Due to the scope of the PZU Group’s business (insurance sector in Poland, the Baltic States and Ukraine, mutual and pension funds sector, banking), the main factors that will shape the environment in which the Group operates and that may have a direct impact on the development and results of the Group in the medium term, in particular in 2023, may be divided into the following three categories:
- macroeconomic and geopolitical factors;
- legal and regulatory factors;
- market factors, specific to individual sectors or businesses in which the Group is involved.
Macroeconomic and geopolitical factors
The growth rate, level and structure of the key macroeconomic factors in Poland and abroad (GDP, inflation, interest rates) translate into the growth rate of business in all sectors in which the PZU Group operates and their profitability. They determine, directly or indirectly, albeit with a certain time lag, the gross written premium growth rate in non-life insurance, changes in demand for credit, accumulation of deposits and inflow of assets into funds. Moreover, they influence the claims ratio in non-life insurance and the investment result. They also determine the fund management results and key measures affecting the performance of the banking sector (interest margin and costs of risk).
In 2023, what remains a particular threat is the ongoing war between Russia and Ukraine, materializing primarily through greater uncertainty and risk of further supply shocks in the food, gas and crude oil markets (disruptions in trade with Russia, Belarus and Ukraine to a lesser extent).
Natural gas is broadly used in many energy-intensive production processes. Additionally, the cost of gas is an important part of household budgets. The shock of rising prices may contribute to a deeper than currently expected weakening of the rate of growth in consumption and may suppress the GDP growth rate even more. Increased uncertainty may, in turn, exacerbate sentiments among investors. There is also the risk that the ongoing increases in prices of gas, oil, food and energy – due to the so-called second-round effect – translate into higher measurements of CPI in the long term, which may limit the opportunity for the change in the sentiment of central banks expected by the market.
Higher regional and global aversion to risk regarding the Russian-Ukrainian war may result in an outflow of foreign capital, continued fall of stock indices, or an ongoing weakening of the zloty. This may also contribute to a further rise in bond yields, although the action taken with regards to monetary policy will also be important in this respect. If the National Bank of Poland finds there still is a significant risk of higher inflation in the medium term, the Monetary Policy Council may decide to once more raise the interest rates, which compared to forecasts would dampen economic demand. If the supply shocks pose a threat of a major deceleration of GDP growth – and the risk of a persistently high inflation in the medium term clearly diminishes – the NBP may opt for a more dovish monetary policy.
Even though three years have passed since SARS-CoV-2 was identified, the COVID-19 pandemic was still present as at the beginning of 2023. With restrictions lifted coronavirus spread more strongly in China, and the new XBB1.5 variant reached Europe in January 2023. The risk of a mutation more dangerous than those which have appeared so far, resistant to existing vaccines, still may not be ruled out. The resumption of the COVID-19 state of epidemic in Poland in 2023 is unlikely; however, it is worth remembering the business restrictions that arose due to the sanitary restrictions of Poland and its trade partners in 2020. Disruptions associated with the pandemic hit hardest the service sector, transport, trade, restaurant and hotel services, and the broadly construed cultural and entertainment sector. Even though it seems the financial sector handled the impact of COVID-19 well, the epidemic might still generate new challenges for insurers, banks and financial institutions in offering products or aftersales service.
The war, the pandemic and global disruptions may heighten the tensions in supply chains and transport, which may in turn put further pressure on the rising prices of raw materials, components, and finished products. This can lead to a downturn in the economic activity of Poland and other countries, and generate an increase in costs of insurance claims.
may be another factor affecting insurance business. Inflation raises amounts claimed, costs of claims handling, and costs of business. It also creates a problem for clients related to the depreciation of insurance benefits in long-term products, significantly reduces the real value of life policies and erodes the guaranteed sum in third party liability insurance (e.g. D&O policies). Growing inflation and high costs may bring about the risk of underinsurance, present when the declared value of assets (such as movable and immovable property and content thereof) and risks are lower than in reality. When underinsurance arises, the insurer accordingly diminishes the sum they are obliged to pay, accounting for the ratio between the insurance value and the real value of the assets lost. As a consequence, the compensation paid out might not be enough to cover the real costs of restoring the assets insured. This is a particularly significant risk for corporate insurance, which may hinder the restoration of business and cause liquidity and stability problems for enterprises.
companies are more often able to extend their offering of group insurance, treating it as an appealing company benefit. For example, as regards health insurance, policy options covering more benefits, including mental and psychological services, may be offered. In turn, as regards life insurance, it is possible to introduce less standard solutions, such as income insurance, ensuring monthly payments until the insured recovers.
A very low interest rate environment has a negative effect on the sector’s performance (by affecting the banks’ net interest income), which could be felt in 2021. An increase in market interest rates contributes to financial stability, because it helps improve profitability and the financial standing of banks and insurers. In turn, however, it carries risks to financial stability by contributing to a deterioration of the quality of banks’ loan portfolios. Higher yields on bonds measured at arm’s length in portfolios of banks and insurers involve a reduction in their nominal value. The effect for insurance companies of this matter depends on the difference between the duration of assets and equity and liabilities. Furthermore, administrative solutions aimed at lowering the cost of rising interest rates for households (such as so-called loan repayment holidays) will limit the profit of the banking sector.
In an environment of recovering demand and an improving labor market, the higher inflation is resulting in tighter monetary policy. There is a risk that the response of central banks will turn out to be too strong, causing an excessive cooldown of the economy, leading potentially to a global recession. In turn, too weak a response from central banks could mean an extended period of high inflation.
The coming into life of the economic recovery scenario and a reduction in the level of uncertainty across the financial markets may result in a slight appreciation of the Polish zloty. This would help reduce expenses related to the prices of spare parts in motor insurance. However, in the conditions of the Russian-Ukrainian war, current account deficit of the balance of payments, and concerns pertaining to a global downturn of economic activity – the risk of weakening of the Polish zloty remains – at least temporarily – relatively high.
In turn, a lower-than-expected growth of GDP along with high inflation and lower individual consumption and internal demand may lead to households and the corporate sector reducing their expenses towards the purchase of insurance policies, lower loan sales and therefore lower borrower insurance sales, as well as reduced demand for life insurance, especially as companies limit the benefits they offer. Poorer financial standing of companies may result in an increase in credit risk (in particular in the banking segment) and higher loss ratio on the financial insurance portfolio, further weakening of the growth rate of new mortgage loans and a weaker growth rate of consumer loans.
Legal and regulatory factors
The PZU Group’s activity and operations are subject to the impact of both national regulations and European legislation.
As for motor insurance, what may be particularly important are the amendments to the Road Traffic Law and the Recommendation of the Polish Financial Supervision Authority on motor insurance claims handling as described in REGULATIONS PERTAINING TO THE INSURANCE MARKET AND THE FINANCIAL MARKETS IN POLAND. These concern, among other things, the option for insurance companies to link motor insurance tariffs to the infractions committed by the drivers and no option to apply discounts and rebates when the cost estimate claims handling method is applied for motor third party liability insurance. Even though the Recommendation of the Polish Financial Supervision Authority causes some confusion due to being in numerous aspects inconsistent with the case-law of the Supreme Court, both changes may have an impact on the prices of motor insurance policies.
What may have an effect on the bancassurance market is the amended U Recommendation on good practices in bancassurance products. In the second half of 2022, the Polish Financial Supervision Authority prepared the draft amendment and referred it for market consultations. The changes suggested involved extending the recommendation onto all section I and II products, including statutory group 5 life insurance products; introducing a provision ensuring the adequate value of an insurance product for the client; limiting bank commission for distributing insurance products up to 50% of assumed costs of claims and benefits; and building products in such a way that the assumed costs of claims and benefits are at least 50% of the equivalent value of the insurance premium. The draft envisages the implementation of the amended U Recommendation by banks and departments of loan institutions by 30 September 2023.
One of the more important factors in 2023 in the context of banks will still be the issue of foreign currency mortgage loans. Given the scale of new lawsuits, the growing number of court judgments which are unfavorable for banks, and another significant CJEU ruling, the risk factor lies in the potential need to establish new provisions to cover the client claims in respect of lost trials concerning loans denominated in Swiss francs.
In 2023, the cost of statutory loan repayment holidays may continue to have its impact on the results of the banking sector. The Act on social funding for economic ventures and borrower assistance gave the borrowers an opportunity to suspend the repayment of loan instalments for eight months throughout 2022 and 2023 – two months in Q3 and Q4 2022, and one month in each quarter of the year 2023. Even though banks did in Q3 2022 establish provisions related to the loss of interest income due to loan repayment holidays, what remains a risk factor is the potential extension of this scheme onto 2024, and the introduction of a new contribution for the Borrower Assistance Fund in 2023.
What has a positive impact on the banking sector’s results is the lack of BFG contribution payable to the bank guarantee fund in 2023. Banks will only have to bear the contribution payable to the bank resolution fund in the amount of PLN 1.455 billion, lower than the year before. In 2022, the value of BFG contributions amounted to PLN 2.195mn, including PLN 1.693 billion for the bank resolution fund and PLN 0.502 billion for the bank guarantee fund.
Regulatory burdens of financial institutions related to the growing awareness in sustainable financing, climate change and environment protection are higher thanks to the European regulations described in REGULATIONS PERTAINING TO THE INSURANCE MARKET AND THE FINANCIAL MARKETS IN POLAND. The year 2023 will be another transition period as regards taxonomy disclosures for insurers and banks. At the same time, banks will for the first time have to make disclosures regarding ESG risk management in their business under third-pillar capital adequacy reporting. Matters of sustainable development are becoming more and more important in the ongoing business of financial institutions. Many of them incorporate ESG objectives into management objectives, on par with purely financial objectives. Insurers and banks are more and more often assessed under such criteria as the extent to which their actions mitigate climate change, promote diversity among their employees and management, support an inclusive organizational culture, and increase transparency of decisions and management structures.
Market factors specific to the sectors in which the PZU Group operates
The PZU Group’s operating conditions and results are affected by factors and conditions specific to the sectors in which the Group companies operate. Currently, the most important involve the competitiveness in core groups of products for the Group’s business; the social, economic and health-related impact of the COVID-19 pandemic; demographic changes; development of technology; and climate change.
One of the most pertinent challenges before the insurance industry in Poland and worldwide is the immense insurance gap created by risks faced by people in their lives – both privately and in the corporate environment – which are not covered by insurance products existing in the market, and those for which cover has not been bought out by the interested parties themselves.
It is estimated that worldwide, this gap amounts to USD 1.5 trillion, this being the total value of premiums which should be paid in order for clients to avoid potential costs of risk materialization*. Part of the gap concerns life insurance and health insurance, but is also related to new risks involving climate change, green transition, and cybersecurity. Risks related to insuring natural disasters still pose a challenge. The insurance gap is an opportunity to build insurance awareness among clients. What is immensely important here is education addressed particularly to the young generation, and an adequate adaptation of the insurance offer.
In 2023’s motor insurance, the diminishing profitability of third party liability insurance will be a challenge. Even if claims arise infrequently (given, among other things, the more widespread hybrid working models and high fuel prices), amounts payable under claims rise because of such factors as inflation or the Recommendations of the Polish Financial Growing electromobility also significantly impacts the motor insurance segments, in the context of claims handling and premium calculation, as valuing a policy for an electric car involves other rules than for vehicles with combustion engines.
With respect to the latter, one of the more important criteria for valuing motor insurance is engine capacity, because this determines the car power which translates to potentially more considerable damage. Electric cars have no engine capacity, which is why insurers need to modify their tariffication method for third party liability insurance and own damage insurance.
Growing electromobility also significantly impacts the motor insurance segments, in the context of claims handling and premium calculation, as valuing a policy for an electric car involves other rules than for vehicles with combustion engines. With respect to the latter, one of the more important criteria for valuing motor insurance is engine capacity, because this determines the car power which translates to potentially more considerable damage. Electric cars have no engine capacity, which is why insurers need to modify their tariffication method for third party liability insurance and own damage insurance.
The premium in non-life insurance / property insurance will also be affected by the market value of property insured. To avoid the problem of underinsurance (i.a. due to higher inflation), sums insured under policies for both individual and corporate clients should be updated and adjusted to the real value of the assets insured. This, in turn, will involve a higher insurance premium, but only thanks to this approach will it be possible for the amounts claimed to fully cover the restoration of property damaged or lost.
The COVID-19 pandemic raised the feeling of uncertainty and therefore insurance awareness among clients. This is related to the expected higher demand for life insurance and health insurance. Similarly, the fact that healthy, active yet safe living is in vogue globally increases interest in insurance and medical products. The challenge for the insurance industry is not only to maintain this interest, but also to prepare an appealing offer in different channels of distribution. Changing customer expectations will affect the business and performance of the PZU Group in these two areas of activity. In particular, this concerns the personalization of the offering and the provision of a quick and easy access to a comprehensive ecosystem of health-related services.
The health market is still facing such effects of the pandemic as the health debt. The long tail of the epidemic, in the form of deteriorating health for many people and the resulting complications, may drag on for years.
The possible overlap of the long-term effects of the pandemic and the effects of not treating other diseases will be an additional risk factor. The pandemic has also evidenced other problems, such as obesity which is a precipitating condition for most chronic diseases, such as diabetes, hypertension, heart diseases and motor diseases.
Other factors that will affect PZU’s operations over the long term include demographic trends, mainly the aging population, mortality, morbidity, especially of civilization diseases, and fertility rates. As the population continues to decline, coupled with the simultaneous aging of the population, the demand for health care and long-term care to senior citizens increases.
New technologies have enabled insurers to continue operations during individual lockdowns, and have set new standards for remote customer service. Further transfer of clients from traditional to remote channels can be expected. The change in customer habits which, under normal circumstances, would have taken several years, was a consequence of the lockdowns, which forced the transition to remote work. These factors accelerated the digitization and the use of advanced technologies, especially in the insurance sector. Just like remote or hybrid work models, remote sales, inspections or claims handling have spread fast. At the same time, it is also more common to apply solutions based on artificial intelligence, which are implemented in more and more business areas. The year 2023 will see adaptation of technology and further investment in technology both in the insurance industry and the banking sector.
The development of new technologies entails several challenges that insurers and financial institutions will have to face in the near future.
One of them is to effectively manage the solutions implemented rapidly at the onset of the pandemic. Three years have passed since the first news about the emergence of the coronavirus in Poland, and although many of the introduced solutions were long-awaited by customers, it is extremely important to skillfully assess their further usefulness, scale and improve the introduced technologies, as well as adjust them to the long-term strategies of insurance companies. As customer preferences are changing dynamically, it is becoming extremely important to balance service processes in such a way that the human factor is retained where it is necessary and expected by customers, and the part of the processes that will not cause a deterioration of service quality is automated.
Another challenge is the supply of skilled workers with expertise and skills in areas related to cybersecurity, artificial intelligence, machine learning and data analytics. The rapid growth of these fields has resulted in an increased demand for employees who can assist companies in leveraging their technological potential. The risk associated with the shortage of employees with appropriate skills in new technologies is one of the main problems associated with the implementation of technological advances.
Technological progress has also led to the emergence of so-called insurtechs and fintechs*, which are already influencing and will continue to influence the transformation of the insurance and banking industries over the long term.
Recently, one of the more popular trends in the financial industry is Embedded Finance. It involves the integration of various financial products such as loans, insurance, debit cards and investments, with almost any non-financial product. In other words, this involves providing financial services in a sector where the core operations are not of this nature. The particular growth of Embedded Finance could be observed especially during the pandemic, as the majority of financial process turned online.
Ongoing digitization, development of the Internet and cloud solutions led to a new challenge for the insurance market – cyberthreats. Cybersecurity risk is currently one of the fastest growing among all risks within the insurance gap, and insurance products cover only a small share of risks related to cyberthreats. With ever-greater awareness among entrepreneurs, one should expect an ever-faster development of a comprehensive cyber insurance offer, not only for large corporations but also for small and medium enterprises.
Current underwriting methods are based on past events and do not capture well the nature of the dynamic global climate changes. The complex nature of climate risk presents insurers with the challenge of developing new insurance products which will adequately reflect the frequency of catastrophic events and translate into the premium levels. The risk of climate change not only affects the costs involved in claims paid or reinsurance schemes, but also the capital requirements for insurance companies.
At the same time, insurers and financial institutions are increasingly expected to take responsibility for delivering a just transition to a low-emission economy. This influences the development of „green” insurance and loan offerings for, among others, large corporations and smaller businesses, supporting sustainable development. At the same time, financial institutions, including insurers and banks, should increasingly incorporate responsible investment principles taking into account ESG factors into their investment activities. This is determined not only by regulatory issues, but also by society’s changing expectations of financial institutions and corporations – customers want large companies to take a proactive stance in the fight for a better planet.
The general interest in mitigating the impact of climate change opened the path for insurance companies and banks to insure and finance investments in renewable energy sources, such as onshore and offshore wind parks, biogas plants, and photovoltaic systems. This generates new challenges in developing adequate offerings ensuring financing and insurance from the moment works commence, through construction, to completion and start-up.
Customers themselves are also increasingly opting for ecofriendly solutions that contribute to combating climate change. The quest for convenience and the increasing environmental awareness result in a rapid development of the shared mobility industry. City dwellers increasingly frequently choose means of transport which allow them to quickly and efficiently move around and change the means of transport depending on the situation on the road – this is the so-called shared mobility. This global trend includes not only cars but also scooters, segways, skymasters and electric unicycles, rented via smartphone apps. Insurers’ offerings will meet customer expectations and include products dedicated to shared mobility.
Similarly, other global trends, such as the sharing economy or the Internet of Things (IoT), and trends in the insurance industry, such as open group insurance and building thematic ecosystems for customers, will influence the direction of insurers’ business models and their product offerings.
The factors which might have an impact on the activities of the PZU Group in 2023 have been described in detail, by operational segments in BUSINESS