On April 27, 2023, PZU updated its strategic metrics for the 2024 outlook. This was due to the implementation of IFRS 17 (effective January 1, 2023) and changes in the macroeconomic environment that have occurred since the publication of the PZU Group's 2021-2024 strategy (i.e., March 25, 2021).
The IFRS 17 standard was introduced to improve the quality and enhance the usefulness and comparability of financial data presented by insurance companies. Technically, the IFRS 17 standard only affects the presentation of data, while it does not affect the ability to generate financial flows, allocate capital to strategic initiatives, or maintain a dividend policy for shareholders.
The IFRS 17 standard introduces significant changes to the existing IFRS 4 standard in terms of valuation methods, aggregation of insurance contracts, segmentation, risk adjustments, recognition of economic changes or the presentation of data in the financial statements itself, among others. Therefore, in order to maintain consistency and transparency, it was necessary to update the adopted strategic ambitions for the PZU Group’s 2021-2024 strategic outlook.
- Non-life insurance valued primarily based on the premium allocation approach (PAA), which ensures comparability of insurance revenue to earned premiums under IFRS 4
- Conservative valuation of incurred claims reserves under IFRS 4 replaced by valuation based on best estimate of cash flows with risk adjustment for non-financial risk (Risk Adjustment)
- Claims reserves recognized at present value (taking into account the effect of the time value of money). Changes in discount rates affecting provisions recognized directly in equity
- Gross written premium (GWP) is replaced by a new measure – insurance revenue. GWP will not be reported directly in the profit and loss account, but will remain an observed financial measure
- Combined ratio (COR) will remain a key KPI; however, the calculation method has been adapted to the new measures introduced by IFRS 17. New COR will be calculated as a ratio of insurance service expenses divided by insurance revenue (both items net of reinsurers share)
- The conservative mathematical provision is replaced by the liability of remaining coverage (LRC) which is the sum of three components: present value of cash flows, risk adjustment and contractual service margin (CSM) representing future earnings
- Life insurance contracts valued mainly using the general measurement model (GMM), for which the main source of the result in the period is the release of the CSM, which leads to more stable scheme of profit distribution over time
- Unlike IFRS 4, in which any changes in actuarial assumptions were directly recognized in the result for the period, under IFRS 17, the impact of assumption changes is recognized through changes in CSM amounts and amortized over the life of the contract
- For the GMM model, the effect of a change in interest rates on liabilities is recognized directly in equity through the change in other comprehensive income (OCI) and does not affect the result of the period
- Profit presented in a more transparent way. The insurance service result will be presented separately from the financial result. Insurance revenue presented excluding the so-called non-distinct investment component
- Gross written premium (GWP) is being replaced by a new measure – insurance revenue. GWP will not be reported directly in the profit and loss account, but will remain a monitored financial measure
- CSM can be used in many new KPIs to measure profit levels in the future
- Insurance margin will remain a key KPI, but the calculation method has been adapted to the new measures introduced by IFRS 17. The margin will be calculated as the ratio of insurance result including the allocated investment activities result to insurance revenue