Fulfilment cash flows
In estimating future cash flows, the PZU Group accounts for all reasonable and supportable information available without undue cost or effort. This information includes both internal and external historical data concerning claims and other measurement components, updated to reflect current expectations about future events.
Estimates of future cash flows cover all cash flows expected to arise in relation to the fulfilment of the rights and obligations arising under an insurance contract. The estimates of future cash flows:
- are within the contract boundary;
- account for all information available about the amount, timing and uncertainty of those future cash flows;
- are explicit – the entity estimates the adjustment for non-financial risk separately from the other estimates; the entity also estimates the cash flows separately from the adjustment for the time value of money and financial risk, unless the most appropriate measurement technique combines these estimates;
- reflect the perspective of the entity, provided that the estimates of any relevant market variables are consistent with observable market prices for those variables;
- are current.
Reinsurance contracts are modelled on the same basis as insurance contracts. However, taking into account the features of reinsurance contracts, on initial recognition (and similarly as at every subsequent reporting date), expected future cash flows include estimates of future cash flows from underlying insurance contracts to be issued by the holder, but which are within the boundary of reinsurance contracts issued.
Discounting of cash flows
The PZU Group uses discount rate curves determined under the bottom-up approach (IFRS 17:B80), which assumes that discount curves will be determined as liquid risk-free rate curves adjusted for the illiquidity premium resulting from the difference in the liquidity characteristics of the rates observed in the market and the liquidity characteristics of the insurance contracts. For groups of contracts established for cohorts arising after the transition date for IFRS 17 measurement (i.e., after 1 January 2022), the PZU Group applies the EIOPA methodology to establish the underlying risk-free curve. The approach to discount rate curves established for the cohorts recognized before the transition date is described in Section 6.3.3.
Risk adjustment for non-financial risk
In measuring insurance contracts, the PZU Group adjusts for non-financial risk (e.g. insurance risk, lapse risk, expense risk). The risk adjustment for non-financial risk is compensation for the uncertainty about the amount and timing of cash flows from groups of insurance contracts. Because of the different risk characterization, the risk adjustment concerning cash flows related to the future coverage period (accounted for in the liability for remaining coverage) and past coverage period (accounted for in the liability for incurred claims) is estimated separately.
The PZU Group estimates the adjustment using the methods available, including the value-at-risk method (VaR) and techniques based on the cost of capital method.
At the entity’s level, the risk adjustment is established as the direct product of risk adjustments for all groups of contracts in a portfolio, not accounting for the correlation between the groups. Finally, that value serves to establish the confidence level which accounts for the correlations and diversification effects between uniform risk groups. The parameters for risk adjustment are selected so that the final value of the risk adjustment for non-financial risk corresponds to a confidence level determined by the PZU Group as the confidence level expected for the purpose of determining non-financial risk in IFRS 17 financial reporting.
Coverage units
Contractual service margin, recognized in profit or loss for a period, is determined by the PZU Group in line with the requirements of IFRS 17 based on coverage units. For each group of insurance contracts, the PZU Group identifies coverage units based on the product characteristics, considering for each contract the quantity of the benefits provided and expected coverage period. For individual product segments, the PZU Group establishes coverage units in line with the following table:
| Type of insurance | Basis of computing coverage units |
|---|---|
| Group and continued insurance | Total sum insured under the host contract and riders |
| Traditional insurance | In addition to annuity insurance, the total sum insured under the host contract and riders. Annual benefit for annuity insurance. |
| United-linked insurance | Total sum insured under the host contract and riders (fund covered) |
| Other insurance | Total sum insured under the host contract and riders |