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