2 3MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
External environment 29 2.1 Main trends in the Polish economy 30 2.2 External environment in the Baltic States and Ukraine 31 2.4 Polish and Baltic States insurance sector compared to Europe 35 2.5 Polish banking sector compared to Europe 38 2.6 Regulations pertaining to the insurance market and the financial markets in Poland 40 2.7 Factors that may affect the conditions of operations and the PZU Group’s activities in 2021 43
PZU Group’s activity 49 3.1 Structure of the PZU Group 50 3.2 Non-life insurance (PZU, LINK4 and TUW PZUW) 52 3.3 Life insurance (PZU Życie) 58 3.4 Banking (Bank Pekao, Alior Bank) 63 3.5 Mutual funds and Employee Capital Schemes (TFI PZU) 67 3.6 International operations 70 3.7 Medical services (Health) 73 3.8 Pension funds (PTE PZU) 77 3.9 Other operating areas 79
Business model 101 5.1 PZU Group’s operating model 102 5.5 Banking and strategic partnerships 125 5.6 Management of the PZU Group’s brands 132
Financial results 135 6.1 Major factors contributing to the consolidated financial result 136 6.2 PZU Group’s income 140 6.3 PZU Group’s claims paid and technical provisions 142 6.4 PZU Group’s acquisition and administrative expenses 143 6.5 Drivers and atypical events affecting the results 143 6.6 PZU Group’s asset and liability structure 143 6.7 Contribution to the consolidated result made by industry segments 146 6.8 Issuer’s financial results – PZU (PAS) 157 6.9 Impact of the COVID-19 pandemic on the PZU Group’s results and the Issuer’s results 161
4 5MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Risk management 165 7.1 Objective of risk management 166 7.2 Risk management system 166 7.3 Risk appetite 168 7.4 Risk management process 170 7.5 PZU Group’s risk profile 171 7.6 Risk vulnerability 181 7.7 Reinsurance operations 184 7.8 Capital management 185
6 7MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
As the leader in digital transformation that continues to draw upon the newest technologies and consistently rolls them out, we focused on accelerating the digitalization of our products and services and migrating many processes to remote channels during the pandemic to afford our clients a high degree of safety when taking advantage of our offering. The utilization of artificial intelligence, among others, gave clients and employees alike the maximum level of service comfort in this trying time, while at the macro scale it contributed to the development of the overall economy by setting new market trends. Remote forms of sales and claims handling have become widespread, the process of digitization in health protection has accelerated and the role played by telemedicine has grown considerably. Its development is currently the most important trend.
PZU Group retained its strong position as the leader in financial services and the insurer crafted a new strategy for upcoming years.
The PZU Group’s capital position continues to be strong. Return on equity attributable to the parent company in 2020 was 10.9%, which surpassed the levels generated by the entire market and our main competitors according to data for the first three quarters of 2020. The high level of profitability was also maintained. The PZU Group’s combined ratio in non-life insurance in 2020 was 88.2%, 0.3 p.p. better than in 2019, the margin in group and individually continued insurance
8 9MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
The global coronavirus pandemic meant that 2020 required for business to demonstrate exceptionally effective management and efficient adjustment to new market conditions. The PZU Group utilized this time to grow dynamically while simultaneously maintaining a high level of safety in its business. It ended the year of the pandemic among the groups reporting the highest solvency ratios in the world. It discharged other obligations in addition to its capital position and stable results on insurance activity whereby it would be capable of surviving any further potential deterioration in the business environment. This was reflected by affirming PZU’s financial rating of A- and its outlook as stable.
Thus the PZU Group is strengthening its position despite the exceptionally demanding market situation precipitated by the pandemic and several interest rate cuts. Poland’s GDP slumped 2.8% in 2020 while back in Q1 when the country was just beginning to prep for the onslaught of the coronavirus it had climbed 1.9% versus the previous year. The isolation that protected Poles’ health while simultaneously restricting their mobility led to a 3% decline in household consumption at the end of 2020 accompanied by the concurrent 3.4% increase in the consumer price index. Registered unemployment in Poland according to the data published by the Central Statistics Office remained at the low level of 6.2% at the end of 2020, though it was up 0.4% from the level seen in early Q2 when Poland embarked on its battle against the pandemic.
The economic effects of the pandemic were markedly attenuated by governmental support programs. Then allowed businesses to preserve their operational continuity and keep employment at a constant level. The PZU Group, in particular its constituent banks played an enormous role in the transfer of government aid to businesses. That was why pessimistic scenarios did not materialize that had anticipated unemployment skyrocketing into a double digits.
Chairman of the Supervisory Board Statement business objectives. It accomplished an important social goal by getting involved in the fight against the COVID-19 pandemic.
The PZU Group’s financial results place it among the most profitable financial institutions in Poland. Its high asset utilization and solvency ratios place it among the best in the world. The American rating agency, namely S&P Global Ratings recognized in Q2 2020 that the PZU Group would maintain its leading business position in Poland, strong
10 11MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
We would like to do something different from the classical client relation model insurers follow in which the only contact clients have with their insurer after buying a policy is when a claim occurs. We want to help our clients make wise choices to protect their lives, health, assets, savings and finances. Gradually, we will modify the company’s operating model from an insurer model (pricing and transferring risk) to the model of a service company specializing in utilizing data (risk management consulting and services as well as caring for the future of clients, retail and business alike).
PZU is much more than insurance. We focus all PZU Group’s activities around the client: non-life and health insurance, medical and assistance services, banking, investments and pension funds. Our client relationships, based on the best satisfaction of client needs and expectations, are our main value.
PZU – More then insurance The Powszechny Zakład Ubezpieczeń Group is the largest financial group in Poland and Central and Eastern Europe. PZU heads up the group with its traditions dating back to 1803 when the first insurance company was established on Polish soil. PZU is a public company. Its stock has been listed on the Warsaw Stock Exchange (WSE) since 2010. Since its stock exchange debut PZU has been part of WIG20, an index of the Warsaw Stock Exchange’s largest companies. It is one of the most highly valued companies and heavily traded stocks on the Polish stock exchange. Since 2019, PZU’s shares have been also part of the WIG ESG (sustainability) index.
The State Treasury with a 34.19% equity stake is PZU’s main shareholder.
a deliberate choice which makes it possible to build the company’s long-term value in an ethical and transparent manner while giving consideration to stakeholder needs and expectations. The full scope of information pertaining to the PZU Group’s implementation of sustainable development principles that also incorporates all the legally-required nonfinancial information can be found in the 2020 non-financial information report of the PZU Group and PZU.
In addition, the PZU Group’s clients in Poland have access to Bank Pekao’s distribution network (713 branches) and Alior Bank’s distribution network (674 branches, including 180 traditional branches, 7 Private Banking branches, 13 Regional Business Centers and 474 partner centers). Both banks have professional call centers and mobile and internet banking platforms.
INNOVATION creates new value for PZU Group’s clients Key operating areas
The PZU Group is also the leader in the insurance market the Baltic States (Lithuania, Latvia, Estonia). It also runs insurance business in Ukraine.
Investments – The PZU Group is one of the largest asset managers on the Polish market.
The PZU Group owns three mutual fund management companies: PZU TFI, Pekao TFI and Alior TFI. It also has Powszechne Towarzystwo Emerytalne PZU managing the PZU Złota Jesień Open-end Pension Fund
Health – in its efforts to ensure greater and more complete satisfaction of its client needs, the PZU Group has been actively developing the health insurance market with accompanying health care services under the PZU Zdrowie brand. The health business deals with the following activities: (i) sales of health products in the form of insurance and sales of non-insurance products (occupational medicine, medical subscriptions, partnerships and prevention programs), (ii) construction and development of medical infrastructure in Poland to give clients the best accessibility to the health care services rendered.
Bank Pekao, established in 1929, is a universal commercial bank offering a full range of banking services provided to individual and institutional clients.
The PZU Group’s operations in the banking segment are conducted in the following areas: bancassurance, assurbanking and operational synergies. .
Insurance Protection against the effects of events of chance – risk valuation, premium calculation and investment, payment of claims
Gross written premium (PLN billion) Group and continued insurance operating margin*
Assets of third party clients of TFI PZU and PTE PZU (PLN bn)
Assets of TFI Pekao clients (PLN bn) Net result on asset management of TFI Pekao (PLN m)
Banking assets in the PZU Group (PLN bn) ROE (return on equity)
20 21MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
The financial results generated by the PZU Group in recent years place it among the most profitable financial institutions in the country. At the same time, they translate into high efficiency ratios. In 2020 the return on equity was 10,9% on the reported basis and 17.9% on the adjusted basis1, much higher than the average posted by insurance companies in Europe. The rapid growth is accompanied by preservation of a high level of security in the business. This is corroborated both by its high solvency ratios and by the A- (stable) investment grade rating awarded by the US rating agency S&P Global Ratings. As at the end of 3 Q 2020, the solvency ratio (calculated according to the standard Solvency II equation) was 257%, a level above the average 1 Excluding the impairment loss on goodwill arising from the acquisition of Alior Bank (PLN 746 million) and Bank Pekao (PLN 555 million), the impairment loss on intangibles arising from the acquisition of Alior Bank (i.e. trademark and relations with clients adjusted for the impact of deferred tax and minority interest) in the amount of PLN 42 million
B) Impairment of goodwill (Alior Bank, Bank Pekao) and intangible assets (Alior Bank) - - - - (1 343)*
Equity attributable to the owners of the parent company 12 990 14 599 14 925 16 169 18 777 * Including the impairment loss on goodwill arising from the acquisition of Alior Bank (PLN 746 million) and Bank Pekao (PLN 555 million), the impairment loss on intangibles arising from the acquisition of Alior Bank (i.e. trademark and relations with clients adjusted for the impact of deferred tax and minority interest) in the amount of PLN 42 million ** Restated data as at 31 December 2017-2019. 2016 data restated as at 1 January 2017
Some of the ratios depicted in the charts above are Alternative Performance Measures (APM) under the ESMA Guidelines on Alternative Performance Measures 2015/1415. Definitions, basis of calculation and explanation of their use are presented in Chapter 11. Attachment: Glossary of terms and Alternative Performance Measures 5x 10x 15x 20x
22 23MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Alior Bank: First place in the cash loan category and distinction in the safe bank category: best practices awarded in the Golden Banker plebiscite
Alior: Newsweek’s Friendly Bank of 2020 in traditional banking and remote banking
Bank Pekao: Five stars in the rating of Private Banking services awarded by the Forbes monthly
Bank Pekao: Best Bank in the category of large commercial banks in the Gazeta Bankowa competition
PZU: Master of Innovative Transformation, special distinction in a contest organized by the ICAN Institute and the MIT Sloan Management Review Poland
Pekao Direct: Bronze medal in the Stevie Awards for Sales & Customer Service in the category Best use of technology in sales
PZU: The Best Annual Report 2019 - The Best of the Best” (second time)
PZU: Distinction in the Internet campaign category in the Employer Branding Excellence Awards 2020
LINK4: Best Quality Employer 2020 Pekao: Special prize Friendly Workplace 2020
HR: IR: TFI of the Year in the ranking published by Gazeta Giełdy i Inwestorów Parkiet
Establishment of the first insurance company on Polish soil – Fire Insurance Company for Cities in Southern Prussia
Creation of the PZU brand transformation of the Polish Mutual Insurance Directorate into a public company – Powszechny Zakład Ubezpieczeń Wzajemnych
Formation of TUW PZUW – a mutual insurance company and a direct insurer in Poland - LINK4
MARCH Appointment of Beata Kozłowska-Chyła to be the President of the PZU Management Board
APRIL S&P’s change of PZU’s ratings outlook from positive to stable
MARCH KNF’s recommendation on suspending payment of dividends from the profit generated in 2019
SEPTEMBER Appointment of Małgorzata Kot and Krzysztof Szypuła to the PZU Management Board
JUNE Purchase of bonds worth nearly PLN 2 billion (issued by PFR) under the governmental program to support businesses in the fight against the consequences of
DECEMBER Nationale-Nederlanden PTE exceeds the 5% threshold in the total number of votes
In this section: 1. Main trends in the Polish economy 2. External environment in the Baltic States and Ukraine 3. Situation on financial markets 4. Polish and Baltic States insurance sector compared to Europe 5. Polish banking sector compared to Europe 6. Regulations pertaining to the insurance market and the financial markets in Poland 7. Factors that may affect the conditions of operations and the PZU Group’s activities in 2021
The gradual lifting of restrictions and the revival of mobility in Q3 2020 translated into an ‘automatic’ rebound in economic activity and the unclogging of delayed consumer demand, in particular for durable goods. In parallel with the restoration of international trade and the economic upturn in China, this contributed to a significant improvement across the global industrial sector in H2 2020, of which Poland was also a beneficiary. As a result, the country’s GDP in Q3 2020 increased significantly compared to Q2 2020, meaning that in annual terms the decline in this period was reduced to -1.5% y/y with a slightly positive rate of growth in private consumption (0.4% y/y). The easing of fiscal and monetary policies helped protect the country’s economic potential and reduce the unfavorable impact of the pandemic on the labor market. Compared to Q2 2020, even investments turned out to be on the rise, owing to which their negative rate of growth shrank to -9.0% y/y in this period.
Source: Statistics Poland, preliminary estimate of GDP in Q4 2020 as at 26 February 2021
Still, owing to government support programs, the increase in unemployment was much lower than may have been feared at the outset of the pandemic. Enterprises, by cutting their costs, made efforts to protect employment to the best of their ability. At the end of 2020, the registered unemployment rate stood at 6.2% (compared to 5.2% in December 2019, the data after the Central Statistical Office). In December 2020, the seasonally adjusted rate of economic unemployment (according to Eurostat) stood at 3.3% (compared to 2.9% in December 2019), clearly below the European Union average (7.5%) and the euro area (8.3%).
The slowdown in employee compensation growth in the enterprise sector was less severe than had been expected in the context of the decline in economic activity. The nominal average gross monthly employee compensation in the enterprise sector increased by 4.7% in 2020, compared to a rate of 6.5% in 2019. The average monthly salary across national economy in the last year increased in nominal terms by 5% (the data after the Central Statistical Office).
Starting in mid-March 2020, the Monetary Policy Council took a number of steps to support the economy in the face of the COVID-19 pandemic. It effected three cuts of the NBP basic interest rate – to 1% in March, to 0.5% in April and to 0.1% in May. The Monetary Policy Council also lowered the reserve requirement for banks and carried out a bond purchase program through structural open market operations. Moreover, it introduced a promissory note loan program under which banks may obtain cheap refinancing of loans granted to commercial undertakings.
Public finance As was the case in other countries, the COVID-19 pandemic and the measures taken by the government to minimize its effects resulted in an increase in the deficit of the public finance sector. According to the European Commission’s forecasts of November 2020, the deficit of the general government sector in Poland might increase to 8.8% of GDP in 2020, while public debt (as defined by the European Union) might increase to 56.6% of GDP. In 2020, Poland did not experience any problems with obtaining market financing. According to the Ministry of Finance’s estimates, at the end of the year, approx. than 36% of the country’s borrowing needs planned for 2021 were prefinanced.
In December 2020, the unemployment rate was 10.1%, thus by 3.7 p.p. more than the year before. The COVID-19 pandemic deteriorated to a significant extent the situation on the labor market. Employees affected most were those from the services sector and with low qualifications. Unemployment had a slightly weaker impact on commerce, construction industry, transport and production activity. At the same time, a high supply of jobs is being observed, which in the situation of growing unemployment shows structural changes in the labor market. On the one hand, the number of people looking for work has increased considerably; on the other hand, companies are not able to fill the existing vacancies. Structural
Labor market and consumption The COVID-19 pandemic caused a deterioration of the situation in the labor market in 2020, albeit to a lesser extent than was predicted in the spring when the coronavirus reached Poland. For the first time since 2012, the number of people employed in the national economy decreased, and the average headcount in the enterprise sector was 1.1% lower than in 2019. After six years of uninterrupted improvement, since April 2020, registered unemployment has bounced back up: the number of registered unemployed individuals and the registered unemployment rate have been greater than the year before.
32 33MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Deposits are the most popular form of accumulating financial assets in Poland
Data of the Latvian statistical office show that in December 2020, the actual unemployment rate was 8.3%, i.e. it was higher by 1.7 p.p. than in December 2019. The number of unemployed increased by 16.8 thousand y/y and reached 80.5 thousand at the end of 2020.
Estonia In Q3 2020, when the restrictions imposed in the spring because of the COVID-19 pandemic, the annual GDP growth rate in Estonia was at -1.9%. After the first wave of the coronavirus, the business activity recovered quite quickly but unevenly. The reduction in restrictions contributed to a rapid recovery of private consumption but exports were still dependent on restrictions in other countries. The adverse influence on the economic situation was seen in the tourism sector, hit hardest by the crisis.
Ukraine After years of political and economic tensions, the Ukrainian economy overcame the signs of crisis and, before the outbreak of the COVID-19 pandemic, went into a stage of recovery, although with a modest growth rate. In 2020, however, as a result of the pandemic, there was a decrease – in the third quarter, the annual GDP growth rate remained at -3.5%. The annual inflation rate was 5% in December, thus reaching the center of the target range of 5.0% ±1 p.p. defined for 2020. The unemployment rate rose to 9.3% in September 20201 from 8.2% in December 2019.
After 11 months of 2020, a negative balance of foreign trade in goods and services was recorded (USD -1.3 billion). The conflict in the eastern part of Ukraine is still harmful for the economy. The loss of control over resources in this part of the country significantly reduced Ukraine’s export capabilities because of disruptions connected with mining production and with electricity generation.
as a consequence of the reduction in consumption and investments partly compensated by growth in net export
Growth in average monthly wages in the corporate sector in Poland in 2020 by versus 6.5% in 2019
34 35MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Equity market Although the COVID-19 pandemic had a particularly strong impact on the equity market, between the end of 2019 and the end of 2020, the WIG index lost merely 1.4% and the WIG20 index declined by 7.7% (the data after WSE). The indices that increased were those of medium (mWIG40, slightly) and small companies (sWIG80). However, during the year, share prices have fluctuated strongly, reacting in this way to information about the development of the pandemic and actions taken by governments and central banks. After the growth in the beginning of the year, both main stock market indices started to fall at the end of February, reaching the minimum on 12 March 2020, when large-scale restrictions were announced because of the COVID-19 pandemic. The WIG index slipped 35.7% and the WIG20 index fell 39.3% between the end of 2019 and 12 March 2020.
Then an upward trend appeared. Until 17 August, the WIG index rose by 42.3% and the WIG20 by 42.6%. Realizing profits and entering the period of dynamically intensifying „second wave” of the pandemic resulted in a renewed fall
Foreign market indices behaved in a diverse manner, reflecting the course of the COVID-19 pandemic and the specific situation in each country. US indices rose very strongly between the end of 2019 and the end of 2020, e.g. S&P500 grew by 16.3% (the data after Refinitiv Datastream). What contributed to this was the outcome of the presidential election known in November 2020. The German DAX30 index increased by 3.5%. On the other hand, the British FTSE 100 lost 14.3%, due to, apart from the pandemic, the completion of the Brexit. The “emerging markets” index MSCI EM rose by nearly 16% in 2020 (the data after MSCI).
Currency market In 2020, the Polish zloty strengthened slightly relative to the US dollar and weakened relative to the euro. The EUR/PLN exchange rate increased by 8.4%, between the end of 2019 and the end of 2020, from 4.26 to 4.61 (the data after NBP). The PLN exchange rate was very volatile during the year. Since the end of February 2020, the zloty has weakened in the face of the development of the COVID-19 pandemic and later decisions to introduce restrictions and relax the monetary policy, while the EUR/PLN exchange rate remained above PLN 4.50 from 19 March to 25 May. Loosening restrictions and the economic recovery resulted then in the strengthening of the zloty. The EUR/PLN exchange rate periodically decreased, especially in the second half of August, when it fell, for a short time, slightly below the threshold of 4.40. From the end of September, the zloty became weaker again, having exceeded even the level of 4.60 at the end of October and the beginning of November. Slowing down the development of the pandemic resulted in the strengthening of the zloty to approx. 4.43–4.44 between 9 and 17 December. At the end of 2020, interventions by the NBP pushed the EUR/PLN exchange rate over 4.50 again.
External environment spent EUR 278 on insurance, the average Estonian spent EUR 270 and the average Latvian spent EUR 140. In 2018, the average Ukrainian spent only EUR 385 on insurance.
Netherlands (EUR 74.7 billion), Switzerland (EUR 52.7 billion) and Sweden (EUR 34.3 billion)8.
The structure of the Polish market is dominated by non-life insurance (approx. 67% of the market), with the majority of gross written premium generated by motor insurance. In 2019, gross written premium collected on motor third party liability insurance and motor own damage insurance accounted for 39% of the entire market’s gross written premium9. The share of life insurance in Poland’s total gross written premium (33%) was, in turn, a third lower than the average for West European markets. A similar structure of insurance markets is typical of the Baltic states. In those countries, life insurance, on average, accounts for approx. 25% of total gross written premium10. This situation is completely different from that of West European countries where life insurance takes the bigger chunk of the market. Countries with the most developed life insurance market are countries that also have the largest insurance markets. These include Italy (in 2019, life insurance accounted for 74.0% of gross written premium), the United Kingdom
(72.1%), France (63.9%) and the Scandinavian states: Finland (81.6%), Sweden (74.6%) and Denmark (74.5%)11.
Penetration of insurance in relation to GDP per capita in Europe (2019, EUR)
Gross written premium per capita (2018, EUR) in relation to the insurance market growth rate (2016-2018, EUR)
Insurance penetration in economy (% premium share in GPD)Low penetration zone
Source: own study based on Eurostat, Insurance Europe, Swiss Re Institute 4/2020: World insurance: riding out the 2020 pandemic storm 4/2020: World insurance: riding out the 2020 pandemic storm
38 39MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Compared to other European Union states, Poland’s banking sector is small in relation to the country’s GDP. Bank loans in the Polish banking system account for 61% of GDP while the European average is 125%. The Netherlands, Finland and Denmark have the highest ratios of loans to GDP.
The Polish banking market features a relatively low percentage of business loans in the total value of loans extended to the non-financial sector (33.9% at year end 2019)17. In turn, the 16 European Central Bank, 17 National Bank of Poland, “Financial data of the banking sector”
20 National Bank of Poland, ”Development of the financial system in Poland in 2019” 21 European Central Bank, lending activity of banks in Poland, like in most other European Union countries, focuses on granting loans to households. Poland ranks third among the EU states in terms of the share of household loans in total financing provided to the nonfinancial sector by banks and financial markets18.
The research conducted by the National Bank of Poland indicates that households in Poland are significantly less indebted than in the euro area. The average household has total liabilities of 5.5% of gross assets, while in the euro area the average debt is 26% of assets in total19.
Growth dynamics in the years 2012-2019 (CAGR for data in euro)
• Act of 16 April 2020 on Special Support Instruments in Connection with the Spread of the SARS-CoV-2 Virus; • Act of 14 May 2020 Amending Certain Acts in Respect of Protective Measures in Connection with the Spread of the SARS-CoV-2 Virus; • Act of 19 June 2020 on Interest Subsidies for Bank Loans Granted to Commercial Undertakings Affected by COVID-19 and on a Simplified Procedure for Approval of a Settlement in Connection with the Occurrence of COVID-19; • Act of 9 December 2020 Amending the Act on Special Solutions Associated with Preventing, Counteracting and Combating COVID-19, Other Infectious Diseases and Crises Caused by Them and Certain Other Acts.
Apart from anti-crisis solutions (such as exemption from payment of social security contributions, micro-loans and idle time pay), the “Anti-Crisis Shields” aligned legal solutions with the new reality.
Amendments to the Commercial Company Code enabled the holding of meetings of the company’s corporate authorities via means of distance communication. They also extended the possibility of remote work by the company’s corporate authorities, in particular by changing in the manner of holding meetings and adopting resolutions by the Supervisory Board by written procedure or using means of direct remote communication. This also applies to matters for which a company’s articles of association provide for the holding of a secret ballot, provided that none of the supervisory board members raises an objection.
Banks in Poland, to a greater extent than the average for the European Union, finance their business with deposits from the non-financial sector (66% of which are deposits by private individuals). At the end of 2019, they accounted for 63% of the total balance sheet value of the banking sector22. The surplus of deposits over loans granted to the non-financial sector in Poland has been growing steadily since 2015. This has been caused, among other factors, be declining demand for financing housing loan portfolios with foreign currencies. The value of the loan-to-deposit ratio in Polish banks is 91%, which is lower than the EU average of 102%23.
2.6 Regulations pertaining to the insurance market and the financial markets in Poland
Preventing, Counteracting and Combating COVID-19, Other Infectious Diseases and Crises Caused by Them; • Act of 31 March 2020 Amending the Act on Special Solutions Associated with Preventing, Counteracting and Combating COVID-19, Other Infectious Diseases and Crises Caused by Them and Certain Other Acts; 22 National Bank of Poland, “Financial data of the banking sector” 23 24 National Bank of Poland, ”Development of the financial system in Poland in 2019”
amount of 100% of the profit generated in 2019 and 50% of the profit generated in 2020 may be distributed by insurance and reinsurance companies that meet the criteria defined in KNF’s document. For more information on this, see SECTION 8.6 PZU GROUP’S CAPITAL AND DIVIDEND POLICY.
Moreover, the insurance sector has developed its own solutions to assist clients affected by the COVID-19 pandemic. The Polish Insurance Association has issued “Recommendations for procustomer actions for the insurance market”. The postulates of this document are as follows: • deferment (suspension) for all or part of the insurance portfolio, payment of the premium for insurance purchased in connection with a loan agreement via the bank for a period of up to three months in the event of financial problems of the client caused by the epidemic situation; • deferment or suspension of payment of a life insurance premium of a savings or unit-linked nature in the event of financial problems of the client; • reduction or no increase in the installment payment for motor third party liability insurance at the individual request of the client, applicable to installments payable during the epidemic; • introduction of a simplified method of handling simple and relatively minor claims.
Measures to be taken in the state of epidemic are also laid down in the Act on Supporting the Insurance Market for Trade Receivables in Connection with Counteracting the Economic Effects of COVID-19, which was adopted by the Sejm on 19 July 2020. The Act specifies the terms and conditions under which the State Treasury may take over from insurance companies certain risks arising from insurance contracts on trade receivables, the provisions of which are applicable to receivables arising in the period from 1 April to 31 December 2020. In accordance with the Act, the State Treasury, under an agreement entered into with an insurance company, may undertake to take over 80% of the insurance risk arising from the insurance portfolio of trade receivables. The State Treasury’s liability may not exceed the amount equivalent to 375% of the gross written premium of the insurance company generated from its insurance of trade receivables in 2019.
Another major change was the loosening of requirements for the rotation of audit firms. The maximum permissible uninterrupted duration of engagements for the conduct of statutory audits by the same audit firm, any of its related parties or members of its network operating in the European Union has been increased from 5 to 10 years.
In connection with the pandemic, solutions for insurance companies have also been prepared by the Polish Financial Supervision Authority, entitled: “Supervisory Incentive Package for Security and Development of the insurance industry”. These solutions are aimed to: • ensure that insurance and reinsurance companies are able to fulfill their obligations towards clients through steps taken by the regulatory authority in the area of capital requirements and solvency; • enable insurance companies to focus on serving their clients, conducting key processes and running current operations by, without limitation, reducing their reporting burdens; • facilitate the execution of insurance contracts by insurance companies and insurance intermediaries by permitting them to execute insurance contracts in a completely electronic manner; • take into consideration the specific situation of insurance companies in the claims handling aspect.
A regulation that may be adopted in 2021 and may potentially exert a major impact on the operations of the PZU Group is the planned amendment to the Commercial Company Code. It is expected to introduce into Polish law the so-called ‘holding law’ governing private and legal relations between the parent company and its subsidiaries and improving governance in companies.
On 13 March 2020, in case no. III CZP 63/19, the Supreme Court ruled that incurring an obligation by the injured party to pay the rent for a replacement vehicle constitutes a loss within the meaning of Article 361 § 2 of the Civil Code which remains in a causal relationship with the related traffic accident.
On 11 September 2020, in case no. III CZP 90/19, the Supreme Court announced in its resolution that indemnification under third party liability insurance of a motor vehicle owner, payable to the lessee in connection with expenses incurred for the repair of a damaged leased vehicle, must include the amount of value-added tax to the extent the lessee may not reduce the amount of tax payable by him or her by the amount of tax paid.
Macroeconomic and geopolitical factors The growth rate, level and structure of the key macroeconomic factors in Poland and abroad (GDP, inflation interest rates) translate into the growth rate of business in all sectors in which the PZU Group operates and the profitability of individual sectors. They determine, directly or indirectly, albeit with a certain time lag, the gross written premium growth rate in nonlife insurance, changes in demand for credit, accumulation of deposits and inflow of assets into funds. Moreover, they influence the loss ratio in non-life insurance and the investment result. They also determine the fund management results and key measures affecting the performance of the banking sector (interest margin and costs of risk).
A key risk factor for GDP growth remains the uncertainty as to the development of the COVID-19 pandemic going forward. As at the end of January 2021, Poland managed to maintain the improvement in the number of new infections, however in March the “third wave” of the pandemic has appeared. A major risk factor is the emergence of new coronavirus mutations resistant to the currently available vaccines. Other risk factors include a possible delay in vaccinations and “social fatigue” with restrictions. The materialization of these risks would translate into an increase in the number of infections and deaths and an extension of the adverse impact of the pandemic on the economy, including the labor market, with all unfavorable consequences for the PZU Group’s insurance segment, such as a reduction in demand for voluntary non-life insurance and an increase in costs related to the disbursement of life and health insurance claims and, possibly, claims under hospital liability insurance. Another consequence might also be a drop in demand for group insurance and an increase in the loss ratio of contractual and financial insurance.
Any disruptions in the rollout of the recovery scenario, including the persistence of the pandemic and related restrictions, may also result in additional monetary policy easing, including interest rate cuts by the National Bank of Poland and a suppressed yield curve. This would translate unfavorably into the financial performance of the PZU Group, including its banks. Among others, it would curtail investment income and hinder the achievement of the required rates of return, which might trigger the need to lower the technical rate applied for discounting provisions in life insurance and provisions for the capitalized value of annuities in motor insurance. For banks, a delayed rebound in economic recovery would mean a reduction in interest margins amidst reduced demand for loans.
Legal and regulatory factors The PZU Group’s activity and operations are subject to the impact of both national regulations and European legislation.
In 2021, the regulations adopted in the previous year in connection with the outbreak of the COVID-19 pandemic and aimed at combating it, including restrictions on the conduct of business, and measures taken with a view to reducing the adverse impact of the pandemic on the economy, will be of decisive significance. These changes are described in SECTION 2.6 REGULATIONS PERTAINING TO THE INSURANCE MARKET AND THE FINANCIAL MARKETS IN POLAND.
Nominal salary growth in the national economy in % (y/y) 7.1 7.2 5.0 5.5
Unemployment rate in % (end of period) 5.8 5.2 6.2 6.0
NBP’s prime rate in % (end of period) 1.50 1.50 0.10 0.10 * Forecast as of 15 March 2021 Source: PZU’s Department of Macroeconomic Analyses the latter regulation, the competent regulatory authority has the power to impose a general prohibition or restriction of certain activities specified in the intervention and related to financial instruments, structured deposits and insurancebased investment products or a specific financial business or financial practice.
One of the more important factors in 2021 in the context of banks continues to be the issue of foreign currency mortgage loans. In the absence of a final systemic solution, the largest impact on the banking system will be exerted by court rulings handed down in lawsuits concerning specific loan agreements. A number of events (among others, the CJEU ruling of 3 October 2019) prompted a growing number of borrowers to adjudicate this dispute through litigation. This will have a strong adverse impact on the performance of banks, in particular banks with a large portfolio of these types of loans. So far, the main area of impact were the provisions recognized by banks in connection with the anticipated legal risk – they had a strong adverse impact on the sector’s results in 2020. According to most forecasts, the total costs for the sector may reach tens of billions of Polish zloty but are difficult to estimate and will be spread over time. Much will depend, among other factors, on the actual number of lawsuits filed (how many borrowers elect to litigate), interpretations adopted by national courts in individual cases, reactions of national regulatory institutions and steps taken by the banks themselves. Also, a scenario cannot be ruled out in which the CHF loan problem will be eventually solved by the adoption of appropriate legislative measures. Because the exposure of the PZU Group’s banks to foreign currency loans is minor compared to other banks operating in Poland, the direct impact of this phenomenon should be limited. However, any statutory or systemic regulations, including those having to do with the capital weakness of certain banks, that would translate into heavier burdens for the whole sector, might also affect the PZU Group’s banks.
46 47MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
In connection with the lockdown periods affecting the Polish economy and restrictions in the movement of people, in 2020 the loss ratio decreased in the key market segment of non-life insurance, namely motor own damage insurance and motor third party liability insurance. The frequency of claims decreased (as a result of less intense domestic and international traffic), although at the same time the average claim value increased. This was due to a lower number of minor claims, a shortage of spare parts due to the disruption of supply chains, causing a longer use of replacement vehicles, and higher costs of these parts due to the appreciation of the euro.
In life insurance, after the first three quarters of 2020, a decrease was recorded in the loss ratio in group and health insurance. It resulted from a lower number of deaths and a lower loss ratio of paramedical risks, chiefly in the areas of inpatient treatment, surgical operations, critical illness and permanent dismemberment, all caused by a lower number of reported claims. A major spike in the loss ratio in life insurance took place in Q4 along with a sharp increase in the number of deaths (+72.8% y/y). The elevated number of deaths persisted into the beginning of Q1 2021.
The slowdown in economic activity due to the COVID-19 pandemic also dampened the financial standing of the banking sector. The quality of the loan portfolio deteriorated, sales of loan products decreased and participation units in mutual funds were frequently redeemed due to the challenging situation on the financial markets. The gradual retreat of the pandemic and the onset of economic recovery should result in an improvement in the situation of the banking sector. Of key significance will be the scale of demand for banking services and the clients’ ability to timely pay their liabilities, itself largely dependent on the clients’ financial situation.
The operations and financial performance the PZU Group in distinct business areas will also be affected by evolving customer expectations. In particular, they concern the personalization of the offering and the provision of a quick and easy access to a comprehensive ecosystem of financial services. Also, other changes may occur in clients’ awareness, expectations and habits.
In turn, the Internet of Things includes smart-home devices such as washing machines, cleaning robots, refrigerators, bathroom scales, TV sets, air purifiers, light bulbs, wearables, smart watches and smart bands as well as cars fitted with smart features. They all collect, process and exchange huge amounts of data over the Internet. The concept of the Internet of Things also encompasses devices used in production (e.g. of food), sales, energy generation and distribution, waste management and even medical devices. And although smart cities are still a distant prospect, many conurbations are already adopting an increasing number of IoT solutions. Connecting all smart devices to the Internet opens up a lot of new opportunities, but also generates certain cybersecurity risks.
A detailed description of the factors that may affect the Group’s business in 2021, broken down into operating segments, is presented in SECTION 3 OPERATION OF THE PZU GROUP.
Client perspective. As the saying goes: “Do not do to others what is unpleasant to you”. “Who would be elated to receive a three page letter from a company or an official notice instead of half a page of text? And whom does the prospect of having to muddle through intricate wording please?” warned Grzegorz Zarzeczny, PhD from the Institute of Plain Polish at the University of Wrocław during the annual conference held by PZU’s Plain Language Department.
In this section: 1. Structure of the PZU Group 2. Non-life insurance (PZU, LINK4 and TUW PZUW) 3. Life insurance (PZU Życie) 4. Banking (Bank Pekao, Alior Bank) 5. Mutual funds and Employee Capital Schemes (TFI PZU) 6. International operations 7. Medical services (Health Area) 8. Pension funds (PTE PZU) 9. Other operating areas
We are strengthening our position as the financial services leader. The PZU Group’s brand spans insurance, banking products, mutual funds, pension funds and medical services.
50 51MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
PZU Ukraina Kiev - Ukraine PZU – 83.22922% PZU Życie – 0.00397% PZU Ukraine Życie – 16.7668%
PZU Ukraina Życie Kiev - Ukraine PZU – 53.4723% PZU Życie – 0.0053% PZU Ukraine – 46.5224%
LLC SOS Services Ukraine Kiev - Ukraine PZU Ukraina – 100.00%
Bank Pekao 5 Warsaw - Poland PZU – 20.00% Investments Funds menaged by TFI PZU – 0.02%
Centrum Medyczne św. Łukasza Częstochowa - Poland PZU Zdrowie – 100.00% RUCH SA
The following changes transpired in the structure of the PZU Group in 2020 up to the date of publication of these financial statements: • On 2 January 2020, Specjalistyczna Przychodnia
52 53MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
In non-motor insurance, the increase in gross written premium growth was affected mostly by higher sales of insurance against fire and other damage to property (up PLN 559 million, or 10.0% y/y, of which PLN 361 million was for direct activity), liability insurance (up PLN 97 million, 5.3% y/y) and assistance (up PLN 50 million, 5.2% y/y). A decline occurred only in various financial risk insurance products (down PLN 157 million, -18.9% y/y) and accident and sickness insurance (down PLN 196 million, -8.9% y/y).
Gross written premium of non-life insurers in Poland (in PLN million)
PZU Ukraine’s share of the non-life insurance market in Ukraine in the first three quarters of 2020 roku,
PZU Group’s motor insurance market share (direct activity) as at the end of Q3 2020 roku
PZU Życie’s share of periodic gross written premium in the first three quarters of 2020 roku
OFE PZU Złota Jesień’s share of total assets in the open-end pension funds operating in Poland at the end of 2020 roku
Lietuvos Draudimas’ share of the non-life insurance market in Lithuania at the end of 2020 roku
AAS Balta’s share of the non-life insurance market in Latvia in the first three quarters of 2020
* PZU Group – PZU, LINK, TUW PZUW ** PZU Group’s market share in non-life insurance on direct business Groups: Allianz – Allianz, Euler Hermes; Ergo Hestia – Ergo Hestia; Talanx – Warta, Europa; VIG – Compensa, , Inter-Risk, TUW TUW, Wiener (Gothaer); Generali - Generali, Concordia Source: Polish Insurance Chamber / KNF’s Quarterly Bulletin. Rynek ubezpieczeń [Insurance Market] 3/2020
After the first 3 quarters of 2020, the technical result of the nonlife insurance market rose PLN 243 million to PLN 2,362 million.
Non-life insurers estimated their net technical provisions at an aggregate amount of PLN 58,030 million, signifying 3.4% growth compared to the end of 2019.
PZU’s activity As the PZU Group’s parent company, PZU offers an extensive array of non-life insurance products, including motor insurance, property insurance, casualty insurance, agricultural insurance and third party liability insurance. At yearend 2020, motor insurance was the most important group of products offered by PZU, both in terms of the number of insurance agreements and its premium stated as a percentage of total gross written premium.
Faced with changing market conditions, PZU realigned its offering in 2020 to clients’ interests and needs by rolling out new products and innovative solutions.
PZU’s activities in the mass insurance segment: • in PZU Home insurance, it extended the scope of the assistance product to include the new personal data protection service, Alerty BIK. The service offers protection against unauthorized use of personal data by third parties, for example to take out a loan. Additionally, a Service Option clause was added to the private property insurance and the insurance cover of the Health Assistant product was modified. The Service Option is a new claims handling standard, in which the company organizes and pays for repairs following a water damage loss, instead of paying out a claim. The new Health Assistant product offers rehabilitation procedures to clients suffering from an orthopedic injury. Also, a new pricing tool Radar Live was introduced, which will enable an even better alignment of the offering with the client’s expectations and risks; • in the PZU Crops product, an additional limit of 10% was introduced to supplement the existing limits of 17% and 25% – in the risk of adverse effects of ground frost for grain and rape. Additionally, the limit of claims paid for total losses occurring after May 31st was increased from 85% to 90% to adapt it to market regulations; • expanded the scope of PZU Firma by adding the following: the PZU Cyber clause providing insurance cover, among others, against the consequences of cyberattacks and breaches of privacy regulations (including the GDPR and the Polish Personal Data Protection Act). In the event of a cyberattack, PZU will arrange for and cover the costs of assistance by incident management specialists, IT investigators, law firms and a PR agency, changes to make the offer more attractive for businesses, which included definitions, a catalog of liability inclusions and a catalog of additional clauses, which was extended; simplifications were introduced in the area of data collection to speed up the offering process, as well as system prompts pertaining to the insurance cover recommended by PZU depending on the business profile; • increased the appeal of General TPL insurance (independent product) and PZU Advisor for businesses, forwarders and IT service providers, by making changes to certain definitions and liability exclusions. The wording of some clauses, including forwarder’s third party liability, was modified; • rolled out the PZU against Cancer product for clients under the age of 65 who have not been diagnosed with cancer prior to enrolling in the insurance. The insurance offers funds needed for treatment in the event that a malignant neoplasm is diagnosed, including pre-invasive or non-malignant brain tumor. It also offers the possibility of obtaining an additional medical opinion from an international specialist; • changed the pricing of the PZU ADD insurance for athletes and in short-term contracts; • launched the UTO TPL insurance of personal transport devices to accompany the TPL insurance for owners of motor vehicles. The insurance covers losses caused by the use of a personal transport device, such as e.g. a bicycle, electric scooter or a segway transporter. A new rider to the TPL insurance for motor vehicle owners who are natural persons increases its appeal and differentiates the product on the competitive motor insurance market; • supplemented the PZU AUTO Assistance insurance with doctor consultations in the event of an accident of a bodily injury suffered in connection with the use of a vehicle. The additional benefit is an element of the medical insurance growth strategy in the PZU Group. Its purpose is to encourage clients to use medical care in PZU; • extended the coverage in the PZU AUTO Legal Protection insurance for businesses and their car fleets, mainly for corporate and fleet clients, to also include: assistance abroad provided over the phone for an owner or a driver of a vehicle insured with PZU; this product assistance in determining liability for a loss, protecting the client from being falsely attributed fault, legal consultation in Poland or abroad after an accident involving a vehicle insured with PZU, increased the sums insured to PLN 2,000 in the Komfort option and to PLN 50,000 in the Super option.
Modification of the legal protection insurance cover ensures comprehensive protection of a fleet and a corporate client and reduces its operating costs. PZU benefits by reducing the frequency and value of foreign losses in TPL insurance of motor vehicle owners; • added the PZU Motor Tires insurance to its offering, providing assistance and funding for clients with PZU Auto TPL or PZU Auto MOD for the repair or replacement of a damaged tire in a vehicle. This insurance stands out due to its very broad available cover, adjustable in accordance with the client’s needs. Another advantage is the largest assistance network on the market comprising over 700 PZU partners providing road assistance services.
In financial insurance, PZU was unswerving in its support for the Polish economy by providing insurance guarantees and securing the performance of contracts in such key areas as the power sector, the construction industry and the science and innovation sector. The most important activities related to the product offering were as follows • modified the Environmental guarantee product to secure claims by owners of waste, who are obligated to obtain a permit for collecting and processing waste; • introduced a financial loss insurance GAP in the dealer channel; • changed the risk assessment process for offering insurance guarantees, insurance of bank loans and GAP financial loss insurance.
In strategic partnerships, cooperation was based mostly on companies operating in the power sector through which PZU offers assistance services, e.g. the assistance of an electrician or a plumber as well as the newly introduced health assistance. PZU’s insurance offering is also present on the e-commerce market through cooperation with PLL LOT, iSpot and Allegro.
As the first insurance company on the Polish market, LINK4 started to provide public documents to clients in 2020 on a durable medium using the blockchain technology. Thanks to that, they have access to electronic versions of documents with a guarantee that they cannot be modified and removed over time. By doing this, the company satisfies legal requirements by using cutting-edge technology, making communication much easier, while reducing the need for mailing hard copy documents.
LINK4 was one of the first insurers in Poland to established the function of the Client Ombudsman in 2020 in cases that go beyond the available complaint paths.
TUW PZUW’s activity Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych (TUW PZUW) offers flexible insurance programs customized to the needs of the insured in terms of insurance cover and costs of the cover. Since 2016, it has been selling and handling commercial insurance products for various industries, focusing predominantly on cooperation with large enterprises, medical centers (hospitals and clinics), church entities and local government units.
TUW PZUW is consistently attuning its operating model to the growing scale of business by expanding its team of professionals, who provide comprehensive service of its members’ insurance and tailor the offering to the members’ individual preferences.
Factors, including threats and risks, that may affect the operations of the non-life insurance sector in 2021 In addition to chance events, such as flood, drought and spring ground frosts, the following risks are possible: • slower growth of new car sales, mainly in the dealership channel and financed by leasing companies, which may result in lower sales of motor insurance; • slowdown in the growth rate of gross written premium, mostly as a consequence of the motor insurance portfolio’s profitability generated in recent years, and thereby a rivalry to attract clients through an active pricing policy applied by competitors; • slowdown in the economic growth in Poland – the more challenging financial standing of companies may result in elevated credit risk, a higher loss ratio on the financial insurance portfolio and deceleration in the pace of gross written premium growth in both motor insurance (predominantly leases) and property non-life insurance; • the prospect of lower interest rates and their impact on the insurance industry; • increase in the prices of spare parts due to the depreciation of Polish zloty against the euro and limited production and interrupted deliveries as a result of COVID-19, affect claims handling expenses; • increase in the loss ratio may be expected to appear in the area of insurance guarantees, job loss insurance and low own contribution insurance for mortgage loans as a result of the continuing pandemic; • reduced demand for voluntary insurance (due to a higher unemployment rate and a decline in employment) which may result from the persisting COVID-19 pandemic; • changes in trends and behavior of client seeking customized proposals and an electronic, swift conclusion of agreements and handling insurance, forcing insurers to adapt to these new expectations rapidly; • increase of insurance fraud as a result of the more difficult situation in numerous industries, increasing unemployment and lower employment rates; • introduction of additional regulations or financial burdens on insurance undertakings.
Market situation After three quarters of 2020, the life insurance market in Poland, measured by gross written premium, was worth PLN 15,395 million, meaning that over the most recent 5 years it contracted on average by 3.6% per annum. At the same time, the premiums collected during the three quarters were 3.1% lower than those in the corresponding period of 2019. This resulted principally from the evolution in the single premium business in investment products. Gross written premium in periodic premium products has increased both in life insurance (class I) and in accident and illness insurance (class V).
The outcome of this market evolution was the expanding significance of periodic premium that constitutes PZU Życie’s competitive edge on the market. During the three quarters of 2020, premium with this payment form was 2.6% higher compared to the same period in 2019, with a cumulative average growth rate of 1.1% for the last 5 years. Despite the declining periodic premium in unit-linked life insurance (by PLN 197 million y/y), the premium in protection products in classes I and V continues to trend upward (PLN +511 million y/y), in both group products (PLN +170 million y/y) and individually purchased insurance (up by PLN 117 million y/y).
The total technical result generated by life insurers in Q1-Q3 2020 was up PLN 176 million (+6.9% y/y) from the corresponding period of 2019 to PLN 2,718 million. An increase occurred only in the accident and illness insurance class (class V) – by PLN 352 million (+24.1% y/y). It resulted from an increase in net earned premium with a simultaneous decline in claims and benefits (the impact of temporary social isolation due to the pandemic and therefore lower accessibility of medical services).
In this same period, life insurers generated a net result of PLN 2,175 million, representing a PLN 114 million (5.5%) increase y/y. This is the effect of the technical result being better than in the corresponding period of 2019, with a simultaneous unfavorable impact of investment performance realized on insurers’ free funds.
The total value of the investments made by life insurers at the end of Q3 2020 was PLN 42,259 million, signifying a 4.8% growth compared to the end of 2019. However, the high level of claims paid out, which exceeded the level of contributions to funds led to a lower net asset value of life insurance in which the policyholder bears the investment risk (down 5.9% to PLN 46,141 million).
PZU Życie’s activity Within the PZU Group, PZU Życie operates on the Polish life insurance market. The company offers an extensive range of life insurance products, which for management purposes are reported and analyzed broken down into the following three segments: • group and individually continued insurance; • individual insurance; • investment contracts.
The changes in the level and the growth rate of the life insurance market premium in recent years have been stimulated mostly by single premiums in investment products. Similarly, the premium contraction for the overall market year on year pertained to single premiums (down PLN 825 million, i.e. -24.1% y/y, compared to -17.0% in the previous year). The changes in circumstances on the capital market and in the legal environment should be considered to be the underlying causes for the gross written premium on single premium business to fall in a trend over several years. The low interest rates and the tax on short-term endowment insurance products with fixed or index-based rates of return, which was introduced in 2015, contributed to the declining interest in those investment products and caused them to be gradually
During Q1-Q3 2020, PZU Życie wrote 42.3% of the gross written premium of all life insurers on the market, signifying further growth on top of last year’s market share (2.4 p.p.). The reason for the increase is the higher level of single gross written premium than a year earlier (both among protection insurance products and investment insurance products) with a decrease in the share of other market participants (mainly in the unitlinked life insurance class).
PZU Życie’s technical result represented more than half the result earned by all life insurance companies. This evidences the high profitability these products enjoy. PZU Życie’s technical result margin on gross written premium was 1.7 times higher than the overall margin generated by other companies offering life insurance (23.3% versus 13.5%).
Under group and health insurance, PZU Życie took the following actions in 2020: • added a new insurance rider, “Child Cover”, to the offering of PZU Cover and Health and PZU Life Protection products. The rider includes three additional risks: critical illness (26 diseases), hospitalization as a result of an illness or accident, and the child’s health loss. The insurance covers children less than 18 years of age. Insurance riders are available in two variants which differ in the amount of the sum insured with the premium amount independent of the number of children covered. The insured has the option to decide on his or her own whether or not to extend the cover with a new rider (My Choice); extended the P Plus group insurance offering with the following three new riders designed to provide insurance cover for children: accidental dismemberment of a child, hospitalization of a child caused by an accident or illness, occurrence of a critical illness of a child (26 different diseases).
Each of these riders may be extended to include medical services, among others consultations with specialist physicians and rehabilitation; • introduced a pilot of the PZU Cover for Farmers product for natural persons who are owners and co-owners of an agricultural farm. Insurance cover may also include their spouses or life partners and adult children. The advantages of this offering include high benefits in the event of accidents and protection for additional risk, addressed only to this group of clients: i.e. death of the insured as a result of an accident at agricultural work. A client may choose from four options of the offering; • launched an industry-specific offer in the PZU Cover and Health and PZU Life under Cover insurance. In this offer, clients may choose a non-standard sum insured and higher benefits for specific permanent dismemberments, which are more prevalent for people employed in specific industries. The scope, and even the graphic design, of each offer refers to the industry, for which it has been developed; • extended the corporate insurance offering by adding new insurance riders against the loss of abilities in everyday life. It is the first product of this type on the Polish market. It ensures financial support if, as a result of illness or accident, the insured loses his/her ability or skill affecting the quality of his/her everyday life and work (such as e.g. sight, hearing, speech, walking, standing, sitting, bending). The key advantage of the PZU Życie’s offering over the products existing on the market, in terms of permanent inability to work and/or function independently is the lack of an obligation to present ZUS decisions on inability to work as well as simple and easy to understand definitions of impairment. The money received from insurance may provide assistance, for instance in rearranging the insured’s apartment or vehicle to the new requirements arising from his or her disability, hiring a rehabilitation specialist or home assistant, or settling current liabilities. In July 2020, a new insurance rider supplemented the PZU Cover and Health and PZU Life under Cover offer; • launched sales of PZU Thinking about Life and Health product for companies employing up to 4 people. Employees may select from among 6 insurance options with different covers and benefit amounts. Each option may be extended to include private medical care. The insurance covers have been prepared to address different needs, depending on the client’s stage in life. Agreements are concluded remotely via the mojePZU portal. PZU Życie can insure even a single employee – also when an employer itself does not take out a cover; • supplemented the PZU Cover and Health and PZU Life under Cover offer to include riders for the insured’s spouse: hospital treatment, surgical operations and permanent dismemberment. The new riders extended the cover for spouses and enhanced the competitiveness of the whole offer; • updated selected insurance riders for the P Plus group insurance (among others, critical illness of the insured/ spouse, specialist treatment). The changes involved mainly adaptation of the definition to the current medical knowledge and simplification of enrollment. In the specialist treatment rider the scope of covered medical procedures was extended (from 6 to 10), thus improving the competitiveness of the agreement.
PZU Życie’s efforts in the area of individual protection insurance and protection and unit-linked insurance: • implemented pioneering insurance riders covering the loss of abilities in everyday life. The product, just like the new one offered in group and health insurance, ensures financial support if, as a result of illness or accident, the insured loses his/her abilities affecting the quality of his/her everyday life and work; • modified the insurance rider covering death caused by a motor accident and introduction of a promotion under the name „Additional sums insured” The purpose of this campaign is to incentivize clients to purchase insurance riders offered under protection and unit-linked products. The campaign focuses on increasing the sum insured in the insurance rider selected by the client without charging an additional premium; • introduced three insurance riders covering critical illness, hospital treatment and surgical operations, covering the largest in Poland list of critical illnesses. These products
Life insurers – percentage of periodic gross written premium in Q1-Q3 2020 (%)
Thanks to the new cover and the numerous changes introduced over the past dozen or so months, PZU’s individual life and health insurance offer has become one of the broadest and the most competitive in the Polish market.
These person may pay into IRSA up to 1.8 times the average forecasted monthly salary in the national economy for the given year. Other clients may pay into IRSA up to 1.2 times the average forecasted monthly salary for the given year.
PZU Życie cooperated actively with 4 banks, including the PZU Group’s banks, continuing the roll-out of a comprehensive offering using the banks’ distribution networks. The cooperation with Bank Pekao and Alior Bank allows PZU Życie to gradually expand the offering and volume of sales of insurance products linked to bank products. In 2020, life insurance for borrowers of Alior Bank’s mortgage loans was launched.
In the case of unit-linked products, sold by Bank Millennium, Bank Pekao and Alior Bank, promotional fees were offered to clients, which increased the attractiveness and competitiveness of the offer in the market. For the time of the pandemic, additional functionalities were launched in the self-service channels, facilitating client access and servicing of concluded agreements.
Factors, including threats and risks, that may affect the operations of the life insurance sector in 2021 The main risk factors include: • the COVID-19 pandemic and its social and economic consequences, in particular deterioration of the financial standing of businesses and employees from industries affected by the restrictions and the related problems with maintaining and paying for the policies, and the higher death rates among Poles and the need to develop modern, remote solutions for product distribution and service; • availability of medical personnel in public health care; • the prospect of lower interest rates and their impact on the insurance industry; • softer conditions on the capital markets deteriorating the attractiveness of products, especially unit-linked products; • demographic changes and the aging society and the ensuing changes in the mortality and fertility levels; • constant price pressure in group insurance and the battle for client ownership (and client data), thereby cutting the insurer’s margins, reducing the quality of the product and fostering entry and exit obstacles for clients to overcome with independent intermediaries; • changes in client trends and behaviors towards customization of the offering; • possible product intervention of the regulatory authority in the unit-linked fund segment; • the emergence of new competitors and solutions from outside the insurance industry, including the operators of large client bases or insurtechs; • continued development of the new pension security system (Employee Capital Schemes) and its impact on the products existing in the 3rd pillar of the pension system.
Market situation In 2020, in connection with the COVID-19 pandemic, the balance of the banking sector was put to a test, and the results of a number of players were burdened with additional provisions. Despite that, banks managed to go through this phase of the crisis with stability. Polish banks started 2020 with, among others, efforts to adapt to the CJEU judgments concerning mortgage loans in foreign currencies and the so-called “small CJEU” concerning consumer loans. However, additional challenges associated with COVID-19 arose quickly. The pandemic spreading across the globe has pushed the global economy into a crisis at a scale not previously seen in the post-war history. Poland entered recession already in the second quarter and has not managed to make up for the losses before the end of the year. Deterioration of economic activity had direct impact on the results of the banking sector. Additionally, the sector had to struggle with record low interest rates. This was one of the instruments which the MPC introduced in order to support the economy during the slowdown period.
Return on equity in 2020 was gradually dropping, starting from March. In 2020, ROE in the banking sector stood at 3.38%, which was the lowest since 2012. Compared to 2019, it fell by 3.35 p.p.
Loans and advances in December 2020 stood at PLN 1,295 billion, down 0.2% y/y, which is a sign of the slowdown of the lending activity as the crisis developed. Despite lower interest rates, the growth rate of deposits increased noticeably. At the end of December 2020 they increased to PLN 1,688 billion, i.e. 14.2% y/y.
PZU Group’s activity laid down in the CRR Regulation1, was PLN 227.5 billion, up 8.1% from the end of September 2019.
Operations of the Pekao Group Bank Pekao is a universal commercial bank offering a full range of banking services provided to individual and institutional clients operating chiefly in Poland. The Bank Pekao Group consists of financial institutions operating on the following markets: banking, asset management, brokerage services, transaction advisory, leasing and factoring. From 2017 Bank Pekao has been part of the PZU Group.
1 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012
Caring about client safety, Bank Pekao was one of the first banks to increase the limit for contactless payments to PLN 100, without authorization required, for all Bank Pekao clients using payment and credit cards.
Moreover, to alleviate the adverse consequences of the COVID-19 pandemic on the operation of enterprises, Bank Pekao signed a portfolio agreement with Bank Gospodarstwa Krajowego regarding a de minimis guarantee facility. As a result, clients from the micro business and SME sector could secure their loans with a guarantee granted on special terms, and portfolio guarantee agreement with BGK under the Liquidity Guarantee Fund. In addition, Pekao signed an agreement with the European Investment Fund pertaining to free guarantees for loans for micro businesses.
In 2020 Pekao opened 409 thousand new accounts. The account sales were driven by the innovative solutions introduced for clients, including primarily opening accounts using a selfie based on biometrics and implementation of the PeoPay KIDS package. In 2020, 26% accounts for retail clients were initiated online, which was four times more than in 2019. In the best months, as much as one out of three accounts was opened this way.
In June 2020, the bank released the PeoPay KIDS app developed specifically for children aged between 6 and 13. The app lets children learn in an easy and accessible manner how to save and manage their money. Children may also obtain their own PeoPay KIDS payment card to let them make purchases in stores and withdraw cash. PeoPay KIDS is linked to the parent panel in the PeoPay app and Pekao24 online banking. All child transactions require a parent’s authorization. Thanks to an intensive advertising campaign, Pekao acquired over 37 thousand PeoPay KIDS packages. As a result, the growth rate of the number of child accounts reached 31% y/y.
In September 2020, the bank’s clients holding Visa Debit Gold and Visa Business debit cards were given the possibility of connecting them to Apple Pay. The service allows for quick contactless payments using Apple devices, such as iPhone, Apple Watch or iPad. To use these convenient payments, you just need to activate Apple Pay in the PeoPay app or add the card directly in Apple Wallet.
Since December 2020, the bank’s clients may enjoy the benefits of Google Pay. The service is available to holders of Mastercard and VISA cards.
Pekao TFI The Pekao Mutual Fund Management Company (Pekao TFI) is member of the Pekao Group. It is the oldest mutual fund company in Poland. Pekao TFI provides clients with modern financial products and offers opportunities to invest in the largest capital markets on the globe. For many years it has been devising savings programs, including programs affording an opportunity to put aside more money for retirement under the third retirement pillar. Pekao TFI also offers portfolio management services and Employee Capital Schemes (ECSs). The company is in the ECS records and its offering is available also through the mojeppk.pl portal.
Alior Bank provides services predominantly to clients from Poland. In 2017, Alior Bank opened a foreign branch in Romania, offering retail banking products and services.
New products and services In 2020, Alior Bank focused on solutions which provided clients with online access to products and services, without the need to visit branches. Among the projects, the solutions supporting remote verification of identity were of key importance. This is an area that was being developed as a priority, to provide clients with convenient, fast and safe access to Alior Bank’s offering, at any time and in any place, also in the unique conditions created by the COVID-19 pandemic.
The first big project in 2020 of this category was the investment in the Autenti fintech. The platform developed by Autenti is used for authorization of documents and concluding agreements online, using all available sIDAS e-signatures: standard, advanced and qualified.
In Q1 2020, Alior Bank implemented also a proprietary client identity verification method without the need to visit a branch. Thanks to the FOTO ID method, the identity verification method takes no more than 5 minutes. At the same time, the solution is intuitive and does not require advanced digital skills.
Micro businesses were offered a fully remote borrowing process, based on the Foto ID method and the Autenti platform. The existing and new clients from this segment may obtain financing up to PLN 200 thousand without having to visit a branch. This comfortable solution comprises working capital loans in the form of a BGK guarantee and repayment period of up to 3 years.
From H2 2020, business clients may also sign, in Alior Bank’s branches, Employee Capital Scheme management agreements with the TFI PZU – inPZU SFIO ECS.
Situation on the mutual fund market As at the end of 2020, assets under management of domestic mutual funds were nearly PLN 280.5 billion, compared to 268.0 billion at the end of 2019, representing an increase by 4.7%.
As at the end of 2020, TFI PZU had 50 funds and sub-funds in its portfolio, including 9 ECS sub-funds.
The basic (mandatory) contribution from the employer, equals 1.5% of the employee’s monthly salary forming the basis for calculation of contributions for retirement and disability insurance. The amount of the employer’s additional (voluntary) contribution is up to 2.5% of the employee’s salary.
The money collected on the ECS account, coming both from own contributions and from contributions made by the employer and State Treasury subsidies, are fully owned by the employee and are inherited. The idea behind ECS is to accumulate savings for the future, when the employee turns payments made by employees, employers and the State Treasury. These funds attracted the most money in 2020 (over PLN 2 billion). Net inflows were also recorded by mixed funds (PLN 1.7 billion) and commodity funds (PLN 0.6 billion).
I at least 250 persons 31 December 2018 1 July 2019 until 25 October
III 20 – 49 persons 31 December 2019 1 July 2020 until 27 October
public finance sector entities (regardless of the number of employees) n/a 1 January 2021 until 26 March 2021 until 10 April 2021 other employers until 23 April 2021 until 10 May 2021
The largest increase in TFI PZU assets was posted by the following funds: PZU Papierów Dłużnych POLONEZ (up PLN 632 million), inPZU Inwestycji Ostrożnych (up PLN 254 million), PZU Stabilnego Wzrostu MAZUREK (up PLN 178 million), PZU SEJF+ (up PLN 168 million), PZU Akcji KRAKOWIAK (up PLN 139 million), PPK inPZU 2035 (up PLN 72 million), PPK inPZU 2040 (up PLN 68 million), PZU FIZ AKORD (up PLN 65 million), PPK inPZU 2030 (up PLN 61 million) and PPK inPZU 2045 (up PLN 60 million).
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TFI PZU is the leader in the pension product segment. At yearend 2020, it accumulated net assets in the amount of PLN 5.1 billion in Employee Pension Schemes.
Factors, including threats and risks, which may affect the operations of mutual funds and Employee Capital Schemes in 2021 The condition and performance of the market for mutual funds and Employee Capital Schemes will depend mainly on the following: • macroeconomic situation (including the rate of GDP growth, the unemployment rate and the inflation rate in Poland and throughout Europe) affecting the financial standing of enterprises and households; • the condition of Polish economy and global economies as a result of the restrictions associated with the COVID-19 pandemic; • effectiveness of the COVID-19 vaccinations and the pace of the vaccination campaigns in individual countries; • actions taken by central bank (Federal Reserve System – FED, European Central Bank – ECB, Bank of Japan, People’s Bank of China) translating into global money supply and liquidity on the financial markets; • continuation of the record low interest rates which affect the attractiveness of bank deposits while increasing the attractiveness of alternative forms of investments; • uncertainties related to privacy and technology regulations, new taxes and the enactment of antitrust regulations; • interest in savings in ECS among employees in the IV stage of the reform, affecting the amount of money accumulated in ECS funds.
Real property insurance was resistant to the crisis. The premium written growth in this group remained at 8.0%. The health insurance sales, which dynamically increased in 2019, slowed down by 1.2% from the beginning of 2020.
As of the end of December 2020, there were 11 companies operating in the non-life insurance sector, including 7 branches of insurance companies seated in other EU member states. The number of companies dropped in comparison to last year after the Compensa and Seesam merger in July 2020.
Gross premiums accumulated by Lithuanian life insurance companies in 2020 were EUR 291 million, up 7.5% relative to 2019. The increase was generated by regular premiums, increasing by 7.7%, and single premiums growing by 4.9%.
In the life insurance structure, unit-linked insurance represented the largest share at 65.1% of the portfolio value. Traditional life insurance accounted for 14.2% of written premium.
The value of new business dropped by 20.4%, which resulted from the restrictions imposed due to the pandemic. Premiums from the sale of new unit-linked products dropped 25.3%, and from the sale of new endowment products by 38.7%. Only premiums from the sale of life products increased – by 8.3%.
The Lithuanian life insurance market is highly concentrated. As at the end of December 2020, 8 companies operated in this sector but the share held by the 4 largest life insurance companies in total gross written premium was 78.1%.
At the end of 2020, 10 insurance companies operated on the Latvian non-life insurance market; the top 4 insurers held 68.8% of the market.
The structure of non-life insurance in 2020 was dominated by motor insurance, with 57.2% market share (including MOD motor insurance accounting for 31.1%). 29.1% of the gross written premium in the market, in turn, was collected on property insurance.
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The share in the Estonian non-life insurance market in 2020 was 14.7%, and the accumulated gross written premium was EUR 56 million, down 10.4% relative to 2019. The biggest drop in sales was recorded in motor insurance (by EUR 5 million, i.e. 12.2%), which was mainly the effect of the restrictions introduced in connection with the COVID-19 pandemic.
Activity of PZU in Ukraine As of the end of June 2020, the supervision over the insurance market in Ukraine was taken over by the National Bank of Ukraine. This change resulted in, among other things, final implementation of the regulations on the solvency levels required of insurance undertakings, which, in turn, led to termination of operations by some entities and the contraction of the financial and property insurance market. The Ukrainian insurance market after Q3 2020 posted a 18.7% decline in gross written premium to UAH 33 billion. The premium written for non-life insurance was UAH 29.4 billion, down 21.1% compared to the corresponding period of 2019. In addition to the reduction of the number of insurance companies, the lower sales were also attributable to the COVID-19 pandemic. As a result of the travel restrictions, significant sales declines were recorded in motor TPL and MOD insurance, green card and travel insurance. As at the end of September 2020, insurance companies offering life insurance collected gross written premium of UAH 3.6 billion, signifying 8.4% growth compared to the corresponding period of the previous year.
The Ukrainian insurance market is highly fragmented. As at the end of September 2020, 215 insurance companies operated in the country, 20 of which offered life insurance. Despite the number of insurers that continues to be large, the top 100 nonlife insurers generated 99% of gross written premium, while the top 10 life insurers generated 97% of written premium.
On the Ukrainian market, the PZU Group operates insurance business via two companies: PrJSC IC PZU Ukraine (PZU Ukraine) (a non-life insurance company), and PrJSC IC PZU Ukraine Life (PZU Ukraine Life) (a life insurance company). In addition, LLC SOS Services Ukraine offers assistance services.
In 2020, gross written premium collected by PZU Ukraine was UAH 1,486 million, 13.1% lower than in the previous year. The restrictions introduced in connection with the COVID-19 pandemic affected the sale of travel and TPL insurance, required, among others, during submission of Polish visa applications (a 47.1% decrease) and green card insurance (a 39.3% decrease). In 2020, gross written premium collected by PZU Ukraine Life, in turn, was UAH 538 million, up 2.8% from 2019.
During three quarters of 2020, PZU Ukraine obtained 3.8% (up by 0.3 percentage points compared to the first three quarters of 2019) of the gross written premium on the Ukrainian non-life insurance sector, which enabled the company to come seventh on the non-life insurance market. The fourth place in the life insurance market went to PZU Ukraine Life with a 11.0% market share (down 0.3 percentage points relative to the previous year)3.
Development of the non-insurance health offering of PZU Zdrowie Responding to the changing market environment, PZU Zdrowie adapted its offering to client expectations, introducing innovative solutions: • In January 2020, PZU Zdrowie’s own sales network started to sell subscription-based medical care, mainly for strategic corporate clients. Rules for internal communication with other PZU Group companies and for work on the shared portfolio were prepared to generate the best possible synergy, and the following were developed: standardized Sales Contacts Report (CRM), uniform documentation necessary for the execution of agreements, rules for cooperation with external sales agents and brokers, promotional and communication materials for the subscription product and occupational medicine; • Within the structures of PZU Zdrowie, a tender offering area was established. Its key purpose is to align the product offering to the individual expectations of strategic tendering clients, in accordance with the tendering roadmap prepared by the company; • Pilot sales of a product designed for seniors, named Caring for seniors, were launched. The offer provides for the use of geolocation bands for seniors, which monitor their basic life parameters and help summon assistance in life-threatening situations. The product also includes a medical package enabling prompt doctor consultations and tests – both stationary and remote; • In August 2020, the Safe Hotel package was introduced for owners of hotel facilities, increasing the safety of hotel guests and providing telemedical care during their stay; • As part of the non-standard subscription offer, the following were implemented: update of the subscription for Tauron’s clients – as part of the offer, prepared in cooperation with TUW PZUW, the possibility of concluding agreements for 36 months was introduced and the limits can be set based on the calendar year, rather than policy year, as before, subscription for PGNIG’s clients – comprises a medical package offered in cooperation with TUW PZUW, medical packages (vouchers) for car service garage employees – a solution delivered in cooperation with PZU Pomoc, update of additional services, such as: elemedical consultations, rental of rehabilitation equipment, hospital consultant, hospital advisor, ambulance transport, ad hoc oral medicine help, same-day surgery – scheduled surgical procedures are performed and the patient is discharged from hospital on the same day or within 24 hours of the surgery. The service includes: limited qualification consultations by a physician of the relevant medical specialty, anesthesiological consultation, surgical procedure, required diagnostic tests accompanying the procedure and prescribed by the physician during hospitalization, anesthesia, dressing materials, medical care, cost of medicines prescribed as part of the service, post-operation check-up.
Each of these types of insurance may be extended to cover medical services adapted to the events covered by insurance. PZU Zdrowie organizes, among others, consultations of specialist physicians and rehabilitation, to minimize the risk of complications.
Activities carried out in 2020 Development of medical infrastructure • PZU Zdrowie became the sole owner of Centrum Medyczne
Gamma – one of the leading orthopedic centers in Poland; • another greenfield PZU Zdrowie center was opened, introducing a number of innovative solutions aimed at providing better patient service and equipping it with modern equipment. The center is located in the modern office complex Varso at ul. Chmielna in Warsaw; • as part of PZU Zdrowie’s Tomma Diagnostyka Obrazowa network, new magnetic resonance imaging (MRI) laboratories were opened in Wrocław and Częstochowa; • the service provider network was expanded by further centers, thanks to which PZU Zdrowie’s partner network comprises already 2,200 centers; • in own centers in Warsaw, Kraków, Poznań and Wrocław, PZU Zdrowie was developing the dental services launched in 2019.
The broad range of health products is adapted to the segment’s and clients’ needs.
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PZU Group’s activity has accelerated significantly. As a result, remote solutions, in particular telemedicine, will become the most important trend in the coming years. PZU Zdrowie is addressing these needs today, by implementing innovations in its medical centers and in patient services: • AccuVein vein imaging device designed to support the nursing staff at blood specimen collection points. It uses a laser to display veins in patients whose veins are either invisible or impalpable, thereby minimizing the risk of painful insertions of a needle, which is especially important when the patients are children; • StethoMe electronic stethoscope – in combination with headphones, the device may be used as a traditional stethoscope, which additionally recognizes and appropriately amplifies sounds originating in the lungs or in the heart. When integrated with a dedicated tablet app, the stethoscope supports the diagnosis of lung diseases in adults and children using medically certified artificial intelligence algorithms; • portable USG Lumify heads are used among others by orthopedists for joint injections. Thanks to this device, in many cases procedures may be carried out without a need for an additional USG test. The device connects directly to a tablet, allowing a physician to perform the test in any location; • monitors in doctor’s offices with visualizations of medical models aid physicians in explaining medical problems to patients, thereby allowing the patient to take an active part in the diagnosis process; • electronic consents with biometric signature – patients, who visit a PZU Zdrowie center for the first time, may place their signature on a tablet and that signature is as valid as one on a paper document. Biometric signature makes the document circulation easier and helps in the digitization of medical documentation; • artificial intelligence in stroke diagnostics – Tomma Diagnostyka Obrazowa SA, which is owned by PZU Zdrowie, cooperated with the Polish start-up by the name of BrainScan, to become one of the first companies in Poland to launch a pilot in August 2020 for a solution, which uses artificial intelligence algorithms to identify strokes in computed tomography tests. This method supports the work of radiologists and helps detect a life-threatening change lesions automatically. Thanks to this cuttingedge solution, the time needed to prepare a description whenever a stroke is detected has been reduced from several hours to just a few minutes, which allows patients to be assisted quickly. This method reduces the likelihood of severe brain damage and increases the patient’s chances of survival; • tele-rehabilitation – allows patients to perform rehabilitation exercises at home by using controllers connected to a personal computer. The pilot of the solution has been conducted since December 2020 in the PZU Zdrowie Medicus Medical Center in Opole.
PZU was the first insurer in Poland to appoint a Health Ombudsman. The PZU Health Ombudsman is a unique function, which has no equal in the entire private medical care and insurance market. The main responsibility is to carry out a dialog with patients and to support them on every stage of interaction with health care operators – from the moment of purchase to visits or examinations in a medical center. The Health Ombudsman will maintain impartiality when reviewing patient cases, assessing the quality of service and procedures in an objective manner. Close contact with patients will allow him or her to have real impact on the development of new solutions and health products. In addition to contacts with customers, the Health Ombudsman also promotes health and prevention activities undertaken by PZU.
Assumptions for the project of redesigning the operating model of OFEs: • universal pension fund management companies (PTEs)
OFE members may submit a declaration on the transfer of assets from OFE to the Demographic Reserve Fund (FRD) at the Social Insurance Institution (ZUS) and have the value of the transferred funds added to their capital accumulated on the Social Insurance Fund account. There will be no conversion fee if the OFE member selects this option. The funds accumulated in ZUS will not be inheritable, and future pensions will be subject to income tax in accordance with the rate of the applicable tax bracket, under the umbrella SFIO established as a result of the transformation of OFE, a pre-retirement sub-fund will be separated for the accumulation of assets owned by fund participants approaching the retirement age, the investment policy of the pre-retirement fund will be aligned with the age group of the insureds, meaning that the fund’s investment risk will be significantly limited by statutorily imposed investment limits, the fees charged by the mutual fund management company for managing the assets of open-end pension funds transformed into individual retirement accounts as well as all other fees and costs will be strictly limited.
No transition period has been envisaged for adapting the activity of the transformed open-end pension funds to the provisions on mutual fund management companies. From the day of transformation into a mutual fund management company, the universal pension fund management company will be required to apply the provisions of the Act on Mutual Funds and the implementing regulations to this Act as well as the provisions of Community law pertaining to collective investment institutions and managers. Such provisions include in particular the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositories, leverage, transparency and supervision.
This approach signifies an evolution in client relations. PZU ceases to be only a seller of insurance and becomes a risk management advisor.
PZU Finanse PZU Finanse Sp. z o.o. is a service company established to keep accounting ledgers for subsidiaries of the PZU Group (excluding PZU and PZU Życie).
PZU Cash The line of business of PZU Cash is brokerage in granting cash loans in the form of an employee benefit. It operates through the Cash lending platform, while the offer is presented by Alior Bank. The Cash portal is an innovative solution on the Polish market that enables employees to take out online loans. The loan offer is targeted at employees of those companies that have established cooperation with PZU Cash.
PZU Corporate Member Limited On 28 September 2017, PZU acquired shares in PZU Corporate Member Limited, entitling it to 100% of votes at the shareholder meeting. The company is a member of Lloyd’s, a market for insurance companies, brokers and agents, bringing together nearly 100 syndicates. PZU Corporate Member is handled by Argenta Holdings Limited agency, which deals with the ongoing activities of syndicates, invests their funds and employs underwriters.
Armatura Kraków Since October 1999, the PZU Group has held an equity stake in Armatura Kraków and since November 2020, PZU has been the sole shareholder.
In this section: 1. #newPZU strategy 2. Strategy operationalization 3. CSR strategy execution in 2020 4. Execution of the #newPZU strategy in 2020
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The strategy update called for an increase in the frequency and quality of client interactions during every stage of life, anytime and anywhere PZU can lend a helping hand. The establishment of long-term, partnership-based relationships was defined as the provision of products and services tailored to the client’s needs, requirements and capabilities, also in terms of price, at the right place and time.
available in the PZU Group to improve understanding of the client’s needs and increase the efficiency customer service.
In order to create the appropriate business environment and attain these targets, the area of client interactions was redefined from scratch. This entailed an alteration to the philosophy of how the overall Group operates. Distinct business units came under the umbrella of an a single integrated system, based on innovative solutions and enabling the provision of full-scale customer service.
PZU* RSA NN Allianz Zurich Aviva** Hannover Re VIG** Generali Talanx AXA Munich Re SCOR
To enable the achievement of the PZU Group’s strategic goals for 2016-2020, 12 initiatives were pursued in the following four areas: • data analysis; • cross-selling; • digitalization of processes; • interactions with clients.
Continuation of work on the project to rescue drivers’ lives – PZU GO
Universalization of the sales network – distributing PZU Życie products through PZU’s Tied Agent network
#4 Cooperation with banks Initiative: cooperate with the PZU Group’s banking segment
Purpose: • sell insurance to the clients of Bank Pekao and Alior Bank; • acquire PZU’s insurance clients for the banks; • generate savings in procurement, IT and real estate.
Metrics: premium in the banking channel, cost cutting as a result of collaborating with banks, number of clients attracted to the Group’s banks.
Execution: In 2020, the development of real-time price optimization tools continued. Solutions were also rolled out to support dynamic pricing to satisfy risk and client requirements and enhance the competitiveness of the offer while simultaneously increasing profitability.
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Execution: • in 2020 there were continued works to make a number of product enhancements for clients. New products and functionalities were rolled out to support more rapid customization of the offer to meet client needs, for instance, POZ Ochrona and POZ Zdrowie, as well as a number of smaller enhancements, such as creating a health questionnaire on the enrollment form to underwrite insurance risk more precisely. A number of service-related improvements were also implemeted, new and simpler documents to confirm the conclusion of a contract were drafted and product parametrization was adjusted. In the near future there are plans to streamline the process of managing negotiations between agents / sellers and the client.
#6 Converting the sales network into a general sales network Initiative: modify PZU’s own networks in the direction of becoming more universal in nature. This project applies to channels fully controlled by the PZU Group: branches, tied agents in life and non-life insurance and the corporate sales network.
Group’s proprietary network, by 2020; • distribution of at least 3 of the 5 lines of business (life insurance, non-life insurance, medical care, investment products, banking products) by general salespersons.
Execution: • In 2020, there were over 5,000 general salespersons • The execution of the goals related to universalizing the sales network was continued, i.e. distributing PZU Życie products through the PZU tied agents network. These solutions have made it possible to extend the distribution of life products and drive up sales effectiveness.
#7 Development of sales in PZU Zdrowie Initiative: build PZU Zdrowie’s size and profitability. Build a competitive edge by tapping into technology and the high quality and accessibility of services.
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• offer a modern patient service process giving consideration to the best practices on the market, innovative technological and medical solutions and highest service standards, including VIP care; • develop a network of proprietary centers through greenfield and M&A projects.
Purpose: • achieve cost synergies (one factory of investment products); • ratchet up sales by deploying new investment products based on indices or on what is known as life cycle; • utilize the changes ensuing from the reform of the pension system (introduction of Employee Capital Schemes); • improve the net result on asset management.
Execution: • Signing of ECS management contracts in 2020 with almost 20,000 companies employing between 20 and 249 staff, making TFI PZU a leader in this segment, with a 35% market share. At yearend 2020, TFI PZU had a total of over 35,000 ECS management contracts, including with companies employing at least 250 staff, in respect of which the requirement to establish the Schemes came into force already in 2019, and with companies employing fewer than 20 staff and public sector institutions required to establish the Schemes in 2021; • Thanks to the cooperation with Goldman Sachs Asset Management initiated in 2019, in January 2020 it was possible to launch two new passive funds: inPZU Goldman Sachs ActiveBeta Akcje Amerykańskich Dużych Spółek and inPZU Goldman Sachs ActiveBeta Akcje Rynków Wschodzących. In addition, the Akcje CEEplus inPZU subfund was launched. It was created in cooperation with the Warsaw Stock Exchange and is based on the WSE CEEplus index.
#9 Implementation of a new mojePZU portal Initiative: integrate the digital services for clients, enabling the broadest possible online use of PZU’s offering. The largest project under this initiative is the mojePZU portal.
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#12 Integrated service model for SMEs Initiative: integrate sales models in the small and mediumsized enterprise (SME) segment.
(including young people) and align the offer better; • segment clients and personalize the offer; • support the development of all of the lines of business; • engage club members to act to benefit their local communities
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The purpose of the corporate social responsibility (CSR) strategy, announced on 9 January 2018 along with the updated PZU Group strategy until 2020, was to systematize the key areas and principles of PZU’s responsibility. The strategy also delineated the PZU Group’s ambitions and directions of actions and initiatives associated with existing social and business challenges.
Indicator concerning the timeliness of examining complaints 98.05% up to 28 days 95% up to 28 days
The percentage of clients who are more willing to recommend PZU than other insurers (beating the competition by 6 percentage points) is driven by PZU’s ability to satisfy the needs of its clients in an increasingly effective manner. Identification of strengths, weaknesses and areas in need of change and improvement owing to extensive surveys aimed at measuring client satisfaction and loyalty.
In 2020, more than half of the total number of complaints were dealt with within 14 days. The indicator concerning timely examination of complaints within 28 days was 98.05% in 2020.
The experience acquired since its launch more than three years ago has become a significant reference point for the ESG strategy currently under development, which will focus on factors related to environmental protection, climate change, social commitment and corporate governance. This will permit the conduct of activities supporting sustainable development in the context of the products being offered, cooperation with business partners, care for the well-being of employees and local communities, and building value-based market leadership.
Financial commitment to social activity PLN 77 million > PLN 50 million per annum
90% of contracts contain an obligation to adhere to the “Code of CSR Best Practices for PZU’s Suppliers”
Operating margin in group insurance and individually continued insurance 2019 2020S2020
In this section: 1. PZU Group’s operating model 2. Insurance 3. Investments 4. Health 5. Banking and strategic partnerships 6. Management of the PZU Group’s brands
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The PZU Group Strategy SECTION 4 PZU 2020 – MORE THAN INSURANCE is client-centered. Our mission is helping clients take care of their future. This means that our client relationships and our knowledge of our clients are becoming the Group’s overriding value, while our chief product is our acumen in addressing client need to build a stable future.
model of an insurer’s client relations rooted solely in sales and aftersales service. PZU wants to establish and maintain longterm relations with clients and deliver products that best fit their needs. Everything in the right place and at the right time, adequate to their requirements and financial capabilities This approach has defined the philosophy of PZU Group’s operating model.
PZU Group’s operating model brings together all of the Group’s activities and integrates them in a client-focused manner: life insurance, non-life insurance, health insurance, investments, pensions, health care, banking and assistance services. This drives the gradual transformation of insurers from focusing primarily on valuation and transfer of risk toward being an advisory and service company (utilizing the technological know-how). We have created an operating model in which the core is client knowledge and the skill of building long-term relations. Thanks to that we will achieve high quality and large volume of interactions with the client. The transformation in the direction of an advisory and service company will makes it possible to care for the clients’ future and satisfy their needs comprehensively when it comes to life, health and property insurance and savings and finance.
We use new risk assessment methods and simplify processes, including client processers, thanks to: • utilizing our Big Data files better, • digitalizing processes, • using artificial intelligence and new technologies associated with the development of fintechs and insurtechs.
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Launching the mojePZU portal is not just the outcome of developing digitalization and mobility in PZU but also a way of radically modifying client interactions. This is a one-of-a-kind dashboard enabling clients to check their policy coverage at any time, manage their medical coverage and appointments and their investments.
MojePZU also includes initiatives aimed at improving safety. From November 2020 the users of the mojePZU mobile app receive information about the launch in Poland of the lost child search procedure under the international Child Alert system.
MojePZU comprises also the PZU Pomocni Club. It is a loyalty program through which clients obtain attractive discounts and rebates. The club gives them bonuses, for example for leading a healthy lifestyle.
In 2020, the mojePZU portal was awarded the “Simple Polish Language Certificate” by the Institute of Simple Polish at the University of Wrocław.
Insurance remains the core business of PZU Group’s activity. The business model utilizes effective sales channels and efficient claims handling functions in their midst. The PZU Group offers insurance in Poland, Lithuania and
Clients and products In Poland the PZU Group has a comprehensive product offer of life and non-life insurance for 16 million clients. They are retail clients, sole proprietors, small and medium enterprises and large corporates. The PZU Group enjoys the trust of 1.2 million clients in the Baltic States and Ukraine.
PZU Zdrowie’s own medical center number of Bank Pekao branches at the end of 2020, 5.5 million Bank Pekao clients,
PLN 3 million for safe drivers in LINK4’s “Cash Back” telematic program in 2017-2020 roku own outlets and partner outlets in Alior Bank at the end of 2020 number of employees in Bank Pekao and Alior who held a license from the Polish FSA to sell insurance at the end of 2020 almost 600 innovative ideas submitted up to the end of 2020 in 8 competitions using the Idea Generator 4.5 million
Non-life insurance is offered in Poland under three brands: PZU, the traditional and most well-known brand, Link4 associated with direct sales channels and TUW PZUW, i.e. the mutual insurance company SECTION 3.2 NON-LIFE INSURANCE
Life insurance is sold in Poland under the PZU brand SECTION 3.3 LIFE INSURANCE
Distribution network PZU’s sales network is organized in a manner that ensures sales effectiveness along with high quality services. Among all the Polish insurers PZU offers its clients the largest sales and service network. It has 410 branches across the country with 189 in small communities and tied agents, multiagencies, insurance brokers and electronic distribution channels.
Securing the future of your child Annuity for your child after you die Accident insurance for children and youths
Bulk of PZU’s clients prefer direct service by the agent and in the agent’s office, therefore PZU focuses on developing a professional agency sales network.
PZU P Plus PZU W Razie Wypadku [In Case of Accident] PZU u Lekarza [PZU at the Doctor’s PZU Pełnia Życia [PZU Full Life]
PZU develops and promotes the agents’ online presence. We set up their websites, which we then put up on the www.agentpzu.pl site and prepare their Google “business cards”. From 2020, PZU has also been offering Facebook profiles, co-managed by PZU. The visit statistics and information from agents confirm that these efforts help them reach a broader group of clients.
Claims and benefits handling Claims handling is for the client the moment when they check the quality of their product. Satisfying client expectations
with the content CLAIM to the number 4102 – we will call you back and accept your notification e-mail kontakt@pzu.pl mojePZU platform / application moje.pzu.pl video chat porozmawiaj.video.pzu.pl/video/pzu/
text message in person in a branch to an agent to a person handling group insurance in the company (for group life insurance)
during the claim handling or case handling process is the key to building PZU’s client relationships.
The service upholds its emphasis on simple communication language and was awarded the “Simple Polish Language Certificate” by the Institute of Simple Polish at the University of Wrocław.
In Poland, claims and benefits handling is carried out in competence centers operating across the country. It is founded predominantly on electronic information and is not tied to the insured’s place of residence or the place of the event. The competence centers handle specific types of damage, which is conducive to stricter specialization and boosts client satisfaction. These units specialize, among others, in handling claims arising from property, motor or personal damage, claims reported by corporate clients, benefits, damage involving in the theft of personal vehicles or claims handled as part of the direct claims handling (DCH) service. A separate unit deals with technical issues related to claims arising from motor or property damage.
A similar claims handling model is in place at PZU Estonia where there are 3 competence centers. Centralized among them is the handling of certain types of damage, such as personal injuries, large property damages and marine damages. In other Group companies operating in the Baltic States and Ukraine, the claims and benefits handling process is entirely centralized.
In connection with the COVID-19 pandemic, in 2020 we launched remote work for most claims handling staff, which secured the continuity of the claims and benefits handling.
PZU has a Relationship Manager who stays in contact with the injured party for the duration of the claims or benefits handling process. That person’s assignment is not only to collect the documents needed to take care of the case, but also to convey information to the client about the stage of handling.
PZU develops methods for determining the extent of the loss to expedite the calculation of the indemnity amount. In non-life insurance, on top of conducting a vehicle inspection in a fixed inspection point, through a Mobile Motor Expert in a venue chosen by a client or in a Repair Network workshop, the quantum of the loss may be determined under: • a simplified service procedure (without conducting a vehicle inspection), • self-service (calculation of the amount of the loss on your own), • video inspection (using an app to determine the amount of the loss).
PZU deals only with the final stage in the claims handling process, i.e. determining the amount of the indemnity and disbursement.
In motor and property damage and in centers repairing devices damaged by a power surge, the client may also assess on his or her own the amount of indemnification payable. This information is then forwarded online to the Relationship Manager who executes the payment. This service allows clients to participate in the payout decision in a simple and convenient manner and reduces the waiting time for the disbursement of the benefit. Satisfaction surveys carried out among PZU clients reveal the fact that insureds are of a very favorable opinion about this service. PZU companies in the Baltic States are rolling out similar improvements. Since 2019, automatic death benefits payments are made. The payments are approved by automated processes, which considerably speeds up the handling process of those cases.
Business model on PZU Group’s resources. The examination takes place in the place where the client stays, without having to leave home. The service is intuitive and very convenient – all the client needs is a device with Internet access. The solution worked perfectly well especially when outpatient clinics were closed due to the COVID-19 pandemic. Despite closed clinics, clients had access to medical examinations. In addition, PZU limited the scope of documents required from clients. This is another initiative which made it possible to continue our services during the pandemic and, additionally, had positive impact on client satisfaction.
In connection with the COVID-19 pandemic, remote inspections were the preferred form of determining the indemnification amount. If the client could not use the video inspection service the claim was handled on the basis of photographs sent by the client.
the prediction model business rules allows for quick detection and analysis of suspicious cases and identification of links between loss participants.
2020 was another year of cooperation with repair shops in the area of post-accident vehicle repairs in countries covered by the PZU Group’s insurance business. PZU has created Poland’s largest network of cooperating repair shops enabling the Company to control the quality and speed of service already at the claim handling stage. Every client who orders a repair in the PZU Repair Network receives a quality certificate guaranteeing that the repair has been performed in accordance with the highest standards. PZU is refining its proposal to assist clients in managing damage remains by selling them on the Online Assistance platform. Clients are presented with a proposal to sell their damage remains for the highest purchase offer obtained from reliable entities that cooperate regularly with the platform administrator. A similar solution is also available to clients of the Estonian Lietuvos Draudimas branch. In connection with the COVID-19 pandemic PZU launched a new service standard in the Repair Network – “door to door” service, i.e. collection and delivery of the vehicle to the client. Also Link4 provided the “door to door” service to its clients. Thanks to this solution the client could have their vehicle repaired without leaving home. Additionally, PZU introduced an obligation to disinfect the vehicle after the repair by the Repair Network shops.
Caring for the financial liquidity of the business partners, service providers and repair shop network, PZU implemented a solution which provides for reimbursement of the repair costs specified in the invoice up to three days.
In 2020, LINK4 implemented an analytical claim segmentation engine. Using machine learning algorithms, the engine chooses the claims handling path which will be optimal for the client. During a discussion, the relationship manager enters data in the system and then obtains the proposed claims handling path, which is communicated to the client during the same visit. In the claims handling process, the customer experience depends also largely on the loss adjusters, whose work in Link4 is supported by technology. A specially-designed application allows them to calculate the claims amount more precisely based on the customer data. The solution enables the analysis of information obtained in conversations with the clients, which allows it to propose the most suitable cooperation scenarios. Analytical claim segmentation also enables early detection of total losses, which can speed up the claims handling process significantly in such cases.
Advanced data analysis is used also in the anti-fraud tool implemented in LINK4. Combination of the scoring engine and
PZU constantly improves its communication with clients. Traditional communication is being replaced with electronic communication and telephone contacts. To made sure the information is clear and comprehensible, letters, e-mails and text messages for clients are adapted to the principles of a simple language.
PZU has had the PZU GO solution in place for two years. The main aim of this modern solution is to help on life threatening situations and monitoring driver and passenger safety when driving. The PZU GO mobile app is connected to a small beacon device, installed on the car windshield. The device collects data and sends them to the PZU GO app via Bluetooth. When it detects a situation which may suggest an accident it sends information on the client’s location to PZU’s Remote Client Service Center. Then a Center employee contacts the client to check if they need help. If it is not possible to establish telephone contact, emergency services are called to the scene (ambulance, fire brigade, police). The PZU hotline may be also contacted by pressing a button (SOS) on the app’s main screen. PZU GO is not only emergency help – it is also professional assistance in arranging for towing, replacement car rental, claim registration or help in quick disbursement of the claim. After the event PZU employees remain in constant contact with the client at each stage of recovery and repair of material damages. Remote Client Service Center consultants support clients and agents in operating the app, installation or replacement of the device. They can also order a device on the client’s or agent’s request or following a sale in the direct channel, and register the PZU GO device following a sale in the direct channel.
An invariably significant area of operation in claims and benefits handling is the prevention of insurance fraud. PZU keeps improving the solutions that curtail the payment of undue benefits, prevent clients from counterfeiting documentation filed during the submission of a claim or statements regarding their health status. In 2018 we extended support to identify undue payments of claims and benefits by incorporating a Fraud Management System (FMS) when examining non-life insurance claims. In the crime prevention division (covering insurance crime) there are three teams whose employees perform clarification activities and prepare recommendations for the decision issued in the case, and participate in preparation and issuing opinions on business decisions for individual product groups and procedures. PZU signed contracts to procure services involving the audit of electronic registers of post-accident vehicle traction and sourcing documents and information from international entities.
Innovations, digitalization and development of new technologies have been in progress for years in all the sectors of the economy. By rolling out many new solutions companies are gaining an ability to transform their strategy, business model and client, partner and employee experience. PZU understands how much new technologies are changing the insurance industry therefore it implements innovative solutions. Activities in this area are supported by the Innovation Laboratory – a unit created with a view to verifying the latest technological trends and testing new solutions across the organization. We are creating modern solutions both internally and in cooperation with the best start-up companies in the respective fields. Annually, over 1,000 solutions are analyzed and 10-15 pilot projects are run. Projects implemented with the support of the Innovation Laboratory are awarded in local and international competitions (in 2020 the awards included, the Celent Model Insurer award for AI in claims handling, the ICAN Institute and MIT Sloan Management Review Polska award – AI Innovation Transformation Champion in claims handling, the Innovation Eagle award for the COVID-19 Band of Life).
In November 2020, the third year passed since the time when the PZU Management Board adopted the Innovation Strategy developed by the Innovation Laboratory. Its purpose is to help pursue the PZU Group’s mission and strategy and maintain the high level of competitiveness in the new technological environment. The Strategy points to three specific areas in which PZU should be especially active while seeking innovation: • utilizing Big Data, • digitalization, • new client interactions.
The designated areas ascribed the direction to be taken by the pilot projects organized in cooperation with the Innovation Laboratory, the relevant business departments and IT. In 2020 they made it possible to vet the ideas and prepare the following implementations: • COVID-19 Band of Life. PZU adapted the Bands of Life to the needs that appeared in the health care system in the times of the COVID-19 pandemic. The COVID-19 Band of Life reduces the risk of infecting the medical staff in hospitals, because it remotely measures the patient’s oxygen saturation of blood, pulse and body temperature in real time. The device alarms when the measured parameters are significantly exceeded and when the patient’s fall is detected. The unique application of this medically certified solution enables doctors to supervise the patients’ health without physical contact. In addition, the solution offers high accuracy of measurements and easy reconfiguration to adapt the device to the conditions and needs in different hospital wards. The band works for three days on a single charge and is easy to disinfect; • AI in claims handling, PZU handles over 500 thousand motor claims per year. Bulk of them are handled by repair shops. Most claims comprise mass photographic and technical documentation which often requires additional in-depth analysis. Analyses may be carried out only by trained and highly qualified experts. The implemented artificial intelligence (AI) solution has improved their daily work. Before using AI most cases handled by repair shops had to be analyzed manually. Thanks to implementation of a solution using artificial intelligence algorithms, experts receive for analysis only selected cases while the remaining ones, which do not raise any doubts, are approved automatically or semi-automatically. The implementation translates into significant financial savings and improvement of client satisfaction. Work is under way to implement artificial intelligence in the remaining motor claims handling processes; • Cyber SME. It is an online platform which automatically scans the websites of small and medium-sized companies and verifies their cyber attack safeguards. A company using this service receives a free report on cyber threats, assessment of the susceptibility of their website to cyber attacks and recommendations allowing it to mitigate the risk and prevent losses; • Car Expert. The service supports clients in purchase of a car and is an element of a comprehensive ecosystem of services for drivers in PZU. The offer comprises: verification of car sale commercials, verification of the technical condition of the car, insurance product “Mobility cover” ensuring support in case of failure of the verified vehicle for 90 days from the purchase, and a loan for the purchase of the car. Non Stop Assistance brand experts verify the technical condition of the car before the purchase.
In 2020, LINK4 also implemented the Voice Bot. The tests of the technology have shown that the bot is often more efficient that a consultant, and at the same time scores positive opinions from clients. In the first place the Voice Bot was introduced in the Premium Handling area, where during the conversation with the client the bot reminds them about the necessity and method of notification of the sale of the car, delay in payment of the insurance premium, or a prepared offer in connection with expiry of the policy. Work is under way on analyzing the potential of the technology in other areas.
In 2020, LINK4 continued the transformation program in Data Driven Company started the year before. The Data and Advanced Analyses Center executed a number of innovative
Business model projects which made it possible to generate measurable business benefits. The Company made a milestone in terms of using the data processing and analysis capabilities. A modern Data Lake was built, which allows for efficient creation of Machine Learning models and business analysis. In addition, technologies were implemented to make it possible to process huge volumes of unstructured data which so far were not available for broader analyses. The data were used to better understand the client needs and address them in the form of an appropriate scope of insurance and price.
The Data Driven Transformation also involved strengthening employee competences. In 2020, LINK4 continued the Analyst Academy program (2nd semester) started in 2019 to improve the analytical skills of the persons employed on three advancement levels. In addition employee knowledge in the technical and business area was developed.
Areas to which alerts were most frequently directed in 2020 broken down by weather phenomena
PZU LAB engineers cooperate with clients at all stages of operations of their enterprises and offer a broad range of solutions and consulting and training services and services using innovative technologies. The Company supports clients in the area of safe enterprise management, reduction of financial losses associated with contingencies and stoppages, and building the reputation of a trusted partner in the local and international market.
The ESTools system, developed by PZU LAB together with its technological partner F@BE (FABE Safety Factory) under an acceleration program, serves to increase and maintain safety in industrial plants. The system supports ongoing control of insurance audit orders.
In 2020, as part of PZU’s prevention fund, PZU LAB launched the proprietary ESTools RyzykoPro program in 20 Polish businesses and provided the support of PZU LAB’s risk engineers in the daily conduct of their operations.
Artificial intelligence solutions implemented by PZU LAB used for failure prediction are another example of risk management innovations. They make it possible to detect irregularities in the operation of machines, going back as much as tens of hours earlier than the existing systems. This has paramount importance especially for complicated industrial installations
(for example, turbines) because it makes it possible to avoid damages and losses in the range of tens of millions of zlotys
PZU LAB has highly qualified engineering staff in the area of thermovisual measurements, holding the international ITC Level 1 (Infrared Training Center) certificate. Thermovisual measurements are performed by practitioner engineers with established theoretical background in infrared measurement techniques. PZU LAB engineers also have industry-specific expertise regarding operation and measurement of power facilities and mechanical systems. Based on the audit, the client receives a thermovisual report constituting a tool for managing risk in the enterprise. PZU LAB conducts training regarding thermovisual measurements for clients and business partners, thus increasing the competences of the safety services in the daily risk management in the enterprise.
In 2020, PZU LAB developed an innovative system for safety certification of the Polish industry and preparation of guidelines for industries of strategic importance for the PZU Group, including the timber, power, municipal waste, chemical and petrochemical industries. PZU LAB engineers developed a consistent system for assessment of the level of safety and efficiency of devices that are key to safeguarding against emergencies. The system combines many years of experience
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PZU LAB took part in the Scale-Up acceleration program funded by the Polish Agency for Enterprise Development (PARP). Its aim is to get together young technological companies with big firms which need innovative solutions for business. As a result of the work under the project and acceleration, in 2020 the BlueMind start-up was established; it developed a tool for parameterization of the risk of corporate clients. Another company, 3DV Risk, which was commissioned by PZU LAB to develop the first in Poland prevention portal, is preparing realistic 3D animations presenting loss events from the initial cause to the final outcome. The aim of the animation is to show the causes of loss events in order to avoid similar events in the future. The animation is a training element for the company’s employees. After watching it the employee takes a test on the knowledge of safety rules associated with the presented event. The animations are aimed at attracting attention to the errors made in the production process.
The Group offers investment solutions customized to the needs of all clients. The online platform, inPZU, launched in 2018, makes it possible for clients to independently invest in the first fully proprietary passive funds in Poland. The platform is available 24/7 on any mobile device, and since 2020 also an English language version has been available. On the inPZU platform you can compare funds, define investment objectives and personalize them. inPZU makes it possible to instantly search funds and ready model portfolios as well as to pay for orders online. The platform is available to both individual and institutional clients. This is an attractive tool both for advanced investors and persons who are just starting to invest their savings.
Thanks to the cooperation with Goldman Sachs Asset Management initiated in 2019, in January 2020 it was possible to launch two new passive feeder funds: inPZU Goldman Sachs ActiveBeta Akcje Amerykańskich Dużych Spółek and inPZU Goldman Sachs ActiveBeta Akcje Rynków Wschodzących. Funds of this type are aimed at achieving a better risk profile and return on investment in the entire investment cycle compared to traditional ETF funds based on the index level and weighted by the market capitalization of the companies. In addition TFI PZU has launched a subfund inPZU Akcje CEEplus, created in cooperation with the Warsaw Stock Exchange and based on the WSE CEEplus index, comprising over 100 of the biggest and the most liquid companies listed on the stock exchanges from the Eastern European region, from Croatia, Czech Republic, Poland, Romania, Slovakia, Slovenia and Hungary.
Both products are available online. You can decide if you want pay into one of them or both of them simultaneously, which allows you to use up the total limit of payments and attain maximum tax benefits. On the inPZU platform you can yourself build your IRA and IRSA portfolio, choosing from 14 funs – 9 index funds, available already before, and 5 new lifecycle funds, among which you can find the fund that is suitable to your retirement age.
The operating model in the Health area supplements and expands PZU’s insurance offering. Two complementary types of activities are conducted: • sale of health products in the form of insurance and sale of non-insurance products (occupational medicine, medical subscriptions, partnerships and prevention programs),
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Distribution network Health products – in the form of life and health and property insurance and non-insurance products – benefit from synergies within the PZU Group and are distributed through virtually all sales channels, including the corporate and agency network of PZU and PZU Życie. The PZU Zdrowie sales network launched in January 2020 is developing dynamically. The COVID-19 pandemic expedited also the sales in the digital channel – the mojePZU portal. Through this portal you can purchase single medical consultations both in the remote format and in the medical centers.
Medical infrastructure PZU Zdrowie cooperates with approx. 2,200 partner centers in nearly 600 towns and cities in Poland.
Contact channels A patient can make a doctor’s appointment or an appointment for any other medical service provided by PZU Zdrowie through: • self-service website mojePZU [myPZU] with access to the calendar of appointments of each center, • PZU mobile app, • 24/7 hotline.
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We offer our patients the possibility of using our services throughout Poland – our partner network covers nearly 600 towns and cities and we keep developing our own network of 130 centers.
• EDM – the project deploys medical documentation in own centers.
• Voice Bot – virtual assistant who makes and cancels patient appointments by phone.
Distribution of insurance via the banking channel is an important element of the PZU Group’s business model. Cooperation with the banking segment forms an additional plane for PZU to build lasting client relations at every stage of their personal and professional development.
Business model available to further work establishments. Currently the portal is already available to several tens of thousands of employee of different size companies. The Cash Portal is a good example of synergy and leveraging the strengths of the two companies in the PZU Group, and implementation of an innovative business model and following the market trends – in this case the trends pertaining to financial wellbeing. The Cash Portal also follows the development of remote channels, making it possible to use financial products 100% online, which is particularly important in the face of the COVID-19 pandemic.
Distribution channels The bank’s customers can use a broad network of branches and ATMs, which provides convenient access throughout Poland, as well as a professional call center and a competitive Internet banking and mobile banking platform for individual and corporate clients, and for small and micro businesses.
Online and mobile banking In 2020, Bank Pekao consistently executed the digital transformation process, comprising initiatives focused on development of sales and improvement of the quality of service in the remote channels, automation and robotization of the processes and enriching the offering to include stateof -the-art digital services. In the face of the dynamically accelerating changes in the area of client behaviors and needs triggered by the COVID-19 pandemic, a number of projects in the digitization area were accelerated to secure the continuity of cooperation with client in the sanitary regime environment. In Q2 2020, the bank deployed a new PeoPay mobile banking app. Its modern graphic design improves navigation and ease of use. The interface developed on the basis of the experience and research with clients provides very convenient access to accounts and products and facilitates daily mobile banking. In the new PeoPay users may check their account balance even before logging in. After entering the app they gain access to all their products and other services offered by the bank. The PeoPay app supports opening an “account with a selfie” both to retail and corporate clients. Thanks to it, clients may easily and conveniently order a transfer to any account, make all other payments, top up their phone, pay contactless with
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Business model their phone and open a deposit. The app offers a number of innovative solutions such as, for example: • obtaining a loan in the “one click” process without leaving home – 30 seconds after an agreement is accepted; • approving transfers and payments using finger or face biometrics; • broad range of payment methods: Google Pay, Apple Pay,
Since mid-April 2020, the new Pekao24 platform has been available to the bank’s clients. The new platform features not only a modern and accessible graphical presentation of the interface, but also improves user experience and enables optimized and simplified processes that respond to the needs of the user community, in particular by enabling them to manage their finances without leaving home. The new functionalities in the platform were made available both to retail clients and to micro clients and small businesses using Pekao24.
In mid-2020 Bank Pekao launched new sales processes in the new Pekao24 service and the PeoPay mobile application, with new functionalities for the clients. The bank launched a new process “Halo” supporting remote sale of cash loans, overdraft limits and credit cards remotely during a phone call, both by a Pekao Direct consultant and a relationship manager in a branch, with acceptance of the documents and the loan agreement in the Pekao24 transaction service or the PeoPay app. The new solutions provide clients with a personalized tool allowing them to finance their needs without the need to visit a branch.
Alior Bank is a universal deposit and credit bank, providing services to natural persons, legal persons and other domestic and foreign entities. The bank’s core business comprises maintaining bank accounts, granting cash loans, issuing bank securities and purchase and sale of foreign currencies. The bank also conducts brokerage activity, provides financial advisory and intermediation services, arranges corporate bond issues and provides other financial services. In its operations,
There are six segments of clients actively cooperating (banking) with the bank, and six segments of consumer finance (installment purchase) clients. The segmentations make it possible to adapt the communication, contact channels, product packages and personalized value added services, which supplement the traditional functionalities of the products and services offered by the bank. The segmentation dedicated to consumer finance clients makes it possible to improve the quality and effectiveness of sales communication, in which the bank offers to installment clients also other, professional banking products. In addition to the behavioral segmentation, the bank divides its retail clients in the following operating segments: mass clients (persons whose assets in the bank do not exceed PLN 100 thousand and whose monthly proceeds to their personal account are under PLN 10 thousand), affluent clients (persons with monthly proceeds credited to their personal accounts exceeding PLN 10 thousand or assets worth more than PLN 100 thousand), private banking clients (persons with assets worth more than PLN 1 million or holding an Elite Account).
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At the end of 2020 the bank catered to over 200 thousand micro businesses. Despite the restrictions associated with the COVID-19 pandemic, the bank actively acquired new clients, using online sales channels, while continuing full service in the bank outlets. In 2020, 25,9 micro businesses opened accounts in Alior Bank.
Treasury activity Alior Bank conducts its treasury activity, among others, in the following areas: • spot foreign exchange (FX) and FX risk hedging transactions, • interest rate instrument transactions, stabilizing the clients’
• FX option portfolio risk management, within the established limits, through concluding hedging transactions and option transactions on the interbank market,
• trading activity on the treasury bond portfolio through purchase and sale of treasury bonds and bonds guaranteed by the State Treasury,
Alior Bank also uses distribution channels based on a modern IT platform incorporating: online banking, mobile banking, call centers and the DRONN technology. Using the Internet, the bank makes it possible to enter into agreements for: savings and checking accounts, currency accounts, savings accounts, deposits, debit cards and brokerage accounts. These channels are also used to accept applications for credit products: cash loans, credit cards, overdraft limits and mortgage loans. Using the Internet, the bank also offers installment loans in an online process and offers services of a currency exchange office.
Remote client service is a priority not only in the bank’s strategy but also in the new reality created by the COVID-19 pandemic. In Q1 2020, Alior Bank implemented a new client identity verification method, without the need to visit a branch. FOTO ID is a technology which opens new sales opportunities in remote channels. Thanks to it, the identity verification process was significantly accelerated – the whole process takes no more than 5 minutes. At the same time, the solution is intuitive and does not require advanced digital skills.
In the Alior Mobile app, the login screen was modified, providing easier access to key functions, such as BLIK, fast connection with the hotline, the Ticket service and car parking, and launch of the fingerprint reader. An option was added supporting the purchase of electronic public transport tickets and payment for car parking in a number of Polish cities. Clients can buy tickets for busses, trams, metro or train for themselves and for their travel companions. Thinking about motorized clients, the bank introduced the Motorways functionality. The service supports automatic opening of a toll gate without stopping and is available in 3 language versions (Polish, English and Russian).
As part of optimization of online banking, among others, Alior Online added new items in the account details and expanded the functionality of adding a trusted browser through online banking. Thinking about clients with special needs, the possibility of ordering documents in the form of an audio recording or visual content, printout in the Braille alphabet or a document with a font size easy to read by persons with impaired vision was introduced.
tests and service design; • The Open Banking team and the Blockchain Competence
Alior Bank operates the RBL_ START program, in which fintechs start cooperation with the bank on the project path. Thanks to that, they have an opportunity to participate not
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• assistance insurance for power consumers, customers of Enea (corporate clients) and Energa-Obrót, guaranteeing services of professionals, e.g. electrician, plumber and brown goods/white goods servicing staff, who provide help in the case of a failure in the household. The assistance services are available in different options, so clients may choose the coverage that suits their needs; • insurance offering services of professionals, e.g. electrician, locksmith for power consumers – retail clients of Innogy – member of the Innogy Benefit Club; • insurance for photovoltaic installations for Tauron Group clients.
PZU is the most recognizable brand in Poland. According to spontaneous brand recognition studies, awareness of the PZU brand reaches 90%, while prompted brand awareness is 100%1. Even though it is associated mainly with insurance, the PZU Group umbrella contains several brands. They differ in terms of the visual systems used, target groups and business models.
The last level of brand architecture is the independent brands group. This category includes the brands within the PZU Group, the names and visualization of which differ from the corporate brand, such as Lietuvos Draudimas and Link4. Prompted awareness of the Link4 brand in the Polish market is 96%1. In 2019, the brand of Lietvous Draudimas had equally high prompted awareness – 96% in the Lithuanian market.
In 2020, in addition the Cash brand joined the PZU Group’s architecture. It denotes a company under the name PZU Cash managing the website offering financial employee benefits.
Negative means “positive”. The pandemic has also affected our language. The word “positive” conveying something good and beneficial now also has negative associations when we say positive as in a positive result to a coronavirus test. In this report, however, the word “positive” has a conservative meaning. It refers to good results, trends and our rating.
In 2020, the net profit attributable to PZU Group’s parent company shareholders was PLN 1,912 million, compared to PLN 3,295 million in 2019 (down 42.0%). Net profit reached PLN 2,530 million, i.e. PLN 2,655 million less than in 2019, and profit before tax stood at PLN 4,058 million, compared to PLN 7,080 million in the previous year.
Operating profit in 2020 was PLN 4,058 million, down PLN 42.7 million compared to the result in 2019.
Operating profit was driven in particular by the following: • higher profitability of the mass insurance segment resulting from the lower loss ratio in motor insurance (due to the lower frequency of claims); • gross written premium down 1.3% y/y – in the case of life insurance, its level was determined by the growing sales of unit-linked products offered in cooperation with banks and development of the portfolio of group health products, and in the case of non-life, the lower motor insurance premium was related to the persisting COVID-19 pandemic; • slightly lower operating result in the corporate insurance segment as the outcome of an increase in the loss ratio on the portfolio of general TPL insurance and various financial risks coupled with the concurrent dip in sales, chiefly of motor insurance; • lower result in individual insurance due to the further development of protection products in the banking channel and of term products sold in own chain, the decrease in income from investments allocated according to transfer prices, the lower result on expiring portfolio of the annuity product and the decrease in acquisition expenses for unitlinked products; 1 Non-recurring events included the impairment loss on goodwill arising from the acquisition of Alior Bank (PLN 746 million) and Bank Pekao (PLN 555 million), the impairment loss on assets arising from the acquisition of Alior Bank (i.e. trademark and relations with clients) in the amount of PLN 161 million (after adjustment for the impact exerted by deferred income tax and minority shareholdings the impact exerted on the net result attributable to the parent company’s shareholders was PLN 42 million) and the conversion effect of changing long-term contracts into annual renewable contracts in type P group insurance
In the individual operating result items, the PZU Group posted: • decrease in gross written premium by 1.3% to PLN 23,866 million. This was related mainly to motor insurance, both in the corporate insurance segment and in the mass insurance segment, and was driven by the lower number of insurance policies and a simultaneous fall in the average price. It was partly offset by higher premiums in the life insurance segments in unit-linked products offered in cooperation with the banks and the growth of the group health product portfolio. Moreover, the written premium in ADD and other insurance in the mass insurance segment increased, primarily as a result of the growing sales of insurance offered in cooperation with the Group’s banks, and providing insurance cover to physicians and medical personnel against a COVID-19 infection. After considering the reinsurers’ share and movement in the provision for unearned premiums, the net earned premium was PLN 23,024 million and was 0.3% lower than in 2019; • 19.8% decrease in investment income which, after factoring in interest expenses2, amounted to PLN 7,352 million, as compared to PLN 9,169 million in 2019.
2 including: interest income calculated using the effective interest rate, other net investment income, discontinuation income recognition of financial instruments and investments, change in write-offs to expected credit losses and impairment losses on financial instruments, net change in the fair value of assets and liabilities measured at fair value, interest expense
Share in net profit (loss) of entities measured by the equity method (3) 16 (1) (4) -
Net profit (loss) attributable to equity holders of the parent company 1,935 2,895 3,213 3,295 1,914 restated data for 2016-2019 1 Including: interest income calculated using the effective interest rate, other net investment income, discontinuation income recognition of financial instruments and investments, change in write-offs to expected credit losses and impairment losses on financial instruments, net change in the fair value of assets and liabilities measured at fair value
Operating result of the PZU Group in 2020 (in PLN m)
140 141MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
of the written premium in the individual insurance segment, driven mainly by growing sales of unit-linked products offered in collaboration with the banks and the persisting upward trend in written premium in equity and term protection products offered in the Group’s own channels; • increase by PLN 41 million (+0.6% y/y, to PLN 7,007 million) of sales of the group and individually continued insurance, in particular the health insurance in group or continued form and active up-selling of other insurance riders in individually continued products; • decline by PLN 132 million (-1.3% y/y, to PLN 10,200 million) of sales in the mass client segment in Poland - this was reported mostly in the motor insurance segment, and was partly counterweighed by an increase in written premium in ADD and other insurance, primarily as a result of the growing sales of insurance offered in cooperation with the Group’s banks, and providing insurance cover to physicians and medical personnel against a COVID-19 infection; • decrease by PLN 302 million (-9.3%, to PLN 2,962 million) of the written premium in the corporate client segment, primarily in motor insurance offered to both lease firms and in fleet insurance; this was caused by the lower number of insurance contracts coupled with a drop in the average price resulting not only from the impact of the COVID-19 pandemic, but also from the persisting market price pressure; • decline by PLN 63 million (-3.1% y/y, to PLN 1,985 million) of sales of the foreign companies driven mainly by the poorer sales of motor and tourist insurance policies both in the Baltic States and in Ukraine due to the restrictions imposed in connection with the COVID-19 pandemic.
The revenues included primarily: • net revenues from commissions and fees in the banking business of PLN 2,522 million, i.e. PLN 81 million (3.1%) less than in the previous year, consisting mainly of brokers’ commissions, revenues and expenses related to the service of bank accounts, payment and credit cards, as well as fees charged for intermediation in insurance sales; • income on OFE asset management – in the amount of PLN 130 million were PLN 13 million (9.1%) lower than in the previous year; the decline was caused by the absence of income on the reserve account and lower income on the management fees; • revenues and fees received from funds and mutual fund management companies in the amount of PLN 509 million, or PLN 19 million (i.e. 3.6%) less than in 2019.
Total non-life insurance – Poland (external gross written premium) 10,878 12,702 13,384 13,596 13,162
Group and individually continued insurance – Poland 6,775 6,855 6 891 6 966 7 007
Total non-life insurance – Ukraine and Baltic States 1,304 1,527 1,729 1,897 1,827
142 143MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Net investment result and interest expenses In 2020, the net investment result including interest expenses, excluding Bank Pekao and Alior Bank, was PLN 2,044 million, i.e. increased by PLN 49 million (or 2.5%) in comparison to the previous year. This was driven mainly by the following: • higher result on listed equities, mainly due to the increase in valuation of the logistics company; • sale of a portion of the Polish fixed-coupon bonds held in the portfolio of assets measured at fair value through other comprehensive income and transfer to the results of valuation disclosed so far in equity; • positive foreign exchange differences on portfolios measured in EUR and covering insurance liabilities, the valuation of which is shown by the movement in net insurance claims and benefits.
The increases were partially offset by the poorer performance of the variable coupon debt portfolios resulting from the declines in interest rates and prepayments, as well as the lower net investment results on the portfolio of assets covering the investment products. The investment result of the portfolio of assets held to cover the investment products alone does not affect the PZU Group’s overall net result because it is offset by the movement in net insurance claims and benefits.
Result on other operating income and expenses In 2020, the balance of other operating income and expenses was negative and stood at PLN 3,990 million.
In 2019, this balance was also negative and amounted to PLN 2,790 million. This was caused by the following: • non-recurring impairment loss on goodwill arising from the acquisition of Alior Bank in the amount of PLN 746 million and Bank Pekao in the amount of PLN 555 million; • non-recurring impairment loss on assets arising from the acquisition of Alior Bank (i.e. trademark and relations with clients) in the amount of PLN 161 million; • lower amount of BFG fees – decline from PLN 611 million in 2019 to PLN 541 million in 2020 due to the lower premium on bank restructuring fund; • higher levy on financial institutions, which in the case of PZU Group (insurance and banking activity) increased from PLN 1,134 million in 2019 to PLN 1,203 million in 2020 owing to the higher burden to banking activity resulting from the increase in value of assets forming the taxable base (the rate of the levy did not change); • reversal of the 2019 provision of PLN 89 million in connection with the reduction of tax risk of PZU Finance AB; • decrease by PLN 60 million of the costs of amortization of intangible assets acquired in company acquisition transactions; • reversal of the PLN 57 million provision for the fine imposed on PZU by the President of the Office of Competition and Consumer Protection (UOKiK) on 30 December 2011.
In 2020, acquisition expenses decreased by PLN 46 million, or 1.4%, as compared to the previous year, and amounted to PLN 3,317 million. The decline was the outcome of lower commission costs in motor insurance driven by lower sales due to the slowdown on the lease market, price pressure, and limitations on accessibility to agents and branches caused by the COVID-19 pandemic. The decrease of indirect costs was another factor.
In 2020, PZU Group’s administrative expenses were PLN 6,597 million compared to PLN 6,606 million in the previous year, i.e. down PLN 9 million. The banking segment’s expenses (net of adjustments on account of the valuation of assets and liabilities to fair value) dropped by PLN 68 million in connection with the cost discipline in Bank Pekao and Alior Bank. The expenses of the insurance segment in Poland increased by PLN 36 million, due among others to the persisting wage pressure and introduction of aid packages in the sales area in connection with the COVID-19 pandemic.
The 2020 result of PZU Group was burdened with the nonrecurring impairment loss on goodwill following from the acquisition of Alior Bank and Bank Pekao. For Alior Bank, the impairment loss was PLN 746 million, and for Pekao – PLN 555 million. The result was also determined by a one-off impairment loss on assets arising from the acquisition of Alior Bank (i.e. trademark and relations with clients) in the amount of PLN 161 million.
Moreover, the PZU Group updated the assumptions about the behavior of the portfolio in connection with the mortality of the insured and the probability of the insured having coinsureds to prevent the growing mismatch between it and the previously adopted assumptions. It also modified its method of calculating provisions for the group insurance portfolio by adopting an individual approach instead of the hypothetical portfolio structure.
0.2% of assets (with respect to the corresponding share at the end of 2019) were the assets and groups of assets held for sale. Their balance grew by PLN 10 million, to PLN 590 million, over a year. It concerned mainly the properties held by real estate sector mutual funds as held for sale, since the expected investment horizon has been reached.
The value of the non-controlling interests increased by PLN 1,507 million, to PLN 24,626 million. This was driven by the increase in the valuation of debt instruments and cash flow hedging instruments measured at fair value through other comprehensive income and the result generated by Alior Bank and Bank Pekao attributable to non-controlling owners of PLN 618 million.
63.9% of the Group’s equity and liabilities at yearend 2020 were liabilities to clients under deposits. They amounted to PLN 241,975 million and were higher by PLN 23,387 million than one year before. This resulted from the increase in current deposits of Bank Pekao and Alior Bank by PLN 58,795 million, which was partly offset by a decrease in term deposits.
On 31 December 2021, the PZU Group had liabilities arising from own debt securities totaling PLN 7,532 million, including: PLN 4,597 million on bonds issued by Bank Pekao i Alior
Bank; PLN 1 611 million certificates of deposit issued by Bank
12.8% of equity and liabilities at yearend 2020 was the value of technical provisions. It amounted to PLN 48,471 million and
A provision for unexpired risk in the amount of PLN 51 million was established for the group insurance portfolio being annual renewable insurance products as of 31 December 2020. Its aim is to cover the deficit on future contributions with respect to the expected benefits and other outflows (costs and commissions) arising from increased mortality due to the COVID-19 pandemic.
Material off-balance sheet line items The value of contingent liabilities at the end of 2020 was PLN 65,785 million, that is PLN 6,348 million more year on year. This was caused predominantly by: • PLN 11,324 million in contingent liabilities for renewable limits in settlement accounts and credit cards, • PLN 33,239 million in liabilities from loans in tranches, • PLN 9,826 million in liabilities in the form of awarded guarantees and sureties, • PLN 4,339 million in the form of guarantees for the issue of securities.
Other provisions Subordinated liabilities Liabilities due to own debt securities Other liabilities Equity Technical provisions Liabilities to customers due to deposits
Corporate insurance The operating result in the corporate insurance segment in 2020 was PLN 313 million, meaning it was down by 4.3% compared to 2019.
The result was affected mainly by: • net earned premium lower by PLN 111 million (-4.5% y/y)
Mass insurance In 2020, the operating result in the mass insurance segment reached PLN 1,671 million, which is 15.3% more than in the previous year.
This was caused by the following: • decrease in net earned premium by PLN 69 million (-0.7%
148 149MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Operating result in the group and individually continued insurance segment (in PLN m)
increase in the loss ratio control by reducing the pressure on the average premium growth rate in group protection products; • decrease in the net earned premium by PLN 9 million (-0.1%) in connection with the establishment of the provision for unexpired risk in the amount of PLN 51 million for the purpose of covering the deficit, if any, of future premiums as an effect of higher mortality due to the COVID-19 pandemic; • income from investment activity higher by PLN 7 million (+1.0% y/y), composed of income allocated according to transfer prices and income from investment products. It was driven by the improved performance of unit-linked products, in particular EPS and reduced income allocated to protection products as a result of a drop in market rates; higher insurance claims and benefits along with the movement in other technical provisions by PLN 133 million (+2.6% y/y), to PLN 5,190 million. They resulted in particular from: rise in insureds’ and co-insureds’ death benefits in Q4 2020, corresponding, as follows from Statistics Poland’s data, with a higher mortality in the whole population in the period, an increase in technical provisions in EPS (a third pillar retirement security product), which was influenced by higher investment performance than in 2019 coupled with a stable level of contributions and a lower level of withdrawals from insurance accounts of unit-linked funds by clients.
150 151MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Financial results growth in premium generated in investment insurance in the bancassurance channel, on products offered in collaboration with Alior Bank and other banks alike, constantly rising level of premiums in the case of protection products in endowments and term insurance offered in own channels – the level of sales and premium indexation under the agreements in the portfolio exceeds the value of lapses; • income from investment activity lower by PLN 83 million (-15.1% y/y), composed of income allocated according to transfer prices and income from investment products. This was predominantly a consequence of the poorer performance of investment products caused by the downturn in the financial markets in connection with the COVID-19 pandemic. At the same time income from investment products does not affect the result of the individual insurance segment because it is offset by the movement in the technical provisions. Income allocated in protection products fell slightly as a consequence of the market interest rate drop; • higher insurance claims and benefits along with the movement in other technical provisions by PLN 30 million (+1.8% y/y). Some of the causes were the development of the protection business in cooperation with banks, where in connection with single premiums there are high initial costs of establishment of provisions, as well as the lower decrease in provisions in annuity products relative to the previous year. The higher increase intechnical provisions in investment products compared to the previous year was brought about by higher contributions to the unitlinked accounts. From the point of view of the operating result, the latter factor was not of significance – it was offset by a higher level of gross written premium. What partly compensated for the above effects was a decrease in provisions in the structured product, whose sale was suspended at the end of 2019; • acquisition expenses higher by PLN 36 million (+25.9% y/y), to PLN 175 million. The increase in fees paid to intermediaries for sales of protection products mainly in the bancassurance channel and the additional expenses incurred on sales support in the Group’s own network were partly offset by the lower commissions on sales of unitlinked products in the bancassurance channel; • administrative expenses higher by PLN 9 million (+12.5% y/y). This is an effect above all of the growing personnel costs and costs related to the aid package for the sales area introduced due to the COVID-19 pandemic.
Investment income, being the key component of the banking segment’s revenue, decreased to PLN 6,248 million (-30.4% y/y). It consists of interest and dividend income, trading result and result on impairment losses. The decline in investment income was primarily due to the lower net interest income and the higher costs of risk stemming from the establishment of additional loan provisions for the anticipated deterioration in the quality of the loan portfolio and of provisions for legal risk related to the portfolio of foreign currency mortgage loans in Swiss francs in Bank Pekao.
The total portfolio of loan receivables in both banks increased by PLN 2.1 billion (+1.1% y/y) in 2020 compared to 2019.
The value of allowances for expected credit losses and for impairment of financial instruments in Bank Pekao amounted to PLN 1,581 million, of which PLN 830 million was estimated as the result of the COVID-19 pandemic.
Alior Bank’s net interest income was driven down also by the impact of the CJEU judgment on the refund of part of the commission in the event of an early repayment of consumer loans. The impact of the judgment was estimated at PLN 344 million, of which PLN 210 million involved current returns charged to net interest income, while PLN 134 million was an additional provision for loans repaid before 11 September 2019, charged to other operating expenses.
Despite the COVID-19 pandemic, loan product receivables grew in both banks – by 1.2% compared to 2019. The increase in loans for individual clients, in particular mortgage loans, was successfully maintained. The sales of loans to business clients dropped, which resulted, among others, from their withholding investments and public support for enterprises in connection with the COVID-19 pandemic, which reduced the demand for bank loans.
Baltic States The operating result on the activity in the Baltic States in 2020 was PLN 220 million, which means an increase in PLN 35 million, i.e. 18.9%, compared to 2019 (after eliminating the impact of the EUR exchange rate the increase would be
The Cost/Income ratio4 was 43% for both banks (43% for Bank Pekao and 44% for Alior Bank), i.e. 2.4 p.p. more than the year before, which resulted from lower income, including net interest income in connection with interest rate cuts in Q2 2020.
Pension insurance The operating profit in the pension insurance segment amounted to PLN 73 million in 2020, i.e. 27.7% less than in 2019.
Factors affecting the operating result and its movement:: • other revenue lower by PLN 12 million (8.5% y/y), to PLN
O pe ra tin g re su lt but in the functional currency an increase by 2.7% was recorded; • investment income higher by PLN 6 million (+18.2% y/y), to PLN 39 million; • decrease in net claims and benefits to PLN 76 million (-6.2% y/y, and in the functional currency: -2.6% y/y). The restrictions in movement introduced due to the COVID-19 pandemic considerably contributed to the lower frequency of losses in TPL and MOD motor insurance, and also the frequency of losses in health insurance decreased. In life insurance the value of benefits paid increased by PLN 8 million (+29.6% y/y, and in the functional currency: +34.8%) compared to the previous year. The loss ratio calculated on the basis of the net earned premium in non-life insurance was 33.6%, down 4.4 p.p. compared to 2019; • decrease in acquisition expenses to PLN 101 million from PLN 118 million (-14.4% y/y) in the previous year. As a result, the acquisition expense ratio dropped by 2.8 p.p. and achieved the value of 51.5%; • administrative expenses higher by PLN 2 million (+6.5% y/y and in the functional currency: +11.7%) – to PLN 33 million. The administrative expense ratio calculated on the basis of the net earned premium increased 2.6 p.p. and stood at 16.8%. The increase was caused, among others, by the higher personnel costs as a result of the payroll pressure and the increase in expenses related to the project activity.
• increase in acquisition expenses to PLN 340 million (+1.5% y/y). In the functional currency, though, acquisition expenses recorded a drop by 2.6% y/y. The acquisition expense ratio calculated on the basis of net earned premium dropped by 0.2 p.p. and stood at 20.7%; • Increase in administrative expenses to PLN 141 million (+6% y/y). In the functional currency, they increased by 3.2% as a result of the project activity and additional expenses related to the adaptation of the activity to work in the conditions of restrictions related to the COVID-19 pandemic.
(-9.7% y/y) combined with a decrease in gross written premium. The gross written premium was PLN 291 million and decreased by PLN 44 million (-13.1% y/y, and in the functional currency: -9.4% y/y) relative to the previous year. Due to the restrictions in movement introduced during the COVID-19 pandemic, the largest drop, by 47.1%, was recorded in travel insurance and other TPL insurance jointly (which is obligatory when filing an application for a visa for entering Poland), and in Green Card insurance (-39.3% y/y). The premium in life insurance dropped by PLN 2 million,
Alternative Performance Measures Selected Alternative Performance Measures (APM) within the meaning of European Securities and Markets Authority Guidelines (ESMA) no. 2015/1415 are presented below.
Return on equity (ROE) is a measure of profitability. It permits an assessment of the degree to which the company multiplies the funds entrusted to it by the owners (investors). This is a ratio of the generated profit to the held equity, i.e. financial resources at the Group’s disposal for an indefinite term which were contributed to the enterprise by its owners. In the case of the PZU Group, the value of net profit and equity differ considerably depending on whether they are provided excluding or including the profit/equity of minority shareholders. Therefore, both return on equity (ROE) – attributable to equity holders of the parent, and return on equity (ROE) – consolidated, without excluding profit and equity attributable to non-controlling shareholders, are presented.
Return on assets (ROA) reflects their capability of generating profit. This indicator specifies the amount of net profit attributable to a unit of financing sources engaged in company’s assets.
In the investment contract segment, no active acquisition of contracts is currently underway.
Alior Bank (i.e. trademark and relations with clients), higher costs of risk stemming from the establishment of additional loan provisions due to the COVID-19 pandemic; • increase in provisions for legal risk in Q4 pertaining to the portfolio of FX mortgage loans in Swiss francs in Bank Pekao.
One of the fundamental measures of operational efficiency and performance of an insurance company is COR (Combined Ratio) calculated, due to its specific nature, for the non-life insurance sector (Section II). This is the ratio of insurance expenses related to insurance administration and payment of claims (e.g. claims paid, acquisition and administrative expenses) to the net earned premium for a given period.
2. Claims and benefits ratio on own share (net claims and benefits / earned premium on own share) x 100%
A fall in 2020 of the net investment result down to PLN 1,103 million (by 50.4% in comparison to 2019) was primarily an outcome of lower results of the banking sector subsidiaries portfolio. It was also related to a non-recurring effect of the impairment loss on goodwill arising from the acquisition of Alior Bank, in the amount of PLN -781 million, out of which PLN-747 million was recognized through the income statement, and Bank Pekao, in the amount of PLN - 374 million, out of which PLN - 51 million was recognized through the income statement. The other impairment losses have been charged to the revaluation reserve.
In 2020, net claims and benefits and the incremental growth in PZU’s provisions totaled PLN 7,523 million, i.e. 3.1% less than in 2019.
The following factors contributed to the change in the net value of claims and benefits: • lower claims and benefits in motor TPL and MOD insurance. It was a result of a lower frequency of claims due to the traffic restrictions introduced at the time of the COVID-19 pandemic. The negative factors were partly offset by increased value of average disbursement; • higher level of losses caused by natural forces and other property damage, including events of high standalone value and claims under crop insurance policies. The number of losses caused by weather phenomena, such as rain and hail, increased disproportionately at the turn of Q2 and Q3 2020; • increased claims and benefits in third party liability insurance. It is mainly a result of a higher movement in provisions for outstanding claims and benefits, primarily in third party liability insurance of medical entities; • higher loss ratio in accident and sickness insurance, predominantly group ADD insurance.
In 2020, acquisition expenses (including reinsurance commissions) amounted to PLN 2,423 million, and declined by 0.8% in comparison to 2019, which along with a 2% decrease in net earned premium y/y translated into a deterioration of the acquisition expense ratio by 0.2 p.p. The growth rate of the acquisition expense ratio was influenced, among others, by a change in the product and sales channels - lower growth rate of motor TPL insurance, which are characterized by lower commission rates and high share of the multi-agent channel.
In 2020, administrative expenses reached PLN 725 million, i.e. 3% higher than in the previous year, which alongside the drop in net earned premium by 2% y/y translates into a worse administrative expense ratio, by 0.3 p.p. The increase in administrative expenses is attributable mainly to higher intervention expenses incurred in connection with the COVID-19 pandemic and higher personnel costs responding to a continuous payroll pressure. The growth has been partly curbed by cost discipline in non-personnel items.
As at the end of 2020, PZU’s receivables stood at PLN 1,689 million, and accounted for 3.8% of assets, whereas in the previous year they amounted to PLN 2,085 million (5.0% of PZU’s assets). The biggest drops were noted in the value of receivables on direct insurance (PLN -352 million y/y) and other receivables, including from related parties (PLN -80 million y/y), where the fall was attributable to the lower receivables from the service of acting as emergency adjuster to Group companies.
As at the end of 2020, PZU held cash of PLN 124 million (0.3% of assets). The year before, the corresponding value was PLN 126 million.
As at the end of 2020, equity reached the value of PLN 17,689 million and accounted for 39.6% of equity and liabilities, up 3.6 p.p. compared to the end of 2019.
In 2020, PZU generated a return on equity (ROE) of 11.8%, up 6.6 p.p. compared to 2019. In 2016-2020, the average return on equity (ROE) was 16.4%.
160 161MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Considering the comprehensive range of financial products offered (insurance, banks, investments, health-related products), the COVID-19 pandemic has had an impact on many aspects of PZU Group’s operation and its financial performance. The total effect of the factors that were material for the 2020 results amounted to PLN 1.93 billion.
The pandemic did not have any major impact on financial results from insurance and investment activities or in the area of health.
In life insurance, the Group recorded - mainly in Q4 2020, a rise in insureds’ and co-insureds’ death benefits, which could be a result of, among others, COVID-19-related complications. It was partly set off by smaller benefit disbursements for critical illness and hospital treatment, as well as for permanent impairment of health, which resulted from decreased activity of the insured in lockdown, as well as postponement of medical treatments resulting from reduced access to health care during the COVID-19 pandemic. The effect on the result attributable to equity holders of the parent company in 2020 was estimated at PLN -101 million..
In non-life insurance, the Group noted lower loss ratio in motor insurance. It was an outcome of a lower frequency of claims due to the traffic restrictions at the time of the COVID-19 pandemic, and an increase of the average disbursement. The effect was partly offset by a lower premium written from motor insurance, which was a result of the prolonged pandemic. Sales of new vehicles in the dealership channel declined (the drop in the registration of new passenger cars was 23% y/y), as did the leasing market, combined with continuing price pressure. Furthermore, personnel costs increased as a result of payroll pressure and introduction of aid packages due to the COVID-19 pandemic in the sales area.
Claims and benefits on own share ratio (net claims and benefits/premium earned on own share) x 100%
Acquisition expense ratio* (acquisition expenses/premium earned on own share) x 100%
Return on equity (ROE) (annualized net profit/average equity) x 100% 12.8% 19.2% 19.7% 18.4% 11.8%
Return on assets (ROA) (annualized net profit/average assets) x 100% 4.3% 6.2% 6.3% 6.2% 4,.4%
Area of operation Factor Net profit attributable to equity holders of the parent company
Impact of the pandemic on the PZU Group’s net result attributable to equity holders of the parent company (PLN million)
Thanks to the fact that the PZU Group’s investment portfolio had already been poised for an expected economic slowdown, its impact on the investment result was minor and limited in particular to lower interest income from variable coupon debt portfolio by an estimated PLN -44 million, whereby the effect was limited by the distribution over time of interest rates reductions in 2020.
Poland, in March 2020 KNF recommended to banks to retain the entire profit achieved in the previous years and refrain from dividend payouts in 2020. As a result of an impairment test, an impairment loss was made on goodwill arising from the acquisition of Alior
The positive aspects of negative results. The record-breaking number of several thousand PZU employees who took part in the Plain Language Department’s annual conference and other events that took place on an online basis on account of the pandemic. We have infected them with the idea of plain Polish.
In this section: 1. Objective of risk management 2. Risk management system 3. Risk appetite 4. Risk management process 5. PZU Group’s risk profile 6. Risk vulnerability 7. Reinsurance operations 8. Capital management
166 167MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
Risk management in the PZU Group consists in analyzing risk in all processes and units and therefore is an integral part of the management process.
Entities from the financial market sectors are additionally obligated to apply the appropriate standards for the respective sector. Their internal regulations pertain to, among others: • processes, methods and procedures facilitating risk measurement and management; • split of duties in the risk management process; • scope and conditions and the frequency of risk management reporting.
PZU exercises supervision over the entire PZU Group’s risk management system on the basis of mutual cooperation agreements entered into with the subsidiaries and the information provided thereunder. PZU manages risk at the Group level on an aggregate basis, especially with respect to capital requirements.
The management boards of PZU Group entities are responsible for fulfilling their own duties in accordance with the generally applicable provisions of national and international law. In particular, they are responsible for implementation of an adequate and effective risk management system.
The role of the PZU Group Risk Committee is to provide support to the supervisory boards and management boards of PZU Group subsidiaries in implementing an effective risk management system that is coherent for the entire PZU Group. The operational objective of the PZU Group Risk Committee is to coordinate and supervise activities related to the PZU Group’s risk management system and processes.
168 169MANAGEMENT BOARD’S REPORT ON THE ACTIVITY OF THE PZU GROUP AND PZU SA 2020
The process of determining the risk appetite and risk limits for each risk category consistent with the Group’s process has been implemented in all the insurance entities in the PZU Group. The management board of each entity determines the risk appetite, risk profile and risk tolerance reflecting its financial plans, business strategy and the objectives of the entire PZU Group. This approach ensures the adequacy and effectiveness of the risk management system in the PZU Group and prevents the acceptance of risk levels that could jeopardize the financial
However this process is personalized to reflect the business strategy and capital structure of each entity. Risk appetite in these companies is consulted with the PZU Group’s parent company and the subject matter of opinions issued by the PZU Group Risk Committee. The aim is to ensure consistency between the activities carried out by the banks and the strategic plans and business objectives of the PZU Group as a whole and maintain an acceptable level of risk at the entire Group level. Once agreed, the level of risk appetite is then approved by the banks’ Supervisory Boards.
Key risks in the PZU Group: actuarial, market, credit, concentration, liquidity, operational, model and compliance
Physical risk is risk to the company that arise from the physical effects of climate change and include: acute physical risk (e.g. storms, fires) and chronic physical risk (e.g. rising sea level). Transition risk is risk that arise from the transition to a low-carbon and climate-resilient economy on climate change and covers policy risk, legal, technological, market and reputational.
Risk concentration compliance risk operational risk credit risk market risk, including liquidity risk concentration risk actuarial risk model risk
The major risks to which the PZU Group is exposed include the following: actuarial risk, market risk, credit risk, concentration risk, operational risk, model risk and compliance risk.
The measurement of actuarial risk is performed using: • an analysis of selected ratios; • the scenario method - an analysis of impairment arising from an assumed change in risk factors; • the factor method - a simplified version of the scenario method, reduced to one scenario per risk factor; • statistical data; • exposure and sensitivity measures; • application of the expertise of the Company’s employees.
designating the optimum medium-term asset structure (AA portfolios); • banking operations – in conjunction with them the PZU Group has a material exposure to interest rate risk.
The identification of market risk associated with insurance liabilities commences with the process of developing an insurance product. It involves identification of the relationship between the cash flows generated by that product and the relevant market risk factors. The identified market risks are subject to assessment using the criterion of materiality, specifying whether the materialization of risk entail a loss capable of affecting the financial condition.
Market risk is measured using the following risk measures • VaR, or value at risk, a measure quantifying the potential economic loss that will not be exceeded within a period of one year under normal conditions, with a probability of 99.5%; • standard formula; • exposure and sensitivity measures; • accumulated monthly loss.
The risk measurement is performed: • daily – for exposure and sensitivity measures of the instruments in systems used by particular PZU Group companies,
• monthly – when using the value at risk model for market risk or a standard formula
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In connection with recognizing additional provisions in PZU Życie in Q2 2020 and taking into account the current interest rate levels in the business processes, in the short term the risk associated with low interest rates in the
PZU Group’s insurance segment is not perceived as significant. The risk is monitored and analyzed on an ongoing basis to ensure proper adaptation of the investment portfolio structure.
Financial liquidity risk means the possibility of losing the capacity to settle, on an ongoing basis, the PZU Group’s liabilities to its clients or business partners. The liquidity risk management system aims to maintain the capacity of fulfilling the entity’s liabilities on an ongoing basis. Liquidity risk is managed separately for the insurance part and the banking part.
Risk assessment and measurement involve estimation of the shortage of cash to pay for liabilities. The risk estimate and measurement is carried out from the following perspectives: • liquidity gaps (static, long-term financial liquidity risk) – by monitoring a mismatch of net cash flows resulting from insurance contracts executed until the balance sheet date and inflows from assets to cover insurance liabilities in each period, based on a projection of cash flows prepared for a given date; • potential shortage of financial funds (medium-term financial liquidity risk) – through analysis of historical and expected cash flows from the operating activity; • stress tests (medium-term financial liquidity risk) – by estimating the possibility of selling the portfolio of financial investments in a short period to satisfy liabilities arising from the occurrence of insurable events, including extraordinary ones; • current statements of estimates (short-term financial liquidity risk) – by monitoring demand for cash reported by business units of an insurance undertaking in the PZU Group by the date defined in regulations which are in force in that entity.
To manage the liquidity of the banks in the PZU Group, liquidity ratios are used for different periods ranging from 7 days, to a month, to 12 months and to above 12 months.
Within management of liquidity risk, banks in the PZU Group also analyze the maturity profile over a longer term, depending to a large extent on the adopted assumptions about development of future cash flows connected with items of assets and equity and liabilities. The assumptions take into consideration: • stability of equity and liabilities with indefinite maturities
The impact of the COVID-19 pandemic on the liquidity of the PZU Group’s insurance segment in 2020 should be classified as low. An increase in the number of deaths (mortality rate) was observed, which could result from, among other things, the hindered access to health care and COVID-19 related complications. However the situation did not significantly impact PZU Group’s liquidity risk. In 2020 there were no grounds to take extraordinary management actions regarding liquidity risk in connection with the COVID-19 pandemic. As part of routine management actions regarding liquidity risk in 2020, the PZU Group constantly monitored the level of available liquid funds and the current utilization of liquidity limits.
Credit risk and concentration risk Credit risk is understood as the risk of a loss or an adverse change in the financial situation resulting from fluctuations in the reliability and creditworthiness of issuers of securities, counterparties and all debtors. It materializes in the form of a counterparty’s default on a liability or an increase in credit spread. The following risk categories are distinguished in terms of credit risk: • spread risk, • counterparty default risk, • credit risk in financial insurance.
The measurement of credit risk is performed using: • measures of exposure (gross and net credit exposure and maturity-weighted net credit exposure), • capital requirement calculated using the standard formula.
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The monitoring pertains to: • exposures to financial insurance, • exposures to reinsurance, • exposure limits and VaR limits, • loan exposures (in the case of banking entities).
Reporting involves providing information on the levels of credit risk and concentration risk and the effects of monitoring and control. The frequency of each report and the scope of information provided therein are tailored to the information needs at each decision-making level.
The structure of credit risk limits and concentration risk limits for various issuers is established by dedicated committees in such a manner that the limits are consistent with the adopted risk tolerance determined by the management boards of the individual subsidiaries and in such a manner that they make it possible to minimize the risk of ‘infection’ between concentrated exposures.
Both banks in the PZU Group, upon KNF’s consent, apply advanced individual models to measure operational risk and to estimate capital requirements on account of this risk.
Monitoring and control of operational risk is supported mainly by an established system of operational risk indicators and limits enabling assessment of changes in the level of operational risk over time and assessment of factors that affect the level of this risk in the business.
Management actions involving reactions to any identified and assessed operational risks involve primarily: • taking actions aimed at minimizing risks, for instance by strengthening the internal control system; • risk transfer – in particular, by entering into insurance agreements; • risk avoidance by refraining from undertaking or withdrawing from a particular type of business in cases where too high a level of operational risk is ascertained and where the costs involved in risk mitigation are unreasonable; • risk acceptance – approval of consequences of a possible realization of operational risk unless they threaten to exceed the operational risk tolerance level.
On 25 February 2020, a Crisis Management Team was appointed in PZU and PZU Życie to ensure business continuity of the companies while observing the safety measures and restrictions resulting from, among others, the
From 5 to 31 March, the Crisis Management Team met daily and, from 1 to 20 April, two times a week or as needed, and after 21 April, once a week. Between 24 July and 20 October, additional meetings were held if necessary.
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• information measures (newsletters, alerts, SMS, information posted in the PZU24 service, webinar, FAQ); • organizational and legal measures (appointing the Crisis Management Team and its regular meetings, declaring a crisis situation, introducing remote work procedure and mode, updating the Business Continuity Plan, creating a register of identified infections, prevention regarding work contacts, increased personal hygiene standards); • technical measures (purchase and expansion of hardware increasing the VPN limit, purchase of licenses for the use of online communicators and for software supporting remote work, increasing the phone data transmission limits, equipping employees with notebooks and desktops for remote work, increasing the bandwidth of internet lines); • protection measures (equipping PZU branches with disinfectants and protective measures, equipping workstations in PZU branches with protective screens, purchase of facemasks and gloves, disinfection and ozoning of rooms).
Remote work was introduced already in March 2020. The necessary technical and organizational measures were ensured to enable as many employees as possible to work remotely or work in a rotation system.
Insurance branches and agencies remained open, adapting to all legal limitations and sanitary restrictions associated with the spread of COVID-19.
At each meeting of the Crisis Management Team, the Security Department presented reports on the number of infections among employees and in Poland, work organization in PZU Group companies, availability of the branches and the agency network, execution of orders for personal protective equipment and disinfectants, and expenditures incurred from the Crisis Management Team budget.
Some of the decisions made by the Crisis Management Team were forwarded as recommendations to PZU Group subsidiaries.
The Business Continuity Plans launched in connection with the pandemic in the remaining PZU Group companies operated in accordance with the internal regulations and procedures in place in such companies.
Model risk Model risk, classified by the PZU Group as significant, is defined as the risk of incurring financial losses, incorrectly estimating data reported to the regulatory authority, taking incorrect decision or losing reputation as a result of errors in the development, implementation or application of models.
The formal identification and assessment process for this risk is currently being developed in PZU and PZU Życie. The process aims to ensure high quality of model risk management practices.
In the entities from the banking sector, given the high significance of model risk, the management of this risk has already been implemented for some years in the course of adaptation to the requirements of Recommendation W issued by the KNF. Both PZU Group banks have defined standards for the model risk management process, including the rules for developing models and evaluating the quality of their operation, ensuring at the same time appropriate corporate governance solutions.
Compliance risk Compliance risk is the risk that PZU Group entities or persons related to PZU Group entities may fail to adhere to the applicable provisions of law, internal regulations or standards of conduct, including ethical standards, adopted by PZU Group entities, and the risk of violating these provisions of law, regulations and standards. This results or may result in: • legal sanctions incurred by the PZU Group or persons acting on its behalf, • financial losses, • loss of reputation or credibility.
The provision of full information on compliance risk in Group companies is the responsibility of their compliance units. They are required to assess and measure compliance risk and take appropriate remedial actions aimed at mitigating the likelihood of realization of this risk.
Group as a whole, • analysis of the implementation of recommendations issued to entities pertaining to the fulfillment of the compliance function,
• support of the PZU Group entities’ compliance business units when assessing compliance risk,
Compliance risk includes, in particular, the risk that the operations performed by PZU Group entities will be out of line with the changing legal environment. This risk may materialize as a result of delayed implementation or absence of clear and unambiguous laws, or what is known as a legal gap. This may cause irregularities in the PZU Group’s business and, as a result, lead to higher costs (for instance, administrative penalties, other financial penalties) and a heightened level of loss of reputation risk.
The identification and assessment of compliance risk for each internal process in PZU Group entities is the responsibility of the heads of organizational units, in accordance with the allocation of responsibility for reporting. Moreover, compliance units in PZU Group entities identify compliance risk on the basis of notifications to the register of conflicts of interest, gifts and irregularities, and from inquiries sent to them.
Compliance risk is assessed and measured by calculating the effects of risk materialization of the following types: • financial risks, resulting among others from administrative penalties, court judgments, decisions issued by UOKiK, contractual penalties and damages,
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• monitoring of anti-monopoly jurisprudence and proceedings conducted by the President of UOKiK; • reviews of the implementation of recommendations issued by the PZU Group’s compliance unit; • ensuring uniform standards and consistent implementation of the compliance function within the PZU Group; Management actions in response to compliance risk include in particular: • acceptance of the risk arising, without limitation, from legal and regulatory changes; • mitigation of the risk, including by: adjustment of procedures and processes to changing regulatory requirements, evaluation and design of internal regulations to suit compliance needs, participation in the process of agreeing on marketing activities; • avoidance of risk by preventing any involvement of PZU Group entities in activities that are out of compliance with the applicable regulatory requirements, best market practices or activities that may have an unfavorable impact on the PZU Group’s image.