3.13. Insurance risk

The risk connected with insurance contracts is the possibility of occurrence of the insurance event and the uncertainty of the amount of the resulting claim the insurer is to pay by virtue of this event. By the very nature of an insurance contract, this risk is random and therefore unpredictable.

For the portfolio of insurance contracts where for creating new products, calculating premiums as well as producing financial plans for subsequent periods the theory of probability is applied, the basic risk is the risk of discrepancy between actual claims and their expected values.

As loss ratio-based estimates are usually based on historic values, there is the risk that their actual realisation will differ from their expected realisation with regard to factors changing over the period such as:

  • demographic structure of insured persons upon collective health insurance,
  • regulations of the law concerning the insurance market,
  • other regulations of the law affecting the insurance market.

Too small insurance portfolio, which does not enable the Law of Great Numbers to function but also does not provide sufficient statistical information for proper risk management is also a factor increasing the risk of discrepancy between loss ratio-based estimates and their actual realisation.

In order to decrease this risk, the Group concentrates primarily on increasing given insurance risk portfolios while limiting the risk as well as the amount of individual risks insured on the Group’s share by application of profound reinsurance.

Another source of insurance risk is insurance fraud, which occurs in a higher or lesser degree in most of insurance products. This phenomenon consists in fraudulent claims for compensations or benefits, which are not due actually.

Methods limiting the results of occurrence of the above indicated phenomenon include among others: preventive actions taken up by insurance companies (registers etc.) as well as procedures preventing acceptance of such risk for insurance and relevant procedures of claims handling.

In 2014, the Group offered short-term property and personal insurance contracts both in individual and collective models. However, the collective model is applied to the sale of insurance portfolio known as bancassurance.

The Group also offers individual agreements in co-insurance with other insurers.

Individual agreements are usually concluded for one year with the possibility of renewal with the exception of tourist insurance agreements which are concluded for the duration of the trip, i.e., from 1 to 90 days. Once a year the Group has the right to propose new conditions while renewing the agreement or may not propose such renewal at all.

Collective agreements are concluded in perpetuity. However, the Group has the right to propose new conditions at any time with a three-month notice with the exception of financial agreements where the agreement conditions can be changed by mutual agreement or with a twelve-month notice.

The Group reinsures insurance contracts upon reinsurance agreements.

Concentration of insurance risk is presented in accordance with the breakdown by the groups and the scope of risks defined by the Polish Financial Supervision Authority as well as according to the individual and collective sale model.

The concentration of insurance risk stated in provisions for compensations and benefits

 

 
Gross risk 31.12.2014 share % 31.12.2013 share %
casualty 20 789 15% 16 808 14%
disease 10 506 8% 11 221 10%
casco of land vehicles 3 533 3% 3 413 3%
damages caused by elements 8 277 6% 6 557 6%
other material damages 5 854 4% 5 317 5%
civil liability due to owing and usage of land vehicles 64 520 47% 53 065 46%
civil liability 1 280 1% 1 016 1%
loan 12 579 9% 10 353 9%
guarantee 523 1% 494 0%
different financial risks 68 0% 215 0%
protection by law 146 0% 161 0%
providing help 8 314 6% 7 245 6%
Gross provision for compensations and benefits 136 389 100% 115 865 100%
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Risk on own share 31.12.2014 share % 31.12.2013 share %
casualty 20 789 31% 16 276 29%
disease 10 506 16% 11 221 20%
casco of land vehicles 724 1% 714 1%
damages caused by elements 4 149 6% 3 717 7%
other material damages 4 482 7% 4 076 7%
civil liability due to owing and usage of land vehicles 12 945 19% 10 657 19%
civil liability 979 1% 758 1%
loan 9 643 15% 6 653 12%
guarantee 523 1% 494 1%
different financial risks 68 0% 215 0%
protection by law 146 0% 161 0%
providing help 1 669 3% 1 712 3%
Provisions for compensations and benefits on own share 66 623 100% 56 654 100%
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Gross risk 31.12.2014 share % 31.12.2013 share %
individual 82 676 61% 70 482 61%
group 53 713 39% 45 383 39%
Provisions for compensations and benefits 136 389 100% 115 865 100%
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Risk on own share 31.12.2014 share % 31.12.2013 share %
individual 23 448 35% 20 523 36%
group 43 175 65% 36 131 64%
Provisions for compensations and benefits on own share 66 623 100% 56 654 100%
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Sensitivity analysis of provisions for damages

With regard to the accepted methodology of calculation of the IBNR provision (‘Naive Loss Ratio’ and ‘Bornhuetter-Ferguson’), total provisions for compensations and benefits together with costs of claims handling are generally linearly dependent on the assumed loss-based ratio, ULR (‘Ultimate Loss Ratio’), accepted for calculation of the IBNR provision with the exception of situations when the ratio calculated only on the basis of damages claimed in a given group of insurance exceeds the accepted value of ULR.

However, the IBNR provision alone is sensitive to changes of assumed loss-based ratios.

Sensitivity analysis was carried out simultaneously for all insured risks of the portfolio, through a change of predicted IBNR ratios with other parameters of the model being unchanged.

The following table presents changes of the IBNR provision depending on changes of parameters of predicted ULR ratios.

 

 
Change of ULR ratio (%)

Change of IBNR provision
(%)

IBNR provision (PLN '000)

Change of the value of IBNR
provision (PLN '000)

The impact on profit after
reinsurance (PLN '000)

31.12.2014 31.12.2013 31.12.2014 31.12.2013 31.12.2014 31.12.2013 31.12.2014 31.12.2013 31.12.2014 31.12.2013
- (20) - (25) 77 998 70 010 (27 630) (23 634) 14 171 12 510
- (10) - (13) 91 679 81 705 (13 949) (11 939) 7 130 6 359
- - - - 105 628 93 082 - - - -
- 10 - 13 119 852 104 481 14 224 12 057 (7 156) (6 416)
- 20 - 26 134 187 116 446 28 559 24 157 (14 388) (12 865)
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Provisions adequacy analysis

The Group carried out a provisions adequacy analysis, which showed that technical-insurance provisions (reduced by deferred acquisition costs) as at 31 December 2014 were created at a level sufficient to cover commitments arising from insurance agreements till 31 December 2014.

Capital management

Since the start of business of BRE Ubezpieczenia TUiR SA, i.e., 15 January 2007, capital management in insurance companies is connected with the aspiration for maintenance of regular adequacy. The purpose of the Group within the scope of capital management is the maintenance of the capacity of insurance companies of the Group for continuance of business and maintenance of an optimal structure of capital in order to reduce costs of capital.

For this purpose, the Group constantly monitors the value of its own resources in relation to the margin of solvency and guarantee capital in accordance with capital requirements imposed by regulations binding in Poland (Insurance Activity Act and Accounting Act with relevant decrees).

In accordance with these regulations, the company BRE Ubezpieczenia TUiR SA is obliged to hold own resources in the value not lower than the margin of solvency and not lower than the guarantee capital. The guarantee capital equals the bigger of: one-third of the margin of solvency or minimum value of the guarantee capital.

The Decree of Minister of Finance, which takes into account the necessity of ensuring solvency of companies conducting insurance activities, determines the manner of calculation of the solvency margin and minimum value of the guarantee capital.

Own resources of the company are the assets of the insurance company, excluding:

  • assets assigned for coverage of all expected commitments,
  • intangible assets other than DAC (Deferred Acquisition Cost),
  • own shares held by the insurance company,
  • deferred income tax assets.

The company BRE Ubezpieczenia TUiR SA is guided only by the law requirements in calculating the solvency margin and the minimum guarantee capital.

Insurance companies check the compliance of capital with law requirements as at the end of each reporting period. Within the whole year 2014 and 2013 the law requirements were met.

In 2014 compared to 2013, the Group has not made changes in assumptions applied to those used by the Group insurance risk assessment models.

 

 
PLN '000 31.12.2014 31.12.2013
Own resources 147 749 167 498
Margin of solvency 22 261 18 165
Minimal guarantee capital 15 403 15 048
1/3rd of margin of solvency 7 420 6 055
Own resources surplus for coverage of margin of solvency 125 488 123 602
Guarantee capital 15 403 15 048
Own resources surplus for coverage of guarantee capital 132 346 152 450
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