As analyzing the impact that climate has on PZU Group’s operations, in the context of growth, results and capital position, PZU has performed risk identification process, accounting for the guidelines of the Task Force on Climaterelated Financial Disclosures (TCFD) and European Commission and conducted a climate change scenario analysis.
Risks related to climate change
The European Commission’s Guidelines on non-financial reporting, providing for the disclosure of detailed climaterelated data and TCFD recommendations classify the risks related to the climate’s adverse impact on businesses as physical risks and transition risks. Physical risk stems from the physical consequences of climate change and encompasses acute (e.g. storms, fires) and chronic risk (rising sea level). Transition risk is the risk related to the economy’s transition to a low emission economy resistant to climate change and encompasses risk related to policy and legal, technology, market and reputation risks.
An analogous approach was suggested in April 20194 by The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), an organization gathering together central banks and supervision authorities. Based on the conviction that climate-related threats are a source of financial risks and that it is the duty of central banks and regulatory authorities to ensure the financial system’s resilience to such threats, six recommendations were formulated for central banks, regulators, decision-makers and financial institutions to ramp up their role in “greening” the financial system and managing the environment and climate risks.
The scenario structure proposed by the NGFS was adopted as the starting point for the analyzes conducted by the PZU Group. The scenarios are structured according to the degree of attainment of the climate goals and the transition pattern. In turn, in its document, European Insurance and Occupational Pensions Authority (EIOPA) assigned two long-term scenarios of temperature increase (above and below 2 degrees Celsius) to the four global pictures defined by the NGFS.
* A call for action; Climate change as a source of financial risk, April 2019
Stress tests and sensitivity analyses
The PZU Group conducts regular stress tests and sensitivity analyses under its annual analysis of own risk and solvency assessment (ORSA) and stress tests consistent with the requirements of the regulatory authority. Under ORSA, the sensitivity analyses for PZU cover stress scenarios affecting assets and liabilities. The stress tests selected for execution as part of this assessment cover the major areas of activity and the PZU Group’s risk profile. They correspond to the assessment of the most important risks; in particular, the short-term impact of extreme weather-related phenomena (catastrophic losses) and the impact of the growth of the loss ratio on the PZU Group’s capital condition are regularly analyzed.
Identification and analysis of risks, identification of key risks
To supplement the processes governing the management of respective risk categories, PZU, as parent company, cyclically conducts identification and analysis of risks, as well as identification of key risks.
All risks identified in this process are assessed as to their frequency and scale of materialization (accounting for the financial aspect and reputation). In particular, risks related to climate change are subject to risk in terms of physical risks and transition risks. This process facilitates risk analysis in the medium-term and identification and assessment of emerging risks. This analysis is updated at least once a year.
The analyses conducted have identified the following climaterelated risk factors which may influence the PZU Group’s business model and financial results.
| Risk factor | Risk of materialization | Horizon | Category in risk management system | Actions taken |
| Difference between the dynamics of Polish economical transition and changes in the reinsurance market, resulting in lower availability of reinsurance offerings for projects in extractive industry and coaldependent energy sector. Materialization may lead to the following consequences: |  |
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| Limited insurance sales for this type of projects | MediumTerm / LongTerm | Business risk (analysis of key risks) | Renewals of contracts involve negotiations with reinsurers and clients. Clients are offered a cover adjusted to the available reinsurance offering. Restrictions on liability limits are necessary.
Additionally, it is assumed that PZU’s portfolio will be gradually transformed in line with the Polish economic transition. |
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| Higher reinsurance cover prices | ShortTerm | |||
| Higher capital requirements for the risk of default by counterparties due to placing of part of the portfolio at lower-rated reinsurers | MediumTerm | Credit risk | Reinsurers’ credit quality is assessed based on market data, figures from external sources, as well as the internal model. The model divides reinsurers into several classes, depending on the estimated risk level. A reinsurer will not be accepted if its risk is higher than a predefined cut-off point. The acceptance is not automatic and the analysis is supplemented by assessments by reinsurance brokers. Within credit risk monitoring, the assessment of a given entity is updated once a quarter. | |
| Lower share price and corporate bonds valuation for companies in selected sectors due to higher regulatory burdens |  |
MediumTerm | Market risk/ Credit risk | Market risk is subject to continuous monitoring and internal limits.
As for credit risk, there is a comprehensive counterparty assessment and limit establishment system (including by industry). When it comes to credit risk assessment, internal credit ratings are set for the given entity (the approach differing, depending on the type of entity). Ratings are based on quantitative and qualitative analysis and are one of the fundamental elements to the process of establishing commitment limits. Counterparties’ and issuers’ credit quality is subject to cyclical monitoring. One of the basic elements of monitoring is a regular update of internal ratings. |
| Raising capital requirements due to revision of parameters in standard formula for selected risks | |
MediumTerm | Compliance risk | The PZU Group monitors changes in regulations on an ongoing manner, takes part in consultations, and analyzes the impact of changes planned or introduced on its equity situation. |
| Risk factor | Risk of materialization | Horizon | Category in risk management system | Actions taken |
| Extreme weather events happening more often, which may lead to higher reinsurance prices | |
ShortTerm / LongTerm | Actuarial risk | The risk management system at PZU Group ensures cyclical monitoring of exposure, and the reinsurance program implemented allows a significant reduction of potential catastrophic Intensive forest fires in suburban localities and loss on the deductible to acceptable levels which do not threaten PZU’s financial stability. |
| Intensive forest fires in suburban localities and croplands due to growing droughts | Actuarial risk | |||
| Higher mortality, in particular in cities, due to extreme weather events and higher temperatures in the cities compared to surrounding areas, which may lead to higher payouts and the need to readjust assumptions or the future by increasing mortality factors in the best-estimate liabilities (BEL). | |
LongTerm | Actuarial risk | Analysis and monitoring of exposure factors concerning risk in selected product groups
Actuarial control cycle, i.e., setting adequate assumptions. |
The risk factors itemized in the table above have been analyzed under 2 scenarios for which the starting point is the structure of the scenarios proposed by The Network of Central Banks and Supervisors for Greening the Financial System (NGFS).
Structure of scenarios
Analysis of climate-related risk factors
During the current phase of analyzing climate risks the PZU Group studied:
- The “Hot house world” scenario in which physical risks play the main role, which in a simplified approach involve the assumption of a zero impact exerted by transition risks;
- The “Disorderly” scenario in which the transition risks play the main role, which in a simplified approach involve the assumption of a zero impact exerted by physical risks.
The following assumptions and risk factors have been taken into account:
| Hot house world scenario | Disorderly scenario |
Short-term horizon: payouts due to catastrophic risks in line with the current reinsurance program, lower equity. Long-term horizon: higher reinsurance prices and legitimate portions, higher SCR due to higher net best-estimate liabilities (net BEL).
Short-term horizon: payouts due to higher claims ratio in first year, lower equity. Long-term horizon: higher mortality rates used to determine BEL, lower equity and change in solvency capital requirement (SCR). |
The transition risks are expected to materialize in the short-term or medium-term horizon. |
- Should the scenarios assumed materialize, the solvency of the PZU Group will not be under a threat.
- The regulatory requirements and the assumptions concerning the internal limit system are satisfied in both scenarios. The table below shows the sensitivity of the PZU Group’s solvency ratio, estimated based on forecasts as at the end of 2023.
- Classifying the occurrence of extreme flooding as a physical risk is the most severe factor. This is a long-term risk associated with temperatures rising more than 2°C. Annual renewals of contracts and analysis of current data and forecasts coupled with the selection of the appropriate reinsurance program make it possible to reduce considerably the possible impact this risk can exert on the PZU Group.
- The most severe transition risk is the regulatory risk associated with a change in the parameters used to calculate the sub-module for the natural catastrophe risk.
- The probability that the risk related to the global economy transition into a low-carbon one (transition risk) will materialize is much higher than the probability that the most extreme physical risk related to the climate change will materialize.
| Sensitivity of PZU Group’s solvency ratio | |
|---|---|
| Greenhouse effect scenario | -32 p.p. |
| Unorganized scenario | -6 p.p. |
The analysis above presents the impact of key risks related to sustainable development, especially climate change, on the PZU Group. Nevertheless, the response to the identified risks facilitates a change in the direction of a sustainable product offering that does not just correspond to client needs and the identified climate-related challenges but above all that offers an opportunity for business development and building a market edge. The PZU Group pursues efforts to limit the likelihood of transition risk materializing by investing in lowemissions economy as well as adjusting its offering to prevent climate risks and support the adaptation capabilities of the Polish economy.
ESG strategy indicator: Preparation and implementation of climate change impact analyses to ensure compliance with regulatory requirements
Level of implementation 2022: Realized