.

Risk concentration is associated with the concentration of insurance contracts or sums insured. For traditional individual insurance products, where concentration risk is related to the possibility that an insurable event occurs or is related to the potential level of payouts arising from a single event, the risk is assessed on a case-by-case basis. The assessment includes medical risk and – in justified cases – also financial risk. Consequently, risk selection occurs (a person concluding an insurance agreement is evaluated) and the maximum acceptable risk level is defined.

In group insurance, concentration risk is mitigated by the sheer size of the contract portfolio. This significantly reduces the level of disturbances caused by the random nature of insurance history. Additionally, the collective form of a contract, under which all the persons insured have the same sum insured and coverage is an important risk-mitigating factor. Therefore, some risks within the contract portfolio are not concentrated.

In the case of group insurance contracts in which insurance cover may be adjusted at the level of individual group contracts, a simplified underwriting process is used. It is based on information about the industry in which the work establishment operates, assuming appropriate ratios of the insureds to employees in the work establishment. The insurance premiums used in such cases and appropriate mark-ups result from statistical analyses conducted by PZU Life on incidence of claims at the level of defined homogeneous risk groups, including relative frequency of events compared to public statistical data.

It should be noted that for most contracts, the claim amount is strictly defined in the insurance contract. Therefore, compared to typical non-life insurance contract, concentration risk is reduced, since single events with high claims payments are relatively rare.

Annuity products in life insurance

Impact of the change in assumptions in annuity life insurance on the net financial result and equity 31 December 2021 31 December 2020
Technical rate – decrease by 1.0 p.p. -18 -20
Mortality at 90% of currently assumed rate -9 -9

Life insurance products excluding annuity products

Impact of the change in assumptions in life insurance, excluding provisions in annuity products, on the net financial result and equity 31 December 2021 31 December 2020
Technical rate – decrease by 1.0 p.p. -2 512 -2 491
Mortality at 110% of currently assumed rate -886 -896
Morbidity and accident rate at 110% of currently assumed rate -194 -205

Effects of lapses in life insurance

Calculation of mathematical technical provisions for life insurance does not include the risk of lapses (resignations). The effects of hypothetical lapses 10% of all life insurance customers are presented below.

Item in financial statements 31 December 2021 31 December 2020
Movement in technical provisions 2 207 2 213
Claims and benefits paid -859 -860
Movement in deferred acquisition expenses -7 -11
Profit/loss before tax 1 341 1 342
Net financial result and equity 1 086 1 087