5.17 Insurance contracts

5.17.1. Written premium, unearned premium reserve, and unexpired risk reserve

5.17.1.1. Non-life insurance

Written premiums from insurance contracts and reinsurance treaties are recognized at the date of the insurance contract conclusion.

Written premiums are recognized in proportion to the period of insurance coverage. Part of the written premium for the period of insurance coverage after the balance sheet date is recognized under unearned premiums reserve. The unearned premiums reserve is determined individually as at the end of each financial year, accurate to one day.

The unexpired risks reserve complements the unearned premiums reserve and covers future claims, benefits and costs, including deferred acquisition costs, relating to insurance contracts which do not expire on the last day of the financial year. The unexpired risks reserve is determined for individual insurance groups as at the end of each financial year.

The overall unexpired risks reserve is determined for insurance groups with the claims ratio for the current year exceeding 100%, as the difference between the product of the unearned premiums reserve and the claims ratio for the current financial year and the unearned premiums reserve – for the same coverage period.

5.17.1.2. Life insurance

Written premiums in life insurance contracts include amounts due under insurance contracts concluded during the financial year, irrespective of the fact whether the amounts have been paid or not, as well as whether the amounts refer to the

whole reporting period or its part. The premiums are adjusted by the change in the unearned premiums reserve during the financial year and reduced by the amount of premium due to the reinsurers. Unearned premiums reserve is created as a portion of written premiums that refers to future financial years proportionally to the period to which the premium is written.

5.17.2. Claims and benefits paid and technical provisions

5.17.2.1. Non-life insurance

Costs of the financial year include all costs of claims and benefits paid under the concluded insurance contracts, including direct and indirect claims handling expenses and costs of collection of subrogations and a change in outstanding claims provisions. The costs of claims and benefits are reduced by all received salvages and subrogations as well as by the change in expected salvages and subrogations.

Outstanding claims and benefits provision

The outstanding claims and benefits provision includes:

• provision for outstanding claims and benefits due to losses and accidents which took place and were reported by the end of the financial year;
• provision for losses and accidents which were incurred by the end of the financial year and were not reported;
• provision for claims handling expenses.

The provision for claims reported but not paid (RBNP) is determined based on an individual approach by claims handling units or, if obtained information does not allow to determine the provision amount, as the amount of average claim determined with an actuarial method. The provision includes the deductible, expected increase in the prices of goods and repair services and may not exceed the sum insured and the guaranteed sum. The provision is revalued immediately after receiving information which impacts its amount by individual assessment or estimated losses and claims.

The provision for claims incurred but not reported (IBNR) is created for claims and benefits which have not been reported by the end of the financial year when the provision is recognized. IBNR is calculated using the loss triangles: the generalized Chain Ladder method, and if the number of claims or their value is insignificant – using the Bornhuetter-Ferguson method, broken down by the years during which losses were incurred. Basis for calculation are annual triangles for claims paid and claims reported.

The provision for direct claims handling costs for claims reported is calculated on a case-by-case basis for each claim, whereas for claims incurred but not reported it is calculated using the generalized Chain Ladder method (based on cost triangles broken down by the years in which claims were incurred).

The provision for indirect claims handling expenses is recognized using the actuarial method as the product of the share of indirect claims handling expenses in claims paid to direct claims handling expenses ratio, and the provision for claims reported but not paid, the provision for claims incurred but not reported and the provision for direct claims handling expenses.

Provisions I and II and the provision for claims handling expenses are recognized at the nominal value, i.e. they are not discounted.

Provisions for the capitalized value of annuities

Provision for the capitalized value of annuities is calculated individually, as the present value of annuity (for life or periodic), paid in advance.

As at the end of each financial year, using actuarial methods a provision for capitalized value of annuities is created for claims incurred after 31 December 1990 by the balance sheet date and not disclosed as annuity (annuity IBNR). As at the end of each financial year, the value of additional provision for liabilities resulting from increased annuity benefits from the so-called old portfolio is determined. Reassessment is carried out only for annuitants with the same provision calculated as at the end of 1997 whose benefit at the end of the financial year is lower than the predetermined percentage of the current value of average salary between 1960 and 1990.

5.17.2.2. Life insurance

Costs of the financial year include all costs of claims and benefits paid under the concluded insurance contracts, including direct and indirect claims handling expenses and a change in outstanding claims provisions.

Costs of benefits paid

Benefits paid include all payments and charges made in the financial year due to benefits incurred during the financial year and earlier (also annuity claims and surrenders), together with all direct and indirect, internal and external benefits handling costs. Handling costs include also the costs of litigation.

The value of benefits is recognized at the actually paid amount, following deduction of refunds (except for refunds due to outward reinsurance), increased by the change in outstanding claims provision and reduced by the reinsurers’ share in claims paid and provisions.

Life insurance provision

Life insurance provision is determined using the prospective actuarial methods, on the case-by-case basis and in the amount corresponding to the difference between:

• expected present value of guaranteed benefits which may result in relation to insurance protection granted;
• the current value of expected premiums which will be paid by the termination of the contracts.

With respect to insurance concerning equity funds, life insurance provision is created to cover present benefits related to the provided insurance coverage over the cash accumulated in the fund and it corresponds to the portion of payment imposed due to the provided insurance coverage attributable to the future financial years.

Calculation of life insurance provision includes also overheads, whereas the sole provision is not reduced by the value of deferred acquisition costs.

Unit-linked life insurance provision

Unit-linked life insurance provision is created at the value of the investment made in line with the provisions of the concluded contract.

Outstanding claims and benefits provision

Outstanding claims and benefit provision is created independently for:

• claims reported but not paid – using the case-by-case method or when the amount of claim cannot be assessed, if the claims and benefits are large-scale, using the average claim from the quarter immediately preceding the financial year;
• claims incurred but not reported – using the lump-sum method, as the percentage of claims paid for the period of the last twelve months.

Outstanding claims and benefits provision includes also a claims handling provision.

Provisions for bonuses and rebates for the insured

The provision corresponds to the portion of profit from insurance granted following the end of the settlement period which will be granted and paid to the insured after the end of the financial year (so-called share in profit) on the terms and conditions as specified in contracts.

Other technical provisions

Other technical provisions in life insurance include:

• provision for revaluation of claims under individual life insurance and annuity assumed from Państwowy Zakład Ubezpieczeń;
• provision for pending court proceedings and claims related to court decisions (based on Article 358 §3 of the Civil Code of 23 April 1964 ( Journal of Laws of 1964, item 121, as amended) concerning the change in the amount and the manner of paying a cash performance; the value of the above provision has been determined based on the expected value of additional future claims resulting from court cases and settlements. The value of such claims has been determined by extrapolating the historical trends related to claims, estimated on the basis of the number of concluded court cases and settlements as well as the awarded amounts;
• provision for low interest rates – related to the projected decline in profitability of assets to cover the provisions concerning life insurance for traditional individual life insurance, birth insurance, and annuities. The provision is created according to the actuarial method, on the case-by-case basis, in the amount corresponding to the difference between:

- amount of mathematical provisions calculated with relevant formulas and application of modified technical rates, including their projected future decrease and

- amount of mathematical provisions calculated in line with the valid regulations for creating provisions with the original technical rate applied for other product pricing.

5.17.3. Liability Adequacy Tests

Non-life insurance

In non-life insurance, the test for adequacy of provisions is not required, however, when preparing the consolidated financial statements, a procedure analogous to the test for adequacy in life insurance is carried out in order to verify the adequacy of provisions for claims for individual products. Currently observed trends in accidents, rate of damage reporting and compensation payment are considered while carrying out the assessment. If the estimates including current trends exceed provisions for claims, the provisions are increased to the level of these estimates. Otherwise, the provisions can be partially released.

The mechanism of the creation of unexpired risks reserve in non-life insurance described in point 5.17.1.1 in line with the minimum requirements of Liability Adequacy Test.

Life insurance

As at the end of each year, the technical provisions recognized in the consolidated financial statements are compared with the present value of expected future cash flows, i.e. the economic value of liabilities, for individual products from the life insurance portfolio. The forecasts for the cash flows include income from premiums, expenses due to claims, costs and commissions, and are determined based on a number of assumptions concerning: mortality, claims, resignations, servicing costs, curves of return rates and other assumptions specific for the product (e.g. indexation).

The assumptions on expected future rate of mortality, claims, resignations and other assumptions specific for the product used for cash flow forecasts are verified every year and updated based on current experience and observed trends. Along with the assessment of their further establishment, they constitute the best estimate assumption in the scope of the further development of mortality, claims, resignations, etc.

Future indexations of the sum insured and premiums resulting from the right to a share in the profit described as the surplus of return rates from investments achieved above the technical rate are based on a forecast concerning future return rates from the current assets covering technical provisions portfolio for these products, along with their reinvestments with present term structure of interest rates, i.e. in line with current market expectations, forecasted in the future.

The forecasts of the future costs are made on a basis of the expected number of contracts that stay in the portfolio in subsequent periods and average unit cost of service per contract. The assumptions concerning unit costs are made based on expected future portfolio maintenance and service costs including asset management and claims handling expenses. It is assumed that unit service costs are subject to the increase in projection in subsequent years by the cost increase rate. The amount of future commissions is set based on agreed commission rates for every contract in the years subsequent to their conclusion.

In order to determine the present value of future cash flows, discount factors are used based on unadjusted profitability of Polish treasury bonds in line with their current market prices.

The test involves a comparison of the present value of projected discounted cash flows with the amount of provision recognized at the end of each year. In the case when the provisions are found to be insufficient as compared to the value of discounted cash flows, the assumptions concerning provision creation are adjusted, thus making the adjustment to the value of the provisions.

The objective of the Liability Adequacy Test is the assessment of sufficiency of value of the technical provisions recognized in the consolidated financial statements, and not the assessment of sufficiency of each assumption. Hence, the Liability Adequacy Test does not lead to direct identification of sufficiency level or inadequacy of each assumption used for the estimation of technical provisions.

5.17.4. Reinsurer's share

The reinsurer’s share in premiums, unearned premiums reserve, unexpired risks reserve, and outstanding claims provisions is determined in accordance with the terms and conditions of relevant reinsurance treaties.

The reinsurers’ share in claims and benefits is determined for the groups of insurance with reinsurance, in the amount of reinsurers’ share in claims and benefits, in line with relevant reinsurance treaties.