14.1. Measurement and presentation of insurance products

The key differences in the measurement and presentation of insurance products that apply to the Group and that came into effect upon implementation of IFRS 17 are presented below.

The standard applies to insurance contracts, reinsurance contracts and investment contracts with direct participation features.

The new standard defines an insurance contract as a contract in which one party accepts a significant insurance risk from the policyholder and undertakes to compensate the insured for an adverse effect arising from, an uncertain future event. This definition is in principle consistent with the definition in IFRS 4

The standard does not apply to, among others, investment contracts, product guarantees issued by the manufacturer, loan guarantees, catastrophe bonds and so-called weather derivatives (contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract).

The biggest impact on the occurrence of differences compared to the current IFRS 4 have:

• the valuation of liabilities and assets under insurance contracts, which:
  • is based on the value of the best estimate of future cash flows;
  • reflects the time value of money;
  • includes the risk adjustment for non-financial risk;
  • includes the expected value of future profits;
• recognition of expected profits for the group of insurance contracts over time, in proportion to the so-called coverage units, corresponding to the level of service provided by the insurance company in each reporting period;
• recognition of entire expected loss on insurance contracts at the point at which the entity assesses that the contract is onerous, which may be at the date of initial recognition of that contract or at subsequent measurement;
• separate (from direct business contracts) measurement of liabilities and assets for outward reinsurance.

Until the implementation of the new standard, the Group recognised net income on insurance activities under commission income – in the line “offering insurance products” which comprised premium income, costs of insurance activities, claims and change in technical reserves, and the impact of the reinsurer’s share in the aforementioned items.

Due to the fact that the Group offers insurance products along with loans and advances and lease products and it is impossible to purchase from the Group an insurance product that is identical as to the legal form, conditions and economic content without purchasing a loan, an advance or a lease product, the payments received by the Group for the insurance products sold were treated as an integral part of the remuneration for the financial instruments offered. All premium received by the Group split in accordance with Recommendation U on the basis of the relative fair value model into a portion relating to:

• the insurance product – measured using an actuarial model in accordance with the requirements of IFRS 4 (recognised in commission income, line „offering insurance products”)
• the portion relating to the credit product – settled using the effective interest rate method and recognized in interest income and, in the part corresponding to the performance of the agency service, if the insurer is a Group company, accounted for using the straight line method during the term of the insurance product and is recognized as commission income (line: offering insurance products).

Costs directly attributable to selling insurance products were accounted for as a component of the amortized cost of a financial instrument or on a one-off basis. The provision for future refunds was allocated to the financial instrument and insurance service in accordance with the relative fair value model.

The Group presented its insurance activities under the following headings in the statement of financial position:

• Assets from insurance activities – receivables on account of reinsurance and share of reinsurers in technical reserves.
• Liabilities in respect of insurance activities – technical reserves to cover current and future claims and costs which may arise from the insurance contracts concluded, i.e. unearned premium and unexpired risk reserves, outstanding claims and benefits reserve, reserve for bonuses and discounts for the insured, as well as deferred reinsurance commission and reinsurance related liabilities.
• Amounts due to customers – “Liabilities in respect of insurance products”: liabilities from unit-linked products, safe capital product, structured products and insurance deposits.

In accordance with IFRS 17, all insurance products offered by the Group are recognized and measured under this standard as insurance products. At the consolidated Group level, the premium received by the Group is no longer split in accordance with Recommendation U on the basis of the relative fair value model (this model was maintained for the Bank’s separate financial statements).

The components of the net insurance income, including the portion that formed part of the Group’s interest income, commission income or administrative expenses and related directly to insurance contracts, is measured using an actuarial model and presented in the „Net income from insurance business” and, as appropriate, in the lines „Insurance revenue (net of reinsurance)” and „Cost of insurance activities (net of reinsurance)”.

The implementation of IFRS 17 at the consolidated level also affected the carrying amount of loans and advances to customers. The premium element recognised under the relative fair value model, adjusting the gross carrying amount of loans at the Bank level, at the consolidated level is an element of the assets and liabilities arising from insurance activities, measured in accordance with the principles set out in IFRS 17.

Starting from 1 January 2023, products i.e. liabilities from unit-linked products, “safe capital”, previously recognised under IFRS 9, are measured under IFRS 17 as part of liabilities from insurance activities (previously presented under “Amounts due to customers” – “Liabilities in respect of insurance products”). On the other hand, structured products and insurance deposits, as investment products, continue to be recognised in accordance with IFRS 9 in the line “Amounts due to customers”.

The Group applied IFRS 17 for the first time in the period beginning 1 January 2023. The Group has implemented IFRS 17 in the retrospective full and modified approach for the part of the portfolio (MRA approach). Due to the need to prepare comparative data, 1 January 2022 is assumed as the date of transition to the new standard.

Detailed accounting policies and financial information for the insurance business are described in note Insurance business.