67.1. Insurance risk

The Group’s portfolio of insurance contracts includes Category I (life insurance) as well as Category II (other personal insurance and non-life insurance) insurance contracts, offering a broad spectrum of insured risks. The Group’s exposure to insurance risks includes primarily:

• Mortality risk;
• Risk of loss in personal and non-life insurance, especially with regard to natural catastrophes, traffic events and insurance of financial risks
• Lapse risk;
• Cost risk;
• Inflation risk.

An unfavourable materialisation of the above risks, i.e. a materialisation worse than assumed in the valuation, may translate into a reduction in the financial result, including the occurrence of a financial loss.

Discrepancies between the expected cash flows included in insurance liabilities and the actual payments to be made in the future are natural and are due to the random nature of insurance events, both in terms of the number of claims and their amount. Therefore, one of the main objectives of portfolio management and reserve valuation is to minimise the deviation between the actual cash flows and their projections.

The use of appropriate statistical methods and the use of up-to-date data available at the reporting date reduce the risk of erroneous estimates of the expected value of insurance and reinsurance assets and liabilities. At the same time, proper portfolio management helps to reduce the impact of potential deviations of actual cash flows from their previous estimates on the financial result. The main instruments that reduce insurance risk and thus mitigate fluctuations in the result and ensure the adequacy of reserves for future liabilities include:

• diversification of risk between different products and also within individual products, e.g. through geographical diversification;
• a prudent approach to underwriting, excluding exposures subject to the greatest risk or requiring additional medical tests or safeguards;
• continuous monitoring of the profitability of the portfolio held by product and dynamic tariff management for selected portfolios;
• the use of outward reinsurance.

Given the variety of insurance products offered by the Group, including both life insurance and insurance of various uncorrelated non-life risks, even a very unfavourable materialisation of the expected cash flows on a single product will have a relatively minor impact on the total result from insurance.

With regard to insurance risks, there is a concentration risk associated with the occurrence of an event that will cover a large number of contracts. Key risks in this area include natural catastrophe risk and pandemic risk. In both of these cases, the Group mitigates concentration risk by, among other things, using non-proportional reinsurance contracts.