8.6 Risk profile

User Kit

PZU Group risk profile did not change significantly in 2014. The main types of risks incurred by PZU Group include insurance risk, market risk, credit risk, concentration risk, operational risk and compliance risk.

8.6.1. Insurance risk (non-life and life insurance)

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

Insurance risk includes:

	Non-life insurance	Life insurance
Longevity risk – a risk of loss or unfavourable 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,	x	x
Cost risk – a risk of loss or unfavourable change in the amount of insurance liabilities resulting from changes in the level, trend or volatility of costs incurred for insurance or reinsurance contract management.	x	x
Laps Risk – a risk of loss or unfavourable 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.	x	x
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.	x	x
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.	x	n/a
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.	x	n/a
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.	x	n/a
Mortality risk – a risk of loss or unfavourable 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.	n/a	x
Disability risk – a risk of loss or unfavourable change of insurance liabilities resulting from changes in the level, trend or volatility of the disability factor and occurrence of illnesses/diseases.	n/a	x

8.6.1.-insurance-risk-pzu_2014_.xlsx

PZU Group manages insurance risk i.a. by way of:

calculating and monitoring the adequacy of technical provisions;
tariff strategy and monitoring of the current estimates and evaluation of premium adequacy;
underwriting;
reinsurance.

Calculation and monitoring of adequacy of technical provisions

PZU Group manages the 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, consisting in the unchangeability of the methods of technical provisioning, provided there are no significant circumstances which justify introduction of changes.

For non-life insurance, 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. History of development and payments per balance sheet year is used to analyse the amount of technical provisions. The analysis results in assessment of precision of actuarial methods.

For life insurance products, 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. Periodic statistical analyses of claims incidence are made at the level of product groups, individual insurance portfolios and well-defined homogeneous risk groups. These analyses allow determining relative frequency of claims compared to public statistics. The use of appropriate statistical methods allows to determine the significance of the determined statistics. If necessary, determined appropriate security charges are applied when creating technical provisions and risk evaluation.

Estimating of technical provisions in PZU Group is supervised by main actuaries. Furthermore, every year an independent expert performs a separate calculation of provisions for the purpose of verifying the internal results or performs an evaluation of life insurance portfolios as part of the embedded value calculation.

Tariff strategy, monitoring of current estimates and premium adequacy assessment

The purpose of the tariff policy 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, among others, evaluation of the technical result on a product for a given financial year. 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 materiality of the product and possible result fluctuation. If the course of insurance is unfavourable, activities are undertaken to restore a defined profitability level, involving adjusting premium tariffs or the insured risk profile through modifying 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 an 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.

Reinsurance

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

PZU Group limits its risk i.a. by way of:

non-proportional excess of loss treaties which protect the portfolios against catastrophic losses (e.g. flood, hurricane);
non-proportional excess of loss treaties which protect property, technical, marine, aviation, TPL and MTPL portfolios against the effects of large, single losses;
proportional treaties which protects the financial insurance portfolio.

PZU Group 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.

8.6.1.1. Exposure to insurance risk in non-life products

Primary cost ratios in non-life insurance	1 January – 31 December 2014	1 January – 31 December 2013
Expense ratio	28.94%	25.94%
Claims ratio, net of reinsurance	66.39%	61.90%
Reinsurer’s retention ratio	3.84%	2.93%
Combined ratio	95.32%	87.84%

8.6.1.1.exposure-pzu_2014_.xlsx

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 net technical provisions to the net earned premiums.

Claims development in direct property and personal insurance, gross (by financial year)	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Provision at the end of the financial year	7,458,401	7,540,570	7,898,097	8,292,721	8,698,661	9,380,501	9,870,123	10,989,024	11,782,567	13,311,566
The provision and the total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year):
- calculated one year later	6,915,636	7,300,086	7,697,588	8,382,022	8,560,746	9,680,960	10,298,173	11,285,586	12,241,486
- calculated two years later	6,814,742	7,286,968	7,833,155	8,409,631	8,855,827	10,192,492	10,752,650	11,958,413
- calculated three years later	7,013,528	7,436,865	7,852,001	8,757,918	9,346,313	10,718,813	11,589,871
- calculated four years later	7,113,164	7,443,246	8,140,607	9,215,412	9,874,432	11,574,390
- calculated five years later	7,119,925	7,661,124	8,599,531	9,723,948	10,712,439
- calculated six years later	7,307,058	8,102,772	9,076,948	10,558,365
- calculated seven years later	7,703,019	8,523,330	9,842,325
- calculated eight years later	8,057,693	9,224,422
- calculated nine years later	8,707,732
Total provision and claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	8,707,732	9,224,422	9,842,325	10,558,365	10,712,439	11,574,390	11,589,871	11,958,413	12,241,486
The total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	4,037,917	4,091,129	4,182,939	4,271,913	3,837,143	4,033,634	3,209,619	2,591,660	1,695,817
Provision recognized in the statement of financial positions	4,669,815	5,133,293	5,659,386	6,286,452	6,875,296	7,540,756	8,380,252	9,366,753	10,545,669
Difference between the first year provision and the run-off result estimated at the end of reporting year	-1,249,331	-1,683,852	-1,944,228	-2,265,644	-2,013,778	-2,193,889	-1,719,748	-969389	-458,919
The above difference as a percentage of the first year provision	-17%	-22%	-25%	-27%	-23%	-23%	-17%	-9%	-4%

8.6.1.1.claims-development_-pzu_2014.xlsx

Claims development in direct property and personal insurance, net of reinsurance (by financial year)	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Provision at the end of the financial year	6,246,070	6,356,239	6,916,099	7,433,410	7,972,938	8,639,044	9,304,621	10,413,376	11,453,315	12,813,985
The provision and the total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year):
- calculated one year later	5,651,285	6,145,931	6,790,822	7,568,099	7,843,760	8,838,330	9,731,139	10,722,247	11,787,321
- calculated two years later	5,605,428	6,201,722	6,968,715	7,597,785	8,091,605	9,344,945	10,185,213	11,282,329
- calculated three years later	5,838,544	6,396,354	6,991,045	7,909,625	8,558,410	9,872,521	10,946,654
- calculated four years later	5,978,990	6,405,273	7,246,292	8,343,715	9,106,236	10,672,033
- calculated five years later	5,984,459	6,589,073	7,683,193	8,874,588	9,891,566
- calculated six years later	6,145,804	7,008,662	8,189,106	9,656,518
- calculated seven years later	6,515,396	7,457,627	8,904,032
- calculated eight years later	6,882,188	8,108,651
- calculated nine years later	7,482,106
Total provision and claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	7,482,106	8,108,651	8,904,032	9,656,518	9,891,566	10,672,033	10,946,654	11,282,329	11,787,321
The total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	3,018,595	3,183,149	3,453,469	3,587,041	3,236,477	3,377,151	2,837,946	2,264,973	1,638,017	-
Provision recognized in the statement of financial positions	4,463,511	4,925,502	5,450,563	6,069,477	6,655,089	7,294,882	8,108,708	9,017,356	10,149,304
Difference between the first year provision and the run-off result estimated at the end of reporting year	-1,236,036	-1,752,412	-1,987,933	-2,223,108	-1,918,628	-2,032,989	-1,642,033	-868,953	-334,006
The above difference as a percentage of the first year provision	-20%	-28%	-29%	-30%	-24%	-24%	-18%	-8%	-3%

8.6.1.1.claims-development-net_pzu_2014.xlsx

Motor insurance products (MTPL and own damage) account for the major part of PZU portfolio. Both types of insurances are usually concluded for a year, during which a claim must occur to be covered. The own damage insurance is based on a claim-made principle, so it is not a source of uncertainty. It is unlike MTPL, which is an occurrence insurance (there is 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 significantly add to the complexity of estimating the technical provisions amount.

Risk concentration in non-life insurance

Depending on the percentage of the value of paid out flood and hurricane damage in the total value of claims paid in the period in which the catastrophic events occurred, i.e. the floods or hurricanes, three groups of regions have been distinguished. Next, relevant insurance sums and the number of policies was defined for each region, thus arriving at flood and hurricane risk concentration.

Risk concentration in non-life insurance – flood claims exposure

Risk concentration in non-life insurance – flood claims exposure as at 31 December 2014		Sum insured					Total
		PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
A group regions - where flood claims constitute 0 to 5% of total claims	Sum insured	3.8%	6.6%	2.5%	1.2%	12.4%	26.5%
	Number of policies	18.6%	5.6%	1.2%	0.3%	0.3%	26.0%
B group regions - where flood claims constitute 5 to 15% of total claims	Sum insured	2.5%	2.8%	1.1%	0.9%	6.4%	13.7%
	Number of policies	12.3%	2.8%	0.5%	0.2%	0.2%	16.0%
C group regions - where flood claims constitute over 15% of total claims	Sum insured	8.2%	12.9%	4.9%	2.4%	31.4%	59.8%
	Number of policies	41.8%	13.0%	2.3%	0.5%	0.4%	58.0%
Total	Sum insured	14.5%	22.3%	8.5%	4.5%	50.2%	100.0%
Total	Number of policies	72.7%	21.4%	4.0%	1.0%	0.9%	100.0%

8.6.1.1.risk_concentration_2014-net_pzu_2014.xlsx

Risk concentration in non-life insurance – flood claims exposure as at 31 December 2013		Sum insured					Total
		PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
A group regions - where flood claims constitute 0 to 5% of total claims	Sum insured	2.3%	2.8%	1.3%	0.7%	8.2%	15.3%
	Number of policies	11.0%	2.7%	0.6%	0.2%	0.2%	14.7%
B group regions - where flood claims constitute 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%	0.8%	0.2%	0.3%	20.5%
C group regions - where flood claims constitute 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%	0.6%	0.5%	64.8%
Total	Sum insured	15.3%	21.1%	8.3%	4.5%	50.8%	100.0%
Total	Number of policies	73.7%	20.5%	3.8%	1.0%	1.0%	100.0%

8.6.1.1.risk_concentration_2013_pzu_2014.xlsx

Risk concentration in property and personal insurance - hurricane claims exposure

Risk concentration in non-life insurance – hurricane claims exposure as at 31 December 2014		Sum Insured					Total
		PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
A group regions - where hurricane claims constitute 0 to 5% of total claims	Sum insured	8.9%	15.6%	6.0%	3.0%	38.3%	71.8%
	Number of policies	46.3%	14.5%	2.8%	0.7%	0.8%	65.1%
B group regions - where hurricane claims constitute 5 to 15% of total claims	Sum insured	4.7%	5.8%	2.2%	1.3%	9.8%	23.8%
	Number of policies	22.8%	5.9%	1.0%	0.3%	0.3%	30.3%
C group regions - where hurricane claims constitute over 15% of total claims	Sum insured	0.7%	0.9%	0.3%	0.2%	2.3%	4.4%
	Number of policies	3.5%	0.9%	0.2%	0.0%	0.0%	4.6%
Total	Sum insured	14.3%	22.3%	8.5%	4.5%	50.4%	100.0%
Total	Number of policies	72.6%	21.3%	4.0%	1.0%	1.1%	100.0%

8.6.1.1.risk_hurricane_claims_2014_pzu_2014.xlsx

Risk concentration in non-life insurance – hurricane claims exposure as at 31 December 2013		Sum insured					Total
		PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
A group regions - where hurricane claims constitute 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%	0.5%	0.5%	52.4%
B group regions - where hurricane claims constitute 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%	0.4%	0.4%	40.4%
C group regions - where hurricane claims constitute over 15% of total claims	Sum insured	1.0%	1.5%	0.6%	0.4%	5.6%	9.1%
	Number of policies	5.3%	1.4%	0.3%	0.1%	0.1%	7.2%
Total	Sum insured	15.3%	21.0%	8.3%	4.6%	50.8%	100.0%
Total	Number of policies	73.8%	20.4%	3.8%	1.0%	1.0%	100.0%

8.6.1.1.risk_hurricane_claims_2013_pzu_2014.xlsx

Risk concentration in non-life insurance: general liability insurance

Risk concentration in property and casualty general liability insurance 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 2014	Sum insured					Total
	PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
General TPL in personal life and other	15.5%	3.4%	2.5%	2.9%	14.1%	38.4%
Medical TPL	0.6%	1.0%	1.2%	6.4%	33.1%	42.3%
Professional TPL except from medical and agricultural (legal, consulting, etc.)	5.5%	2.9%	1.3%	1.5%	3.7%	14.9%
TPL of farmers and their movable property	0.0%	0.0%	0.0%	4.3%	0.0%	4.3%
Product TPL	0.0%	0.0%	0.0%	0.0%	0.1%	0.1%
Total	21.6%	7.3%	5.0%	15.1%	51.0%	100.0%

8.6.1.1.tpl_2014_pzu_2014.xlsx

Gross written premium in non-life insurance – TPL as at 31 December 2013	Sum insured					Total
	PLN ‘000 0-200	PLN ‘000 200-500	PLN ‘000 500-1000	PLN ‘000 1000-2000	over PLN ‘000 2000	Total
General TPL in personal life and other	16.1%	3.3%	2.4%	2.9%	14.2%	38.9%
Medical TPL	0.6%	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	0.0%	0.0%	0.0%	5.3%	0.0%	5.3%
Product TPL	0.1%	0.0%	0.1%	0.0%	0.1%	0.3%
Total	22.5%	7.3%	5.0%	15.6%	49.6%	100.0%

8.6.1.1.tpl_2013_pzu_2014.xlsx

Capitalised annuity amount

The below results do not take into account the impact of changes in valuation of deposits taken into consideration in the calculation of the provision value.

Change in the assumptions for the provision for capitalised value of annuities amount in non-life insurance - gross (in PLN ‘000)	Effect of change in the assumptions on net financial profit/loss		Effect of changes in assumptions on equity
	31 December 2014	31 December 2013	31 December 2014	31 December 2013
Technical rate - increase by 0.5 p.p.	426,244	421,951	426,244	421,951
Technical rate - decrease by 1.0 p.p.	-1,101,344	-1,092,141	-1,101,344	-1,092,141
Mortality at 110% of the currently assumed rate	132,268	129,725	132,268	129,725
Mortality at 90% of the currently assumed rate	-147,984	-145,112	-147,984	-145,112

8.6.1.1.capitalised_annuity_amount_2014_pzu_2014.xlsx

Change in the assumptions for the provision for capitalised value of annuities amount - net of reinsurance in property and personal insurance (in PLN ‘000)	Effect of change in the assumptions on net financial profit/loss		Effect of changes in assumptions on equity
	31 December 2014	31 December 2013	31 December 2014	31 December 2013
Technical rate – increase by 0.5 p.p.	415,451	411,121	415,451	411,121
Technical rate – decrease by 1.0 p.p.	-1,073,704	-1,064,334	-1,073,704	-1,064,334
Mortality at 110% of the currently assumed rate	128,940	126,437	128,940	126,437
Mortality at 90% of the currently assumed rate	-144,263	-141,438	-144,263	-141,438

8.6.1.1.capitalised_annuity_amount_2013_pzu_2014.xlsx

8.6.1.2. Exposure to insurance risk in life products

PZU Group has not presented information on the development of claims in life insurance due to the fact that the uncertainty regarding amounts and claim payment periods usually stops within one year.

Risk concentration in this group 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. The assessment includes both medical risk and – in justified cases – financial risk. 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. This allows for 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 the case of group insurance contracts, allowing adjusting of coverage at the level of each group of contracts, a simplified risk assessment is applied. It is carried out on the basis of information about the industry of a given employer, assuming appropriate participation limits of the insured in respect of all persons employed in the workplace. In such cases, premium and charges are based on statistical analyses carried out in relation to the frequency of claims on the level of defined homogeneous risk groups, including relative frequency of events compared to public statistics.

It should be noted that for most contracts, 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.

Annuity insurance products in life insurance

Changes in the annuity insurance in life insurance portfolio	Effect of change in the assumptions on the net financial profit/loss		Effect of change in the assumptions on equity
	31 December 2014	31 December 2013	31 December 2014	31 December 2013
Technical interest rate – decrease by 1 p.p.	-34,259	-36,080	-34,259	-36,080
Mortality at 90% of the currently assumed rate	-12,318	-12,539	-12,318	-12,539

8.6.1.2.annuity_insurance_pzu_2014.xlsx

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	Effect of change in the assumptions on the net financial profit/loss		Effect of changes in the assumptions on equity
	31 December 2014	31 December 2013	31 December 2014	31 December 2013
Technical interest rate – decrease by 1.0 p.p.	-2,194,319	-2,221,496	-2,194,319	-2,221,496
Mortality at 110% of the currently assumed rate	-922,805	-937,246	-922,805	-937,246
110% morbidity and accident rate	-187,082	-194,624	-187,082	-194,624

8.6.1.2.change_in_assumptions_pzu_2014.xlsx

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 clients with life insurance products in PZU Życie.

Item in financial statements	31 December 2014	31 December 2013
Change in technical provisions	2,093,927	2,025,688
Claims and benefits paid	-782,563	-725,871
Change in deferred acquisition costs	-6,256	-5,943
Gross financial profit/loss	1,305,109	1,293,874
Net financial profit/loss	1,057,138	1,048,038
Equity	1,057,138	1,048,038

8.6.1.2.effects_of_clients_withdrawing_pzu_2014.xlsx

8.6.2. Market risk

Market risk is a risk of a loss or an unfavourable 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.

Market risk in PZU Group includes:

equity instruments price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market prices of shares or their volatility;
property price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market prices or their volatility;
goods price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market prices or their volatility;
inflation risk – a possibility of incurring a loss resulting from inflation, in particular inflation of goods and services prices, as well as expectations regarding the future inflation level which impact valuation of assets and liabilities;
liquidity risk – the inability to realise investments and other assets with no impact on their market prices in order to settle one's financial liabilities when they fall due;
interest rate risk – a possibility of incurring a loss following changes in the value of financial instruments or assets and fluctuations in the present value of projected cash flows on liabilities following changes in term of structure of market interest rates or volatility of these risk-free rates;
basis risk – a possibility to incur a loss following changes in the value of financial instruments or assets and fluctuations in the present value of projected cash flows on liabilities following changes in term structure of market interest rate spreads as compared to risk-free rates or volatility of these spreads - with the exception of credit spreads;
currency risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in exchange rates or their volatility.

Market risk in PZU Group 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 investment activity in the PZU Group entities is regulated in a number of documents approved by the Supervisory Boards, the Management Boards and dedicated Committees.

Departments of risk management take part in the risk identification process, measure those risks, monitor and report those risks. Market risk is measured by the Value at Risk method. The total market risk value is determined by aggregated amounts of individual risks based on a pre-defined correlation matrix. In order to effectively manage market risk, limits in form of capital amounts allocated to each market risk, as well as limits for separate market risk factors are determined.

Market risk exposure

Carrying amount as at 31 December 2014	Note	Risk covering assets of the Group	Unit-linked assets	Total
Financial assets and cash exposed to interest rate risk		48,991,002	1,557,038	50,548,040
Fixed interest debt instruments	33.1,33.2,33.3,33.4	30,686,636	1,368,931	32,055,567
Floating interest debt instruments	33.1,33.2,33.3,33.4	5,851,652	105,969	5,957,621
Term deposits at credit institutions	33.4	6,061,643	82,138	6,143,781
Loans and receivables	33.4	2,309,972	-	2,309,972
Cash	42	324,007	-	324,007
Buy sell-back transactions	33.4	3,250,173	-	3,250,173
Derivatives	33.3	506,919	-	506,919
Financial assets exposed to other price risk		3,110,178	3,422,151	6,532,329
Shares listed on a regulated market	33.2, 33.3	2,831,054	532,352	3,363,406 ¹⁾
Participation units and certificates in investment funds	33.2, 33.3	239,640	2,889,799	3,129,439 ²⁾
Derivatives	33.3	39,484	-	39,484
Total		52,101,180	4,979,189	57,080,369

1) Difference of the values presented as equity instruments listed on the regulated market in notes 33.2 and 33.3 amounting to PLN 10,529 thousand regards listed units and investment certificates in the line below.

2) Difference of the values presented as equity instruments not listed on the regulated market in notes 33.2 and 33.3 amounting to PLN 10,073 thousand regards listed units and investment certificates (PLN 10,529 thousand) and non-listed equity instruments other than units and investment certificates not included in that item (PLN 456 thousand).

8.6.1.2.market_risk_exposure2014_pzu_2014.xlsx

Carrying amount of financial assets and liabilities held for sale	Note 43	31 December 2014
Financial assets and cash exposed to interest rate risk		314,284
Fixed interest debt securities		217,852
Term deposits with credit institutions		88,085
Cash		8,347
Financial assets exposed to other price risk		36,702
Equity instruments listed on the regulated market		16,366
Participation units and investment certificates in investment funds		20,336
Total		350,986

8.6.1.2.carrying_amount_of_financial_assets_pzu_2014.xlsx

Carrying amount as at 31 December 2013	Note	Risk covering assets of the Group	Unit-linked assets	Total
Financial assets and cash exposed to interest rate risk		47,671,217	1,630,915	49,302,132
Fixed interest debt instruments	33.1,33.2,33.3,33.4	30,133,778	1,450,292	31,584,070
Floating interest debt instruments	33.1,33.2,33.3,33.4	4,521,641	99,512	4,621,153
Term deposits at credit institutions	33.4	7,305,896	81,111	7,387,007
Loans and receivables	33.4	1,722,208	-	1,722,208
Cash	42	569,157	-	569,157
Buy sell-back transactions	33.4	3,203,344	-	3,203,344
Derivatives	33.3	215,193	-	215,193
Financial assets exposed to other price risk		3,220,389	3,129,095	6,349,484
Shares listed on the regulated market	33.2, 33.3	3,109,602	576,046	3,685,648 ¹⁾
Participation units and certificates in investment funds	33.2, 33.3	65,937	2,553,049	2,618,986 ²⁾
Derivatives	33.3	44,850	-	44,850
Total		50,891,606	4,760,010	55,651,616

1) The difference to the values presented as equity instruments listed on the regulated market in notes 33.2 and 33.3 amounting to PLN 5,305 thousand regards listed units and investment certificates in the line below.

2) The difference to the values presented as equity instruments not listed on the regulated market in notes 33.2 and 33.3 amounting to PLN 5,251 thousand regards listed units and investment certificates (PLN 5,305 thousand) and non-listed equity instruments other than units and investment certificates not included in that item (PLN 54 thousand).

8.6.1.2.market_risk_exposure2013_pzu_2014.xlsx

In its investing activities PZU Group uses derivatives to manage various investment risks. Most of the aforesaid instruments reduce exposure to individual types of risks. In 2014 and 2013, the PZU Group's derivatives comprised interest rate and FX swaps and forwards, stock index futures and bond futures. All the derivatives held by PZU Group are classified as financial instruments held for trading.

The table below presents the PZU Group’s derivatives as at 31 December 2014 and 31 December 2013.

Interest rate derivatives	Base amount by maturity as at 31 December 2014					Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
Interest rate derivatives	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total	Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
OTC, including:	5,316,874	12,300,000	27,874,630	5,145,782	50,637,286	506,919	556,426
- futures	2,500,000	5,400,000	-	-	7,900,000	7,203	5,735
- SWAP transactions	2,816,874	6,900,000	27,874,630	5,145,782	42,737,286	499,716	550,691
Interest rate derivatives, total	5,316,874	12,300,000	27,874,630	5,145,782	50,637,286	506,919	556,426

8.6.1.2.interest_rate_derivatives_pzu_2014.xlsx

Interest rate derivatives	Base amount by maturity as at 31 December 2013					Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
Interest rate derivatives	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total	Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
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

8.6.1.2.interest_rate_derivatives2013_pzu_2014.xlsx

Derivatives linked to currency exchange rates	Base amount by maturity as at 31 December 2014				Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
Derivatives linked to currency exchange rates	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Total	Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
Instruments listed on a regulated market, including:	-	620,808	1,030,540	1,651,348	-	9,516
- futures	-	620,808	1,030,540	1,651,348	-	9,516
OTC instruments, including:	8,262,468	50,000	-	8,312,468	14,975	48,266
- futures	423,422	-	-	423,422	720	15,633
- SWAP transactions	7,839,046	-	-	7,839,046	13,016	32,633
- call options	-	25,000	-	25,000	994	-
- put options	-	25,000	-	25,000	245	-
Total derivatives linked to currency exchange rates	8,262,468	670,808	1,030,540	9,963,816	14,975	57,782

8.6.1.2.iderivatives_linked_pzu_2014.xlsx

Derivatives linked to currency exchange rates	Base amount by maturity as at 31 December 2013			Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
Derivatives linked to currency exchange rates	Up to 3 months	Over 3 months and up to 1 year	Total	Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
OTC instruments, including:	1,505,938	344,873	1,850,811	22,492	632
- FRA transactions	341,136	344,873	686,009	5,592	-
- SWAP transactions	1,164,802	-	1,164,802	16,900	632
Total derivatives linked to currency exchange rates	1,505,938	344,873	1,850,811	22,492	632

8.6.1.2.iderivatives_linked2013_pzu_2014.xlsx

Security price derivatives	Base amount by maturity as at 31 December 2014				Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
Security price derivatives	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Total	Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
Instruments listed on a regulated market, including:	-	620,840	1,030,540	1,651,380	1,843	9,516
- futures	-	620,808	1,030,540	1,651,348	-	9,516
- call options	-	32	-	32	1,843	-
OTC instruments, including:	215,110	102,539	365,732	683,381	22,666	2,120
- futures	153,443	-	-	153,443	-	2,120
- call options	61,667	102,539	365,732	529,938	22,666	-
Security price derivatives, total	215,110	723,379	1,396,272	2,334,761	24,509	11,636

8.6.1.2.security_price_derivatives_pzu_2014.xlsx

Security price derivatives	Base amount by maturity as at 31 December 2013				Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
Security price derivatives	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Total	Assets at fair value as at 31 December 2013	Liabilities at fair value as at 31 December 2013
Instruments listed on a regulated market, including:	530,634	-	-	530,634	5,080	-
- futures	530,634	-	-	530,634	5,080	-
OTC instruments, 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	-

8.6.1.2.security_price_derivatives_2013_pzu_2014.xlsx

Risk concentration

	as at 31 December 2014 (in PLN ’000)	31 December 2014 (% financial asset value)	as at 31 December 2013 (in PLN ’000)	31 December 2013 (% financial asset value)
Involvement in treasury instruments issued and guaranteed by the Polish State Treasury and buy sell-back transactions on these instruments	36,161,177	63.7%	34,789,026	63.2%
PZU Group's involvement in shares listed on the Warsaw Stock Exchange	2,713,587	4.8%	3,006,599	5.5%
Involvement in assets related to one bank ( PKO BP SA - bank deposits, debt instruments and shares of that bank)	1,953,044	3.4%	2,341,320	4.3%
General involvement bank assets - bank deposits, debt instruments issued by banks, shares of banks and derivative transactions concluded with banks	13,201,504	23.3%	10,153,416	18.4%
Involvement in financial assets denominated in Polish zloty	52,678,740	92.8%	51,487,201	93.5%
Investments where the investment risk is borne by the policyholder	4,979,189	8.8%	4,760,010	8.6%

8.6.1.2.risk_concentration_pzu_2014.xlsx

Exposure to debt instruments issued by treasuries other than the Polish Treasury, companies and local government authorities

Table below present the exposure of the PZU Group entities to bonds issued by treasuries other than the Polish Treasury, companies and local government authorities. Financial instruments classified as held to maturity as well as loans and receivables have been presented as measured at amortized cost, while financial instruments classified as available for sale and measured at fair value through profit or loss (classified as such both upon initial recognition and held for trading) have been presented as measured at fair value.

Debt instruments issued by treasuries other than the Polish Treasury

As at 31 December 2014	Currency	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
Bulgaria	EUR	at fair value	12,589	13,941	13,941	-
Croatia	USD	at fair value	13,489	15,555	15,555	-
Croatia	EUR	at amortised cost	2,418	2,447	2,478	-
Cyprus	EUR	at fair value	20,663	21,585	21,585	-
Iceland	USD	at fair value	24,745	29,246	29,246	-
Lithuania	EUR	at fair value	61,935	68,565	68,565	-
Lithuania	LTL	at fair value	436,696	458,145	458,145	-
Lithuania	USD	at fair value	14,178	17,113	17,113	-
Lithuania	EUR	at amortised cost	12,964	14,050	15,380	-
Lithuania	LTL	at amortised cost	14,857	15,196	15,786	-
Latvia	EUR	at fair value	66,277	70,051	70,051	-
Latvia	USD	at fair value	31,236	35,048	35,048	-
Latvia	EUR	at amortised cost	1,631	1,679	1,781	-
Romania	EUR	at fair value	143,607	156,896	156,896	-
Romania	RON	at fair value	48,545	50,882	50,882	-
Romania	USD	at fair value	15,631	20,436	20,436	-
Turkey	USD	at fair value	449	477	477	-
Ukraine	USD	at fair value	1,458	1,663	1,663	-
Ukraine	UAH	at fair value	10,183	9,343	9,343	-
Ukraine	UAH	at amortised cost	25,181¹⁾	9,231¹⁾	9,196	-
Ukraine	USD	at amortised cost	23,692	25,916	25,785	-
Hungary	EUR	at fair value	17,308	20,230	20,230	-
Hungary	HUF	at fair value	160,882	163,499	163,499	-
Hungary	USD	at fair value	7,801	9,456	9,456	-
Hungary	EUR	at amortised cost	570	655	721	-
other	EUR/USD	at fair value	53,492	59,279	59,279	-
Total			1,222,477	1,290,584	1,292,537	-

1) For these bonds, the principal amount is repaid annually in a fixed amount of UAH 100 (i.e. 10% of the bond nominal value). The cost reveals the actual price paid by the company and does not include the repayments of the principal amount.

8.6.1.2.debt_instruments_issued_by_treasuries_pzu_2014.xlsx

As at 31 December 2013	Currency	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
Croatia	EUR	at fair value	142	143	143	-
Croatia	USD	at fair value	50,038	48,677	48,677	-
Iceland	USD	at fair value	88,150	84,365	84,365	-
Lithuania	EUR	at fair value	1,888	1,992	1,992	-
Lithuania	LTL	at fair value	3,255	3,351	3,351	-
Lithuania	USD	at fair value	14,354	14,893	14,893	-
Lithuania	EUR	at amortised cost	74,206	75,835	79,247	-
Lithuania	LTL	at amortised cost	81,242	82,012	84,393	-
Latvia	USD	at fair value	35,960	33,737	33,737	-
Germany	EUR	at fair value	129,700	126,939	126,939	-
Romania	EUR	at fair value	371,772	381,138	381,138	-
Romania	RON	at fair value	108,132	108,686	108,686	-
Romania	USD	at fair value	27,985	27,856	27,856	-
Slovenia	EUR	at fair value	389,175	443,084	443,084	-
Slovenia	USD	at fair value	138,259	134,090	134,090	-
Ukraine	USD	at fair value	12,678	10,933	10,933	-
Ukraine	UAH	at amortised cost	25,095¹⁾	14,556¹⁾	n/a	-
Ukraine	USD	at amortised cost	17,070	15,665	n/a	-
Hungary	EUR	at fair value	125,401	136,097	136,097	-
Hungary	EUR	at amortised cost	5,124	5,324	5,420	-
Turkey	TRL	at fair value	45,746	41,963	41,963	-
other	EUR/USD	at fair value	57,363	59,068	59,068	-
Total			1,802,735	1,850,404	n/a	-

1) for these bonds, the principal amount is repaid annually in a fixed amount of UAH 100 (i.e. 10% of the bond nominal value). The cost reveals the actual price paid by the company and does not include the repayments of the principal amount.

8.6.1.2.debt_instruments_issued_by_treasuries2013_pzu_2014.xlsx

All debt securities issued by governments other than the government of the Republic of Poland, which have been measured at fair value or for which the fair value has been disclosed (classified as held to maturity) are included in Level I of the fair value hierarchy.

Debt instruments issued by companies and local government authorities.

As at 31 December 2014	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
WIG index companies – Banks	at fair value	184,224	190,676	190,676	-
	at amortized cost	1,616,283	1,630,862	1,711,036	-
WIG index companies - Fuels	at fair value	303,226	314,558	314,558	-
	at amortized cost	700,000	700,746	715,642	-
WIG index companies – Chemical index	at amortized cost	1,211	1,236	1,229	-
WIG index companies – Energy	at amortized cost	400,000	401,778	399,721	-
Domestic banks not listed	at amortized cost	20,000	20,271	23,594	-
Foreign banks	at fair value	23,600	24,081	24,081	-
	at amortized cost	76,359	77,813	82,944	-
Mortgage banks	at fair value	41,983	42,623	42,623	-
Local government	at fair value	45,632	58,608	58,608	-
	at amortized cost	50,000	52,504	60,884	-
Other	at fair value	38,427	38,942	38,942	-
	at amortized cost	62,751	63,760	64,409	-
WIG index companies - Raw materials - written down	at amortized cost	200,000	193,142	201,339	10,144
Other impaired	at fair value	11,630	-	-	11,630
Other impaired foreign banks	at amortized cost	1,142	-	-	1,142
Total		3,776,468	3,811,600	3,930,288	22,916

8.6.1.2.debt_instruments_issued_by_companies_pzu_2014.xlsx

As at 31 December 2013	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
WIG index companies – Banks	at fair value	138,661	140,340	140,340	-
	at amortized cost	1,336,121	1,349,381	n/a	-
WIG index companies - Fuels	at fair value	268,489	283,249	283,249	-
	at amortized cost	700,000	700,816	n/a	-
Domestic banks not listed	at amortized cost	65,000	66,227	n/a	-
Foreign banks	at fair value	552	634	634	-
	at amortized cost	90,548	92,296	n/a	-
Local governments	at fair value	45,632	54,279	54,279	-
	at amortized cost	50,000	52,507	n/a	-
Other	at fair value	5,154	5,573	5,573	-
	at amortized cost	23,657	23,835	22,408	-
Other impaired	at fair value	11,630	-	-	11,630
Other impaired foreign banks	at amortized cost	1,142	-	-	1,142
Total		2,736,586	2,769,137	n/a	12,772

8.6.1.2.debt_instruments_issued_by_companies2013_pzu_2014.xlsx

8.6.2.1. Interest rate risk

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

Change in portfolio value (in PLN ’000)	31 December 2014		31 December 2013
Change in portfolio value (in PLN ’000)	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.	125,668	223,086	432,701	464,288
Market interest rate increase by 100 b.p.	-138,436	-219,307	-403,257	-434,618

8.6.2.1.interest_rate_risk_pzu_2014.xlsx

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 8.6.1.

8.6.2.2. Currency risk

Degree of risk exposure

Information regarding exposure to currency risk by class of financial instruments is presented in item 16.

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

Change in portfolio value (in PLN ’000)	31 December 2014		31 December 2013
Change in portfolio value (in PLN ’000)	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	6,052	118,583	18,669	82,775
20% decrease in FX to PLN rates	-6,052¹⁾	-118,583¹⁾	-18,669	-82,775

1) With assumption of decrease by 80% in exchange rates of UAH against PLN (while retaining 20% decrease for other currencies) the negative influence on financial result and equity would amount, respectively: PLN 46,550,000 and PLN 159,081.

8.6.2.2.currency_risk_pzu_2014.xlsx

Financial assets exposed to FX risk include deposit transactions and debt instruments 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 foreign companies included in consolidation.

8.6.2.3. Equity instruments 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 16.2 and 16.3 respectively.

Sensitivity analysis

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

Change in portfolio value (in PLN ’000)	31 December 2014		31 December 2013
Change in portfolio value (in PLN ’000)	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%	345,885	561,156	395,590	455,567
decrease in measurement of listed equity instruments by 20%	-345,885	-561,156	-395,590	-455,567

8.6.2.3.sensitivity_analysis_pzu_2014.xlsx

8.6.2.4. Liquidity risk

Financial liquidity risk of the PZU Group may result from three types of events:

shortages of liquid funds in ongoing operations;
illiquidity of financial instruments;
a structural gap between the maturity of assets and liabilities.

In the liquidity risk management process, liquidity is controlled in the short, medium and long term, i.e.:

short-term liquidity – the balance of funds in the liquidity and currency portfolios is held as not greater than the limit defined. Furthermore, conditional sell buy-back transactions are used in liquidity management;
medium-term liquidity – PZU and PZU Życie hold adequate liquid investments portfolios;
long-term liquidity and structural mismatch between the maturity of assets and liabilities – Asset Liability Management (ALM), i.e. matching of the structure of financial investments which cover technical provisions to the nature of such provisions is applied.

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 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.

For the purpose of the analysis the adjustments of cash flows presented in tables on following pages and engagement of PZU Group in investment funds (units and investment certificates) were not consolidated. This means that they are presented as units and investment certificates rather than assets held by the funds. Such an attitude reflects the liquidity management perspective and ensures coverage of technical provisions with assets at the level of given companies, taking into account statutory limits for type concentration of those assets.

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
Item	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)	-1,647,787	-1,176,099	-1,752,775	-5,163,674	-11,243,357
I. Outflows	-1,678,327	-1,192,951	-1,770,576	-5,206,545	-11,337,138
II. Inflows	30,540	16,852	17,801	42,871	93,781
B. Inflows from assets covering technical provisions	4,038,705	1,372,188	1,917,156	5,629,030	11,786,596
I. Future inflows whose value is known as at the end of reporting year	4,014,383	441,151	1,339,895	4,374,964	5,269,161
- Treasury bonds	1,229,660	164,105	1,040,255	3,310,581	5,073,670
- Other debt securities	8,278	26,758	135,119	589,475	72,252
- Term deposits with credit institutions	1,529,722	63,253	22,789	-	-
- Loans	662,658	24,177	2,725	282,813	70,710
- Receivables	558,975	87,889	48,853	4,676	-
- Other	25,090	74,969	90,154	187,419	52,529
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year	10,258	930,871	576,511	1,253,265	6,441,014
- Treasury bonds	-	-	25,354	374,974	358,926
- Other debt securities	8,530	-	18,772	10,927	1,482
- Loans and receivables	38	314	638	3,276	193
- Shares listed on a regulated market	1,690	-	-	-	10,485
- Shares not listed on a regulated market	-	-	-	-	30
- Investment fund units	-	930,557	531,747	864,088	4,320,442
- Investment certificates	-	-	-	-	1,749,456
III. Inflows from other assets	14,064	166	750	801	76,421
C. Balance of projected cash flows (A + B)	2,390,918	196,089	164,381	465,356	543,239
D. Balance of accumulated cash flows	2,390,918	2,587,007	2,751,388	3,216,744	3,759,983

8.6.2.3.non-life_insurance_pzu_2014.xlsx

The projected net cash flows resulting from non-life insurance contracts concluded by the end of the financial year 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 2.9 (4.9 in 2013), whereas the duration of technical provisions was 5.8 (5.1 in 2013).

Life insurance

The table below presents the match between cash flows from technical provisions and liabilities under investment contracts with guaranteed and fixed terms and conditions, and the assets associated with them. The table does not present cash flows relating to unit-linked insurance products and investment contracts.

Item	Projected cash flows
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
A. Projected net outflows resulting from insurance and investment contracts concluded by the end of reporting year (I + II)	-838,189	-380,932	-1,252,388	-1,254,326	-3,597,926	-5,630,259
I. Outflows	-1,680,214	-1,196,287	-6,916,352	-6,650,475	-10,396,779	-9,640,084
II. Inflows	842,025	815,355	5,663,964	5,396,149	6,798,853	4,009,825
B. Inflows from assets covering technical provisions	1,948,026	2,772,638	6,034,370	7,994,242	3,705,617	5,544,570
I. Future inflows whose value is known as at the end of reporting year	1,891,087	2,768,796	6,015,453	6,356,417	3,705,617	1,777,285
- Treasury bonds	1,108,501	2,411,170	5,528,852	6,255,333	3,705,617	1,777,285
- Other debt securities	8,066	5,710	159,352	13,256	-	-
- Term deposits with credit institutions	677,655	99,639	207,341	-	-	-
- Loans	96,865	252,277	119,908	87,828	-	-
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year	56,939	3,842	18,917	1,637,825	-	3,767,285
- Treasury bonds	24,868	80	2,021	-	-	-
- Other debt securities	2,195	1,265	7,055	-	-	-
- Deposits with credit institutions	28,215	663	-	-	-	-
- Loans and receivables	1,661	1,834	9,841	2,000	-	-
- Investment fund units	-	-	-	-	-	3,767,285
- Investment certificates	-	-	-	1,635,825	-	-
III. Inflows from other assets	-	-	-	-	-	-
C.Balance of projected cash flows (A + B)	1,109,837	2,391,706	4,781,982	6,739,916	107,691	-85,689
D. Balance of accumulated cash flows	1,109,837	3,501,543	8,283,525	15,023,441	15,131,132	15,045,443

8.6.2.3.life_insurance_pzu_2014.xlsx

The forecast of future claims and future net premiums in life insurance takes into account 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 4.9 (5.5 in 2013), whereas the duration of technical provisions was 22.4 (21.1 in 2013).

8.6.3. Credit risk and concentration risk

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

Credit risk in PZU Group includes:

credit spread risk – the sensitivity of the value of assets, liabilities and financial instruments to changes in the level of credit spreads with regard to the time structure instruments issued by the State Treasury or their volatility;
counterparty default risk - the risk of losses due to a counterparties' and debtors' failure to meet their obligations;
credit risk in financial insurance – credit risk arising from activity in the financial insurance sector, related primarily to the danger of the client’s company, the debtor's or the borrower's failure to meet obligations towards a third party; this risk may result from unsuccessful venture implementation or the economic environment's unfavourable impact.

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, business partners or debtor.

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

bankruptcy of an issuer of financial instruments (e.g. corporate bonds) in which PZU Group invests, or which it trades, e.g. corporate bonds;
risk of a contractor’s failure to meet its obligations, e.g. reinsurance or OTC derivatives, as well as bancassurance activities;
risk of a PZU Group client’s failure to meet its obligations to a third party, e.g. insurance of monetary receivables, insurance guarantees.

Investment activity

The principles of credit risk management in PZU Group regarding risk arising from investing activities is regulated in a number of documents approved by the Supervisory Boards, the Management Boards and dedicated Committees.

Credit and concentration risk limits are set by dedicated Committees.

Limits for banks and other issuers of debt securities are determined based on the level of exposure. The exposure limits are regarded with reference to a single entity or capital group (both credit limits and concentration limits). The use of credit and concentration risk limits is being monitored. Exceeding the limit results in obligation to prepare and submit a plan to reduce exposure.

Credit risk assessment of an entity is based on internal credit ratings (rating approach differs depending on an entity type). Ratings are based on a quantitative and qualitative analysis and provide the basis for determining the limits. 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 groups (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 insurance receivables. This was due to significant dispersion of the portfolio of assets, resulting in, among others, a significant share of receivables from small enterprises and retail clients who do not have ratings.

Assets exposed to credit risk as at 31 December 2014	Note	AAA	AA	A	BBB	BB	No rating	Assets at the customer's risk	Total
Debt securities	33.1	-	-	33,685,106	2,415,765	310,188	127,229	1,474,900	38,013,188
- held to maturity	33.1	-	-	19,933,317	50,372	-	-	-	19,983,689
- available for sale	33.2	-	-	2,141,329	261,139	-	32,397	-	2,434,865
- measured at fair value	33.3	-	-	10,533,633	326,441	208,738	60,367	1,474,900	12,604,079
- loans and receivables	33.4	-	-	1,076,827	1,777,813	101,450	34,465	-	2,990,555
Bank deposits and repo transactions involving treasury securities	33.4	-	-	7,195,733	1,746,022	-	370,061	82,138	9,393,954
Other loans	33.4	-	-	-	-	256,763	2,053,209	-	2,309,972
Derivative instruments	33.3	574	14,725	516,252	3,073	-	11,779	-	546,403
Reinsurers’ share in net outstanding claims provisions	35	-	208,856	174,539	12,175	-	55,372	-	450,942
Reinsurance receivables	34	-	5,308	12,730	491	-	10,153	-	28,682
Assets held for sale		-	-	305,937	-	-	-	-	305,937
Debt securities	43	-	-	217,852	-	-	-	-	217,852
Bank deposits	43	-	-	88,085	-	-	-	-	88,085
Total assets exposed to credit risk		574	228,889	41,890,297	4,177,526	566,951	2,627,803	1,557,038	51,049,078

8.6.3.assets_exposed_to_credit_risk_pzu_2014.xlsx

Assets exposed to credit risk as at 31 December 2013	Note	AAA	AA	A	BBB	BB	No rating	Assets at the client's risk	Total
Debt securities		128,757	7,648	31,702,962	1,958,877	720,342	136,832	1,549,805	36,205,223
- held to maturity	33.1	-	-	18,604,202	165,926	12,913	76,861	-	18,859,902
- available for sale	33.2	126,939	-	1,117,344	22,909	243,965	-	-	1,511,157
- measured at fair value	33.3	-	658	11,148,733	566,749	421,680	57,647	1,549,805	13,745,272
- loans and receivables	33.4	1,818	6,990	832,683	1,203,293	41,784	2,324	-	2,088,892
Bank deposits and repo transactions involving treasury securities	33.4	26,854	43,956	4,737,001	4,070,651	1,605,745	25,033	81,111	10,590,351
Other loans	33.4	-	-	-	305,164	95,142	1,321,902	-	1,722,208
Derivative instruments	33.3	22,114	21,834	136,028	40,759	36	39,272	-	260,043
Reinsurers’ share in net claim provisions	35	-	125,409	125,504	16,666	-	48,976	-	316,555
Deposits with ceding undertakings	33.4	-	87	-	-	-	-	-	87
Reinsurance receivables	34	-	751	3,938	655	-	13,484	-	18,828
Total		177,725	199,685	36,705,433	6,392,772	2,421,265	1,585,499	1,630,916	49,113,295

8.6.3.assets_exposed_to_credit_risk2013_pzu_2014.xlsx

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

Standard&Poor’s ratings	AAA	AA	A	BBB	BB	No rating¹⁾
Ratio (%) for 2014	0.74	0.84	1.59	4.33	14.39	26.97
Ratio (%) for 2013	0.76	0.88	1.65	4.59	15.09	27.84

1) In the case of exposure to mortgages with no rating, the ratio of 2% was adopted corresponding to the lowest BBB+ investment rating.

8.6.3.standardpoors_ratings_pzu_2014.xlsx

The credit risk, to which PZU Group was exposed as at 31 December 2014 amounted to PLN 1,639,172 thousand (PLN 1,708,948 thousand as at 31 December 2013; after applying the coefficients of 31 December 2014, the risk would amount to PLN 1,639,445 thousand).

Risk related to financial insurance (i.a. credit insurance, surety insurance, guarantees)

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

As regards risks assumed by the Company, the risk appetite is determined by a relevant 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.

A control function in terms of risk monitoring which is independent from the sales function is established at three levels:

level I – individual level – measurement of risk of financial insurance (i.a. underwriting);
level II – portfolio level – analysis of changes in the exposure value, level of claims related to the portfolio as well as analysis of concentration and exposure to one entity and capital group. Information about the level of risk in the portfolio is transferred and aggregated in order to monitor the overall exposure of PZU Group;
level III – relevant committee.

Degree of risk exposure

As at 31 December 2014, the maximum credit risk exposure relating to insurance guarantees and measured by the amount of sums insured was PLN 2,673 million (PLN 2,410 million as at 31 December 2013).

Reinsurance (from the credit risk perspective of the reinsurer)

PZU Group enters into proportional and non-proportional reinsurance contracts with the objective to reduce liabilities arising from its core business. Reinsurance is 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 groups, 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 out.

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

Reinsurer	Reinsurers’ share in (net) technical provisions as at 31 December 2014	Rating assigned by Standard&Poor’s as at 31 December 2014
Reinsurer 1	69,490	AA-
Reinsurer 2	50,938	AA-
Reinsurer 3	50,069	A+
Reinsurer 4	46,689	AA-
Reinsurer 5	45,389	AA-
Reinsurer 6	25,556	AA-
Reinsurer 7	20,969	A+
Reinsurer 8	19,689	A+
Reinsurer 9	16,185	BBB+
Reinsurer 10	15,355	no rating
Reinsurer 11	14,803	AA
Reinsurer 12	14,549	A+
Reinsurer 13	14,125	A+
Reinsurer 14	13,603	AA-
Reinsurer 15	12,349	A+
Reinsurer 16	11,126	AA+
Reinsurer 17	10,592	no rating
Reinsurer 18	10,369	AA+
Reinsurer 19	9,736	A
Reinsurer 20	9,183	no rating
Others ¹⁾	292,215
Total ²⁾	772,979

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

2) PLN 753,115 thousand was reported in the consolidated statement of financial position in "Reinsurers’ share in technical provisions", and PLN 19,864 thousand was reported in 'assets held for sale". Additional information concerning assets held for sale has been presented in 43.

8.6.3.reinsurer_pzu_2014.xlsx

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 21	35,419	no rating
Reinsurer 6	27,678	AA-
Reinsurer 4	24,579	AA-
Reinsurer 8	18,445	A+
Reinsurer 9	17,141	BBB+
Reinsurer 7	14,669	A+
Reinsurer 22	13,979	no rating
Reinsurer 10	13,465	no rating
Reinsurer 5	13,099	AA-
Reinsurer 13	10,412	A+
Reinsurer 16	9,483	AA+
Reinsurer 23	8,499	no rating
Reinsurer 20	7,223	no rating
Reinsurer 3	6,830	A
Others ¹⁾	210,254
Total	526,605

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

8.6.3.reinsurer2013_pzu_2014.xlsx

8.6.4. Operational risk

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

The objective of operational risk management is to optimize the level of operational risk and operating effectiveness in the PZU Group’s operations, leading to a reduction of losses and costs arising from such risks and ensuring adequate and effective control mechanisms. Operational risk management complies with defined guidelines which take into account external conditions and gathered information on the level of operational risk are reported to relevant internal authorities periodically.

8.6.5. Compliance risk

Compliance risk is 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.

Internal regulations impose a division of duties regarding on-going and system management of non-compliance risk.

System management consists in particular of formulating solutions ensuring that the rules of compliance risk management are followed, monitoring compliance risk management and promoting and monitoring 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.