Where the application of the full retrospective approach has been assessed as impracticable, the PZU Group uses the modified retrospective approach or the fair value approach, and the choice of approach is made individually for each group of contracts. Factors such as the availability of historical data, materiality and whether the group of contracts belongs to the portfolio offered for sale by the PZU Group as at the transition date are taken into account in the selection.
The table below presents the simplifications allowed in IFRS 17 that the PZU Group has applied, along with a reference to the relevant provisions of IFRS 17 depending on the approach taken:
| Description of the simplification | Modified retrospective approach | Fair value approach |
|---|---|---|
| Assessment of groups of contracts using information available at the transition date, instead of at the date the contract was concluded | C9 | C21-22 |
| Non-application of paragraph 22 to divide groups into those that do not include contracts issued more than one year apart | C10 | C23 |
| Use of historical cash flows in determining the contractual service margin | C12 | n/a |
| Simplified calculation of risk adjustment for non-financial risks at the date of initial recognition of the group of insurance contracts | C14 | n/a |
| Disaggregation of financial income or expenses into amounts included in profit or loss and amounts included in other comprehensive income | C18-19 | C24 |
Modified retrospective approach
Where the application of the full retrospective approach is impracticable, IFRS 17 allows the application of a modification to such an approach – the so-called modified retrospective approach – to achieve the closest outcome to retrospective application possible. Modifications allowed by the standard cover assessments of insurance contracts or groups of insurance contracts that would have been made at the date of inception or initial recognition, estimates related to the contractual service margin or loss component, and estimates of insurance finance income or expenses.
The modified retrospective approach is applied by the PZU Group solely for the groups of contracts without direct participation features. For groups of contracts with direct participation features, for which the full retrospective approach is impracticable, the PZU Group applies the fair value approach.
In the cases stipulated in IFRS 17 and where the PZU Group has deemed the modified retrospective approach to be reasonable, the PZU Group has applied the following modifications to the full retrospective approach:
- use of historical cash flows and reliable estimates of historical cash flows to estimate future cash flows and contractual service margin or loss component as at the initial recognition of a group of contracts or group of insurance contracts without direct participation features;
- estimated adjustment for non-financial risk as at the initial recognition of a group of insurance contracts and release from risk before the transition date based on information available as at the transition date. information used for such estimates include the calibrated adjustment for non-financial risk as at the transition date, estimated cash flows on initial recognition of the group of insurance contracts and historical data available as at the transition date;
- aggregation of groups of contracts issued more than one year apart.
In its estimations using the modified retrospective approach, the PZU Group did not apply the modifications allowed in the IFRS 17 relating to the measurement of discount rates.
In applying the modified retrospective approach, the PZU Group has used to the greatest possible extent the reasonable and supportable information available without undue cost or effort which the PZU Group would use in the full retrospective approach.
Fair value approach
The fair value approach in the transition period was applied by the PZU Group for:
- annuity and traditional products entered into before 1994 for which there are no reasonable and supportable information available without undue cost or effort that would allow computations in line with the modified retrospective approach;
- unit-linked products for which the use of MRA or FRA would entail undue cost or effort, disproportionate to the level of potential distortion of reported values, which are considered immaterial.
With respect to contracts where the fair value approach has been applied, the PZU Group determined CSM as at the transition date as the difference between the fair value of the liability for remaining coverage and cash flows in respect of liabilities measured as at that date. In determining fair value, the PZU Group applied the requirements of IFRS 13 Fair Value Measurement, except for the lower limit for deposits at notice. This approach is of preliminary nature and may change.
The PZU Group has aggregated contracts issued more than one year apart in determining groups of insurance contracts in line with the fair value approach as at the transition date, because it did not have reasonable and supportable information allowing disaggregation into groups of contracts issued within one year.
In applying the fair value approach, the PZU Group has used reasonable and reliable information as at the transition date to:
- identify groups of insurance contracts;
- determine whether insurance contracts meet the definition of an insurance contract with direct participation features;
- identify any discretionary cash flows for insurance contracts without direct participation features.
The PZU Group applied the income method to measure the fair value of insurance contracts as at the transition date.