8.6 Risk profile

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 insuranceLife 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

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 insurance1 January – 31 December 20141 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%

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)2005200620072008200920102011201220132014
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%  

Claims development in direct property and personal insurance, net of reinsurance (by financial year)2005200620072008200920102011201220132014
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%  

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 insuredTotal 
PLN ‘000 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%
Number of policies 72.7% 21.4% 4.0% 1.0% 0.9% 100.0%

Risk concentration in non-life insurance – flood claims exposure as at 31 December 2013   Sum insured    Total 
PLN ‘000 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%
Number of policies 73.7% 20.5% 3.8% 1.0% 1.0% 100.0%

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 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%
Number of policies 72.6% 21.3% 4.0% 1.0% 1.1% 100.0%

Risk concentration in non-life insurance – hurricane claims exposure as at 31 December 2013   Sum insured    Total 
PLN ‘000 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%
Number of policies 73.8% 20.4% 3.8% 1.0% 1.0% 100.0%

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 2014Sum insuredTotal
PLN ‘000 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%

Gross written premium in non-life insurance – TPL as at 31 December 2013 Sum insured    Total 
PLN ‘000 0-200PLN ‘000 200-500PLN ‘000 500-1000PLN ‘000 1000-2000over PLN ‘000 2000
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%

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/lossEffect of changes in assumptions on equity
31 December 201431 December 201331 December 201431 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

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 201431 December 201331 December 201431 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

8.6.1.2. 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 201431 December 201331 December 201431 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

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 201431 December 201331 December 201431 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

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 statements31 December 201431 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

8.6.2. 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 2014NoteRisk covering assets of the GroupUnit-linked assetsTotal
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).

Carrying amount of financial assets and liabilities held for saleNote 4331 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

Carrying amount as at 31 December 2013NoteRisk covering assets of the GroupUnit-linked assetsTotal
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).

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   
Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal
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

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 
Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsOver 5 yearsTotal
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

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  
Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsTotal
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

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 
Up to 3 monthsOver 3 months and up to 1 yearTotal
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

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 
Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsTotal
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

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  
Up to 3 monthsOver 3 months and up to 1 yearOver 1 year and up to 5 yearsTotal
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 -

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%

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 2014CurrencyValuation methodCostCarrying amountFair valueImpairment 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.

As at 31 December 2013CurrencyValuation methodCostCarrying amountFair valueImpairment 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.

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 2014Valuation methodCostCarrying amountFair valueImpairment 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

As at 31 December 2013Valuation methodCostCarrying amountFair valueImpairment 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

8.6.2.1. 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 
Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect 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

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 
Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect 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.

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 201431 December 2013
Effect on net financial profit/lossEffect on equityEffect on net financial profit/lossEffect 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

8.6.2.4. 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    
up to 3 monthsover 3 months and up to 6 monthsover 6 months and up to 1 yearover 1 year and up to 5 yearsover 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

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     
up to 6 monthsover 6 months and up to 1 yearover 1 year and up to 5 yearsover 5 years and up to 10 yearsover 10 years and up to 20 yearsover 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

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 2014NoteAAAAAABBBBBNo ratingAssets at the customer's riskTotal
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

Assets exposed to credit risk as at 31 December 2013NoteAAAAAABBBBBNo ratingAssets at the client's riskTotal
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

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

Standard&Poor’s ratingsAAAAAABBBBBNo 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.

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.

ReinsurerReinsurers’ share in (net) technical provisions as at 31 December 2014Rating 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. 

ReinsurerReinsurers’ share in (net) technical provisions as at 31 December 2013Rating 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.

8.6.4. 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.