| The estimated effect of IFRS 17 implementation on consolidated equity of the PZU Group 1 | January 2022 |
|---|---|
| Total equity, per IFRS 4 | 39,994 |
| Equity attributable to equity holders of the Parent | 17,080 |
| Other funds, incl. accumulated other comprehensive income | 14,429 |
| Accumulated, non-allocated result | 2,651 |
| Non-controlling interest | 22,914 |
| The effect of IFRS 17 implementation on equity | 5,115 |
| Equity attributable to equity holders of the Parent | 5,115 |
| Other funds, incl. accumulated other comprehensive income | (770) |
| Accumulated, non-allocated result | 5,885 |
| Non-controlling interests | – |
| Total equity, per IFRS 17 | 45,109 |
| Equity attributable to equity holders of the Parent | 22,195 |
| Other funds, incl. accumulated other comprehensive income | 13,659 |
| Accumulated, non-allocated result | 8,536 |
| Non-controlling interest | 22,914 |
The estimated effect of IFRS 17 implementation on consolidated equity of the PZU Group as at 1 January 2022 amounts to PLN 5,115 million. In particular, it results from a change in approach in the valuation of liabilities under insurance and reinsurance contracts in accordance with IFRS 17. The new standard enables to recognize part of the difference in the valuation of liabilities as a value reducing accumulated other comprehensive income by PLN 770 million. This is due to declines in historical interest rates. The discount rates used at the time of initial recognition (so-called locked-in rates, which are rates from the period of the policy or of the loss event) were mostly higher than the risk-free rates as of 1 January 2022.
As at 31 December 2022, the PZU Group expects an increase in the amount of impact of IFRS 17 application on equity compared to balances as of 1 January 2022, in the range between PLN 3.5 and 4 billion. The increase results mainly from a significant increase in risk-free interest rates in 2022.
The above figures concerning the estimated effect of IFRS 17 implementation on selected consolidated equity items are of a preliminary nature, and the final effect of implementing IFRS 17 may differ from the one presented hereinabove, among otherthings, due to:
- ongoing adaptation of new processes concerning the preparation of figures, as well as computations, reporting, accounting, IT environment and internal control;
- the possibility of changing the assumptions and methodologies adopted for the calculations;
- lack of crystallized consistent market practice in the application of the standard.
The following table presents the key decisions made by the PZU Group in selecting an accounting policy for IFRS 17 measurement.
| Choice of accounting policy | PZU Group decision | Justification |
|---|---|---|
| Method of determining discount curves | Curves determined in the bottom-up approach | Approach adopted for consistency with Solvency II discounting methodology |
| Recognition of financial income or expenses | For non-unit-linked products, financial income and expenses are divided between financial result and other comprehensive income. For unit-linked products, financial income and expenses are included in full in the financial result |
The decision was made to reduce the volatility of the financial result and to keep the approach in valuing liabilities as consistent as possible with the approach used in valuing assets. |
| Risk adjustment for non-financial risk | Depending on the nature of the risk in question, the risk adjustment for non-financial risk is determined using the VaR method or a technique based on the cost of capital method. | The decision on the valuation method was based on the characteristics of the portfolio’s risk profile, referred to in section 6.3.2.1 in order to best reflect the valuation uncertainty associated with non-financial risks. |
| Contractual service margin at the transition date | In the case of life insurance, the PZU Group decided to divide contracts into groups that contain contracts concluded during the year („annual cohorts”). In the case of non-life insurance, the PZU Group decided to divide contracts into groups that contain contracts concluded during the quarter („quarterly cohorts”). |
The method for valuing liabilities as of the transition date was selected based on the availability of historical data, materiality and whether the group of contracts was part of the portfolio offered for sale by the PZU Group as of the transition date. The default valuation approach used was the full retrospective approach. Only when the full retrospective approach was not feasible in practice did the PZU Group decide to use one of the simplified approaches, based on the factors indicated above. In the PZU Group, contractual service margin was recognized on less than 40% of the portfolio measured by insurance revenues. |
| Grouping of contracts | In the case of life insurance, the PZU Group has decided to divide contracts into groups that include contracts entered into during the year („annual cohorts”). In the case of property insurance, the PZU Group decided to divide contracts into groups that contain contracts concluded during the quarter („quarterly cohorts”). |
PZU Group felt that for long-term life insurance contracts, the introduction of a period of less than a year would lead to excessive complexity (maintaining much more data), which would not be commensurate with the benefits. However, for non-life insurance, most of which is short-term, division into quarterly cohorts will enable a more accurate assessment of profitability in situations where tariffs change during the year. |
| The effect of accounting estimates made in interim financial statements | The PZU Group has decided to change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements and in the annual reporting period (so-called year-to-date reporting). | Consistency with existing IFRS 4 reporting and with reporting in other accounting standards. |