41.2 Estimates and assumptions

The PZU Group has analyzed the risks resulting from the impact of the COVID-19 pandemic on the business of the PZU Group’s insurance companies.

41.2.1 Non-life insurance

As regards non-life insurance, the risks associated with the COVID-19 pandemic may pertain to the largest extent to, among other things, commercial credit insurance, financial guarantees, job loss or loss of profit insurance, or motor insurance. 

As regards financial guarantees, the PZU Group has not recorded an increase in the loss ratio in connection with the impact of the COVID-19 pandemic on the contracts performed by our clients. Approx. 60% of the value of exposures in the guarantee portfolio are clients from the construction industry which was affected by the COVID-19 pandemic only insignificantly. 

In the bank credit insurance segment, the increase of the loss ratio may result from an increase of the unemployment rate and discontinuation of repayment of mortgage loans by the borrowers. This risk is mitigated by the loan repayment moratoria granted by banks. 

The PZU Group did not observe any increase in the loss ratio in the financial loss insurance segment and cash receivables insurance, either. The market situation is stabilized by such elements as the governmental aid programs and the sustainable activity of the commercial credit insurers who do not cancel limits en masse, which could cause an insolvency domino effect. 

The COVID-19 epidemic may potentially cause a decrease of the provision for the capitalized value of annuities due to the increased mortality and decrease in the annuity recipient portfolio. In the case of non-annuity provisions, they take into account the current loss ratio resulting from the decreased exposure in some products. The PZU Group does not expect the observed trends to be long-term, hence the assumptions were not modified in the applied provision calculation models. 

As a result of the analyses, the PZU Group did not introduce any major changes to the applied approach or, as a consequence, to the level of technical provisions in non-life insurance. The developments are constantly monitored and, in the case of observing any major changes to the loss ratio, the assumptions made for the calculation of provisions will be adequately modified.

In the calculation of provisions for outstanding claims and benefits, the uncertainty related to bodily injury claims is taken into account. For such claims, changes in the legal environment and uncertain jurisprudence may affect the ultimate amount of benefits paid. 

When calculating the provision for the capitalized value of annuities, the future increase in average annuity is estimated based on historical data and taking into account other information that may contribute to an increase in annuities in the future (for example, growing insurance awareness, legislative changes, etc.). 

Both as at 31 December 2020 and 31 December 2019, a discount rate of -0.3% was assumed for all annuities.

For lifetime annuities, the period in which the annuity will be payable is determined using publicly available statistics (in Poland – Polish Life Expectancy Tables). Additionally, the provision for the capitalized value of annuities is calculated taking into account the cost of future handling services at 3% of the value of benefits paid.

The estimated final value of claims and benefits paid in provision development triangles and the analysis of sensitivity of the net result and equity to changes in the assumptions used to calculate the provision for the capitalized value of annuities are presented in section 7.5.2.1.

41.2.2. Life insurance

The amount of the life insurance provision corresponds to the value of liabilities under insurance contracts concluded. It is calculated as the difference between the present value of expected benefits and the present value of expected premiums. The calculation of provisions takes into account all the benefits and premiums provided for in contracts as contractual liabilities and receivables, regardless of whether a contract is performed by the policyholder until the end of the agreed term or terminated by the policyholder.  The assumptions made for the frequency of events covered by insurance, i.e. mortality, morbidity and accident rate, are determined based on publicly available statistics, such as the Polish Life Expectancy Tables in Poland or based on own statistics developed using historical data on particular groups of products in the portfolio. 

The assumptions used to calculate life insurance provisions are determined separately for each insurance product at the time the premium tariffs are adopted and sales of the product are launched (lock-in assumptions). Such assumptions are subject to natural uncertainty resulting from the long term of the projection. However, these assumptions are verified for adequacy every year. The data are subjected to an analysis in particular in terms of the behavior of the whole portfolio, as opposed to various distinct cases. If it is found that an assumption is inadequate, it is verified and adjusted, which leads directly to a change in the value of liabilities presented in the consolidated financial statements. 

In June 2020, the PZU Group revised some of its assumptions applied for the calculation of provisions in life insurance. 

The decline in bond yields caused by the interest rate cuts suppresses the projected rates of return on assets covering the provisions. Accordingly, a decision was made by the PZU Group to decrease the technical rate for the continued and group insurance portfolio to 1.5% (from the technical rates used previously, of between 1.5% and 3%, depending on the date of execution or modification of the policy). 

In the calculation of its technical provisions, the PZU Group applies the Polish Life Expectancy Tables or other publicly available statistics, among other sources. For the group and continued insurance portfolio, the calculation of provisions also makes use of assumptions regarding the probability of the insured having co-insureds (spouse, parents and in-laws). These assumptions, due to their long-term nature, are subject to natural uncertainty as to the actual evolution of the portfolio. In recent years, the PZU Group has witnessed a growing mismatch in terms of these assumptions between the actually disbursed benefits and the benefits forecasted based on the adopted assumptions. This mismatch has been caused by a general decrease in mortality and an increase in life expectancy.  

For this reason, a decision was made to align the assumptions with the observed demographic situation.

For the mortality rate, the Polish Life Expectancy Tables from 2018 were used with additional mark-ups for the main insured (depending on the age of the insured). The probabilities of the insureds having co-insureds were also updated.

The PZU Group also modified its method of calculating provisions for the group insurance portfolio and applied an individual approach to them instead of the hypothetical portfolio structure used previously.

The effect of the modified assumptions on the technical provisions in life insurance is presented in the following table.

A provision for unexpired risk in the amount of PLN 51 million was established for the group insurance portfolio being annual renewable insurance products as of 31 December 2020. Its aim is to cover the deficit on future contributions with respect to the expected benefits and other outflows (costs and commissions) arising from increased mortality resulting from the COVID-19 pandemic.

The analysis of sensitivity of the net result and equity to changes in the assumptions used to calculate technical provisions in life insurance is presented in section 7.5.2.2.