6.2 Estimates and assumptions made

6.2.1. Fair value

Assumptions applicable for determining the fair value of assets have been presented in Note 10.

6.2.2. Impairment

6.2.2.1. Goodwill

Key assumptions made for the purpose of estimating the recoverable amount have been presented in Note 29 (for subsidiaries) and Note 32 (for the entities measured using the equity method).

6.2.2.2. Financial instruments measured at amortised cost

Impairment losses on assets held to maturity and loans and receivables are determined as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted using the effective interest rate determined upon initial recognition (original effective interest rate).

6.2.2.3. Equity instruments listed on regulated markets as well as participation units and investment certificates issued by investment funds

Impairment losses on equity instruments listed on regulated markets, units in open-end investment funds and certificates issued by closed-end investment funds classified as available for sale are recognized if at least one of these two conditions is met:

  • the negative difference between the present value and the cost or the amount revalued (by a previous impairment loss) represents at least 30% of the cost or the amount revalued;
  • the market value of the asset as at the end of each of the 12 consecutive months is lower than the cost or the amount revalued (by a previous impairment loss).

Impairment losses are not recognized if it is concluded that the aforesaid events may be reversed within 6 months of the end of the financial year or there are any other indications that the decreases may be temporary in nature.

6.2.2.4. Receivables from policyholders

Receivables from policyholders are reviewed in order to determine possible occurrence of impairment indicators.

Firstly, impairment losses for individual assets are assessed. An impairment loss for individual asset is made for a single account receivable after an evaluation of the economic and financial situation of the debtor and the probability that the amount due will be paid. These receivables are not taken into account in group impairment losses.

As far as accounts receivable from debtors that are in liquidation or bankrupt are concerned, the impairment loss is based on the amount not covered by a guarantee or another security of receivables made known to the liquidator in case of liquidation or to the Magistrate in Bankruptcy in bankruptcy proceedings. If the debtor saw their bankruptcy petition dismissed and the debtor’s assets are not sufficient to satisfy the costs of bankruptcy proceedings, the total value of the account receivable is written-off.

An impairment loss for individual asset is increased when there are indications suggesting that the estimated amount which can be recovered has decreased or that the amount due, for which the impairment loss for individual asset was created – has grown. An impairment loss for individual asset is reversed if it is estimated that the amount which can be recovered exceeds previous estimates or if it has been confirmed that the receivables will be paid partially or in total, or if the amount has been deemed undue. An impairment loss for individual asset is used if the receivables are to be partially or fully remitted or written-off.

Where no case-by-case estimates have been made, the impairment of receivables is assessed on a collective-basis, which provides grounds for a group impairment loss.

Non-life insurance

The group impairment loss is assessed on the basis of the adopted model of a permanent yet individually insignificant impairment assessment. In the model, the impairment loss is determined on the basis of a collective assessment of impairment of receivables due from policyholders grouped according to similar characteristics of the credit risk.

Mature receivables are subject to age analysis, depending on their overdue period. Mature receivables are reduced by the value of the receivables subject to impairment losses for individual assets. The group impairment loss is assessed according to individual overdue periods and on the basis of the unrecoverability ratios of mature receivables that are determined on the basis of a historical analysis.

The value of receivables that will probably become mature on the basis of a historical analysis of the share of overdue receivables is determined for non-mature receivables. The amount determined in this way is reduced by the value of the receivables subject to impairment losses for individual assets. On the basis of the remaining amount of receivables, an impairment loss in the amount of the unrecoverability ratio of mature receivables for the shortest overdue period is determined.

Life insurance

The group impairment loss is assessed for receivables which are not subject to impairment losses for individual assets. Receivables are grouped according to similar credit risk characteristics which indicate the debtor’s ability to repay the entire debt. It is also allowed to group receivables according to criteria different than how long they have been overdue, as long as it allows for a more accurate estimate of the value of the group impairment loss. Calculations are carried out separately for each insurance product or groups of insurance products.

The amount of group impairment losses is estimated with the help of models which are created and updated on the basis of data on debt collection in particular groups sharing similar characteristics. Such estimates are created on the basis of historical data concerning defaults on loans and receivables in various categories of overdueness.

6.2.3. Assumptions made in estimation of technical provisions for non-life insurance

The final estimated value of claims and benefits paid has been presented in the provision development triangles in Note 8.6.1.1. Methodologies used to calculate the IBNR provision and the old portfolio provision are described in Note 5.17.2.1.

When calculating a provision for capitalized value of annuities, estimated future increase of an average annuity is based on historical data taking into account other information that may result in an increase in the value of annuities in the future (for instance, increased insurance awareness, legislation changes etc.).

Future profitability of the portfolio of investments covering the provision for capitalized value of annuities is calculated as projected profitability of the portfolio of bonds maintained to maturity in line with the prudence principle.

The technical interest rate applied to all annuities was 3.6% both as at 31 December 2014 and 31 December 2013. At the same time, based on the forecast inflation and the pay growth rates, a growth rate of 3.9% was used for annuities both as at 31 December 2014 and 31 December 2013.

As regards life annuities, the period during which annuity claims are paid is determined based on publicly available statistics, such as, for example, the Polish Life Expectancy Tables (PLET), published by the Central Statistical Office in Poland. Additionally, calculation of the provision for capitalized value of annuity claims includes the cost of their future management in the amount of 3% of the value of paid claims.

6.2.4. Assumptions made in estimation of technical provisions for life insurance products

The amount of life insurance provision, except for unit-linked provisions, equals to the value of liabilities related to the concluded insurance contracts. It is determined as a difference between the current value of expected claims and the current value of expected premiums using the so-called net premium method.

This means that provision calculation includes all claims and premiums provided for in the contracts as contractual liabilities and receivables, irrespective of the fact whether the contract will be maintained by the insured until the end of the period or terminated. The assumptions for the frequency of events under insurance coverage, i.e. mortality, incidence proportion and accident rate is determined based on publicly available statistics, such as PLET in Poland, or based on own statistics developed on the basis of historical data for individual classes of products found in the portfolio.

The assumptions used in calculation of life insurance provision are calculated separately for individual insurance products at the time of determining premium rates and marketing a given product (the so-called lock-in assumptions). During preparation of financial statements the adequacy of assumptions is verified.

Incidence of events covered by insurance

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

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

An analysis of sensitivity of the net profit/loss as well as equity to changes in the assumptions made for determining the value of technical provisions for life insurance is presented in Note 8.6.1.2.

6.2.5. Calculation of provisions for employee benefits

Provisions for retirement and death benefits (as described in Note 30) are estimated using actuarial methods with the application of appropriate actuarial techniques and assumptions.

Actuarial assumptions

The table below presents the key actuarial assumptions made for calculation of provisions.

Key actuarial assumptions made for calculation of provisions for retirement and death benefits31 December 201431 December 2013
Discount rates, including:    
- PZU and PZU Życie in accordance with the bond yield curve 1) in accordance with the bond yield curve 2)
- other PZU Group entities 1.0%-4.5% 2.0%-4.5% 
Anticipated pay growth rates, including:  
- PZU and PZU Życie 3.0% 3.0%
- other PZU Group entities 0.2%-4.3%  1.5%-3.0%
Mortality rate, including:  
- PZU and PZU Życie PLET 3) PLET 3) 
- other PZU Group entities PLET 3) PLET 3) 
Employee turnover ratio, including:  
- PZU and PZU Życie specific to company 4) specific to company 4)
- other PZU Group entities 0.0%-10.0% 5) 0.0%-10.0% 
Disability rate (entitlement to a disability pension), including:  
- PZU and PZU Życie 0.2% 0.2%
- other PZU Group entities 30%-60% PLET 6) 30%-60% PLET 6) 

1) The yield curve for zero-coupon Treasury bonds used for discounting the provisions for employee benefits at PZU and PZU as at 31 December 2014 covers the period from 2015 to 2045, assuming increasing values for the range until 2033 (1.75%-2.90%) and subsequently becoming an inverted yield curve decreasing to the level of 2.88%.

2) The yield curve for zero-coupon Treasury bonds used for discounting the provisions for employee benefits at PZU and PZU as at 31 December 2013 covers the period from 2014 to 2044, assuming increasing values for the range until 2031 (2.68%-4.87%) and subsequently becoming an inverted yield curve decreasing to the level of 4.61%.

3) The assumed mortality rate matches the level defined in PLET.

4) The employee turnover ratio has been calculated based on ongoing observation of employee turnover. The ratio differs depending on the employee’s age, length of service and sex. Some PZU Group entities do not take the aforementioned ratio into account.

5) In one of the Group’s companies, due to a very high employee turnover, the assumed ratio equaled 90.0%.

6) The disability rate represents a relevant percentage of the mortality rate described above. Some PZU Group entities do not take the aforementioned rate into account.

Sensitivity analysis

Effect of changes in actuarial assumptions for retirement and death benefits on the related provisions 31 December 201431 December 2013
Retirement benefitsDeath benefitsRetirement benefitsDeath benefits
Discount rates      
- increase by 1 p.p. -2,124 -2,629 -1,505 -1,953
- decrease by 1 p.p. 2,652 3,176 1,863 2,328
Projected pay growth rates:      
- increase by 1 p.p. 2,611 3,125 1,866 2,331
- decrease by 1 p.p. -2,134 -2,639 -1,514 -1,962
Mortality rate:      
- increase by 10% -245 1,978 -164 1,707
- decrease by 10% 251 -2,022 167 -1,736
Employee turnover ratio:      
- increase by 10% -356 -620 -214 -457
- decrease by 10% 375 650 224 479

6.2.6. Estimated provisions for disputes

Provisions for disputes are estimated using the individual method, in accordance with IAS 37, taking into account the probability of an outflow of cash, including economic benefits to settle the obligation. Outflow of cash is regarded as probable if the event is more likely than not to occur, i.e. the probability that the event will occur is greater than the probability that it will not.

6.2.7. Deferred tax assets and liabilities

PZU Group entities estimated taxable future income taking into account the possibility of realization of negative temporary differences due to a tax loss incurred by these companies. No deferred tax assets concerning unused tax loss were recognised in result of the estimations. Deferred tax assets and liabilities are recognized according to the principles defined in Note 5.22.