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6.2.1 Fair value
Assumptions applicable for determining the fair value of assets have been presented in Note 10.
6.2.2 Impairment
6.2.2.1 Goodwill
Key assumptions made for the purpose of estimating the recoverable amount have been presented in Note 28 (for subsidiaries) and Note 34 (for the entities measured using the equity method).
6.2.2.2 Financial instruments measured at amortized cost
The assessment is made for all loans exposures (groups of loans exposures) in order to identify objective evidence for impairment. It is made in accordance with the most recent data and on the day of value remeasurement. While determining the amount of impairment loss, the assessment of the estimations of amounts and realization dates of future cash flows is made. The estimations are based on assumptions concerning many factors, hence the real results may vary. This may lead to a future change in the amount of an impairment loss.
Individual assessment is valid for impaired exposure exceeding the adopted materiality or exposure thresholds (PLN 150 thousand for individual client and PLN 500 thousand for business client), for which there is no possibility of separating a group of assets with similar credit risk characteristics or the attempt to assess the parameters of the group was insufficient.
The individual assessment is based on an analysis of possible scenarios (business clients) or an Event Tree for possible events (individual clients). The probability of realization and expected recoveries were assigned to each scenario or branch of the Tree. The standard Event Trees which represent different collection strategies were prepared for the individual clients. The assumptions for individual measurements are thoroughly described. The values of the salvages expected in individual measurements are compared to salvages realized quarterly.
The group measurement is based on the time the given exposure spends in the state of impairment; it takes into account the characteristics of a given group in terms of expected salvages. The hedges are recognized on the exposure level.
The credit exposures for which individual evidence of impairment loss was not identified are grouped with respect to the homogeneity principle concerning risk profile and the provision for exposure group for the coverage of losses incurred but not reported is created.
Impairment losses on assets held to maturity and loans and receivables are determined as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted using the effective interest rate determined upon initial recognition (original effective interest rate).
If in a subsequent period the amount of impairment decreases as a result of an event that occurred after the impairment, the previous impairment loss is reversed by adjusting the balance of impairment losses. The reversal is recognized in the consolidated statement of profit or loss under "Net result on realization and impairment losses on investments".
6.2.2.3 Equity instruments listed on the regulated markets as well as participation units and investment certificates issued by investment funds
Impairment losses on equity instruments listed on the regulated markets, units in open-end investment funds and certificates issued by closed-end investment funds classified as available for sale are recognized if at least one of these two conditions is met:
- the negative difference between the present value and the cost or the amount revalued (by a previous impairment loss) represents at least 30% of the cost or the amount revalued;
- the market value of the asset as at the end of each of the 12 consecutive months is lower than the cost or the amount revalued (by a previous impairment loss).
Impairment losses are not recognized if it is concluded that the aforesaid events may be reversed within 6 months of the end of the financial year or there are any other indications that the decreases may be temporary in nature.
6.2.2.4 Receivables from policyholders
Receivables from policyholders are reviewed in order to determine possible occurrence of impairment indicators.
Firstly, impairment losses for individual assets are assessed. An impairment loss for individual asset is made for a single account receivable after an evaluation of the economic and financial situation of the debtor and the probability that the amount due will be paid. These receivables are not taken into account in group impairment losses.
As far as accounts receivable from debtors that are in liquidation or bankrupt are concerned, the impairment loss is based on the amount of receivables not covered by a guarantee or another security. If the debtor saw their bankruptcy petition dismissed and the debtor’s assets are not sufficient to satisfy the costs of bankruptcy proceedings, the total value of the account receivable is written-off.
An impairment loss for individual asset is increased when there are indications suggesting that the estimated amount which can be recovered has decreased or that the amount due, for which the impairment loss for individual asset was created – has grown. An impairment loss for individual asset is reversed if it is estimated that the amount which can be recovered exceeds previous estimates or if it has been confirmed that the receivables will be paid partially or in total, or if the amount has been deemed undue. An impairment loss for individual asset is used if the receivables are to be partially or fully remitted or written-off.
Where no case-by-case estimates have been made, the impairment of receivables is assessed on a collective-basis, which provides grounds for a group impairment loss.
Non-life insurance
The group impairment loss is assessed on the basis of the adopted model of a permanent yet individually insignificant impairment assessment. In the model, the impairment loss is determined on the basis of a collective assessment of impairment of receivables due from policyholders grouped according to similar characteristics of the credit risk.
Mature receivables are subject to age analysis, depending on their overdue period. Mature receivables are reduced by the value of the receivables subject to impairment losses for individual assets. The group impairment loss is assessed according to individual overdue periods and on the basis of the irrecoverability ratios of mature receivables that are determined on the basis of a historical analysis.
The value of receivables that will probably become mature on the basis of a historical analysis of the share of overdue receivables is determined for non-mature receivables. The amount determined in this way is reduced by the value of the receivables subject to impairment losses for individual assets. On the basis of the remaining amount of receivables, an impairment loss in the amount of the irrecoverability ratio of mature receivables for the shortest overdue period is determined.
Life insurance
The group impairment loss is assessed for receivables which are not subject to impairment losses for individual assets. Receivables are grouped according to similar credit risk characteristics which indicate the debtor’s ability to repay the entire debt. It is also allowed to group receivables according to criteria different than how long they have been overdue, as long as it allows for a more accurate estimate of the value of the group impairment loss. Calculations are carried out separately for each insurance product or groups of insurance products.
The amount of group impairment losses is estimated with the help of models which are created and updated on the basis of data on debt collection in particular groups sharing similar characteristics. Such estimates are created on the basis of historical data concerning defaults on loans and receivables in various categories of being overdue.
6.2.3. Assumptions made in estimation of technical provisions for non-life insurance
When calculating a provision for capitalized value of annuities, estimated future increase of an average annuity is based on historical data taking into account other information that may result in an increase in the value of annuities in the future (for instance, increased insurance awareness, legislation changes etc.).
Based on the forecast inflation and the pay growth rates, the technical rate of 3.6% and the growth rate of 3.9% was used for all annuities, both as at 31 December 2015 and 31 December 2014.
As regards life annuities, the period during which annuity claims are paid is determined based on publicly available statistics, such as, for example, the Polish Life Expectancy Tables (PLET), published by the Central Statistical Office in Poland. Additionally, calculation of the provision for capitalized value of annuity claims includes the cost of their future management in the amount of 3% of the value of paid claims.
The final estimated value of claims and benefits paid has been presented in the provision development triangles, as well as an analysis of sensitivity of the net profit/loss and equity to changes in the assumptions made for determining the value of technical provisions for life insurance is presented in Note 8.5.1.1. Methodologies used to calculate the IBNR provision and the old portfolio provision are described in Note 5.18.2.1.
6.2.4. Assumptions made in estimation of technical provisions for life insurance products
The amount of life insurance provision equals to the value of liabilities related to the concluded insurance contracts. It is determined as a difference between the current value of expected claims and the current value of expected premiums using the so-called net premium method.
The provision calculation includes all claims and premiums provided for in the contracts as contractual liabilities and receivables, irrespective of the fact whether the contract will be maintained by the insured until the end of the period or terminated. The assumptions for the frequency of events under insurance coverage, i.e. mortality, incidence proportion and accident rate is determined based on publicly available statistics, such as PLET in Poland, or based on own statistics developed on the basis of historical data for individual classes of products found in the portfolio.
The assumptions used in calculation of life insurance provision are calculated separately for individual insurance products at the time of determining premium rates and marketing a given product. The assumptions used in calculation of life insurance provision are calculated separately for individual insurance products at the time of determining premium rates and marketing a given product. Every year, the approved assumptions are verified in terms of adequacy. In the case when any of the originally determined assumptions is found to be insufficient, the adjustments are made; however, in the case of lack of insufficiency, the lock-in assumptions are applied.
Incidence of events covered by insurance
Group insurance by employers and individually continued and family products cover both the insured individuals, referred to as "the key insured", and their family members. As the Company had only access to data on the main insured covered by continued insurance and due to a lack of complete information on the age, sex, marital and family status of the insured in group insurance, in 2004 a statistical survey was conducted with regard to the age structure and sex of the individuals covered by group insurance, as well as their family members. The aforementioned survey also served as the basis for the assumptions regarding the family structure of the individuals covered by individually continued insurance.
The assumptions made on the basis of the statistical survey for the purpose of determining the group insurance provisions, in line with the theory of probability and statistical methods, allow to take into account the age structure and sex of the insured and their family members and to estimate the value of the provisions for the whole portfolio.
An analysis of sensitivity of the net profit/loss as well as equity to changes in the assumptions made for determining the value of technical provisions for life insurance is presented in Note 8.5.1.2.
6.2.5. Deferred acquisition expenses
From 1 January 2015, PZU extended the range of the costs that undergo deferral in time by some of indirect acquisition costs related to conclusion and extension of insurance policies (especially the costs of operations indirectly related to sales processes which cannot be qualified as indirect acquisition costs) and, primarily, the costs of operations related to: concluding contracts and underwriting processes in sales units (specified on the basis of work time surveys), automatic and manual input of policies into production systems (sales recording) and functioning of the contact center in scope of selling the policies. The change mentioned above provides better proportionality of revenue and expenses (written premium generated by these activities is deferred in time through the premium reserve) and resulted in the increase of the gross result for 2015 by the amount of PLN 112,031 thousand.
6.2.6. Calculation of provisions for employee benefits
Provisions for retirement and death benefits (as presented in Note 44) are estimated using actuarial methods with the application of appropriate actuarial techniques and assumptions.
Actuarial assumptions
The table below presents the key actuarial assumptions made for calculation of provisions.
| Key actuarial assumptions made for calculation of provisions for retirement and death benefits | 31 December 2015 | 31 December 2014 |
|---|---|---|
| Discount rates, including: | ||
| - PZU and PZU Życie | in accordance with the bond yield curve 1) | in accordance with the bond yield curve 2) |
| - other PZU Group entities | 1.0%-4.5% | 1.0%-4.5% |
| Anticipated pay growth rates, including: | ||
| - PZU and PZU Życie | 3.0% | 3.0% |
| - other PZU Group entities | 0.2%-5.0% | 0.2%-4.3% |
| Mortality rate, including: | ||
| - PZU and PZU Życie | PLET 3) | PLET 3) |
| - other PZU Group entities | PLET 3) | PLET 3) |
| Employee turnover ratio, including: | ||
| - PZU and PZU Życie | specific to company 4) | specific to company 4) |
| - other PZU Group entities | 0.0%-15.6% | 0.0%-10.0%) |
| Disability rate (entitlement to a disability pension), including: | ||
| - PZU and PZU Życie | 0.2% | 0.2% |
| - other PZU Group entities | 30%-60% PLET 5) | 30%-60% PLET 5) |
1) The yield curve for zero-coupon Treasury bonds used for discounting the provisions for employee benefits at PZU and PZU as at 31 December 2015 covers the period from 2016 to 2045, assuming increasing values (1.51%-3.41%).
2) The yield curve for zero-coupon Treasury bonds used for discounting the provisions for employee benefits at PZU and PZU as at 31 December 2014 covers the period from 2015 to 2045, assuming increasing values for the range until 2033 (1.75%-2.90%) and subsequently becoming an inverted yield curve decreasing to the level of 2.88%.
3) The assumed mortality rate matches the level defined in PLET.
4) The employee turnover ratio has been calculated based on ongoing observation of employee turnover. The ratio differs depending on the employee’s age, length of service and sex.
5) The disability rate represents a relevant percentage of the mortality rate described above. Some PZU Group entities do not take the aforementioned rate into account.
Sensitivity analysis
| Effect of changes in actuarial assumptions for retirement and death benefits on the related provisions | 31 December 2015 | 31 December 2014 | ||
|---|---|---|---|---|
| Retirement benefits | Death benefits | Retirement benefits | Death benefits | |
| Discount rates | ||||
| - increase by 1 p.p. | -2,028 | -2,578 | -2,124 | -2,629 |
| - decrease by 1 p.p. | 2,517 | 3,094 | 2,652 | 3,176 |
| Projected pay growth rates: | ||||
| - increase by 1 p.p. | 2,49 | 3,056 | 2,611 | 3,125 |
| - decrease by 1 p.p. | -2,044 | -2,596 | -2,134 | -2,639 |
| Mortality rate: | ||||
| - increase by 10% | -239 | 2,026 | -245 | 1,978 |
| - decrease by 10% | 245 | -2,071 | 251 | -2,022 |
| Employee turnover ratio: | ||||
| - increase by 10% | -332 | -620 | -356 | -620 |
| - decrease by 10% | 350 | 650 | 375 | 650 |
6.2.7. Estimated provisions for disputes
Provisions for disputes are estimated using the individual method, in accordance with IAS 37, taking into account the probability of an outflow of cash, including economic benefits to settle the obligation. Outflow of cash is regarded as probable if the event is more likely than not to occur, i.e. the probability that the event will occur is greater than the probability that it will not.
Detailed descriptions and amounts of provisions for disputes are presented in Note 44 and 53.
6.2.8. Deferred tax assets and liabilities
PZU Group entities estimated taxable future income taking into account the possibility of realization of negative temporary differences due to a tax loss incurred by these companies. No deferred tax assets concerning unused tax loss were recognized in result of the estimations. Deferred tax assets and liabilities are recognized according to the principles defined in Note 34.
