Insurance risk is a risk of loss or of adverse change in value of insurance liabilities, due to inadequate pricing and provisioning assumptions (in particular for technical provisions).
The objective of insurance risk management is to maintain risk on an acceptable level and to limit potential loss from adverse change in the value of insurance liabilities.
71.1 Identification and assessment of insurance risk
Exposure to insurance risk exists in PKO Życie Towarzystwo Ubezpieczeń S.A. (PKO Życie) and concerns the following sub-types of risk:
- mortality,
- morbidity,
- contracts withdrawal,
- cost increase,
- catastrophic.
Assessment of exposure to insurance risks in PKO Życie is as follows::
- mortality and morbidity risk (in a current solvency regime risk of claims) is assessed at a low level due to the small share of insurance policies relating to this risk in the whole Company’s insurance portfolio and reinsurance applied,
- the contracts withdrawal risk relates primarily to insurance products with Insurance Capital Funds. As a result of the proceedings of the UOKiK and its agreements, the Company estimated the changes in the distributions of future resignations. The amount of the future payments of liquidation in accordance with the above agreement was also adjusted. Until the date of this report, no increase in contract resignations was observed. Based on data from 2015 and previous decisions of the UOKiK the level of contract resignations is assessed as stable, but their risk is at increased level
Insurance risk measurement in PKO Życie is carried out as a part of contracts withdrawal analysis, claims analysis, analysis of assets covering technical provisions (APR) and annual analysis of shock scenarios – stress-tests, on the basis of methodology required by the PFSA Office. In preparation for implementation of the new Solvency II system applicable since 1 January 2016. PKO Życie calculated the minimum capital requirement (MCR) and standard capital requirement (SCR) at the end of the third quarter of 2015 and prepared a report on prospective assessment of own risk (FLOAR) in 2015. According to these analyses the Association predicts that solvency ratios in accordance with the system of Solvency II are at an adequate level.
71.2 Monitoring of insurance risk
Assets covering technical provisions (APR) were at a sufficient level (above 100%), as well as had the appropriate structure (in line with regulatory requirements). The total provisions cover ratio amounted to 103% at the end of 2015. For insurance products with Insurance Capital Funds and for structured products, which comprise the greater part of the portfolio of PKO Życie, surplus of assets is not required, hence the total level of ratios remains at the level above 100%.
71.3 Insurance risk reporting
Insurance risk reporting is performed in PKO Życie in the form of monthly report for the Management Board and the quarterly report for the Assets & Liabilities Management Committee, Local Risk Committee and for Risk Committee of the Supervisory Board.
71.4 Management actions concerning insurance risk
As to mitigate the insurance risk exposure, PKO Życie uses among others:
- Reinsurance of risks (mortality, morbidity)
- Grace periods,
- exemptions,
- retention activities.
Passive reinsurance of PKO Życie is performed on the basis of:
- obligatory - facultative, quota share - surplus treaties, on the basis of risk - premium,
- facultative reinsurance agreements, on the basis of risk – premium,
- obligatory, proportional reinsurance agreements, on the basis of risk- premium
Facultative reinsurance is applied for all insurance agreements and risks not covered by obligatory – facultative reinsurance agreements, in which the sum on the gross risk exceeds agreed amount
In case of the new products and the risks, PKO Życie choses reinsurer, level of protection, conditions of the reinsurance, changes in concluded reinsurance contracts and concluding new reinsurance contracts in relation to the newly introduced to offer or modified insurance products and new risks.