67.2. Financial risk

Liquidity risk refers to the risk of not being able to settle obligations in a timely manner without incurring extraordinary costs. In the case of settlements of insurance and reinsurance contracts, this risk is mainly related to the potential lack of sufficient liquidity in the asset portfolio that is held. Insurance companies perform gap analysis and liquidity measurement. Liquidity risk is mitigated by maintaining a buffer of liquid funds, planning liquidity needs and matching the investment structure with the maturity of the company’s liabilities. In particular, PKO Życie TU manages liquidity risk associated with transfers and payouts in its UFK products by maintaining excess assets to cover reserves in the form of liquid assets at an appropriate level.

Credit risk arising from contracts falling within the scope of IFRS 17 mainly includes the risk of reinsurer bankruptcy and non-payment of premiums by policyholders. The Group manages counterparty bankruptcy risk by diversifying reinsurers and sticking solely to reinsurers with high credit ratings. In contrast, the risk of non-payment of premium by policyholders is mostly mitigated by terminating the contract and limiting underwriting exposure. Given the diversification of credit risk exposures, the Group does not identify any significant concentration risk in this area.

Currency risk refers to the risk of an adverse change in assets and liabilities due to changes in exchange rates. The Group does not identify significant currency risk in the area of contracts covered by IFRS 17 given the nature of its portfolio. Nearly all settlements, both with policyholders, the insured and reinsurers, are performed in the domestic currency, and settlements in foreign currencies are mainly related to the settlement of motor and travel claims that occurred outside Poland. The Group additionally mitigates currency risk through significant reinsurance of portfolios exposed to currency risk. Due to the insignificant level of net exposure to currency risk, the Group does not identify concentration risk in this area.

Interest rate risk is associated with adverse changes in the measurement of assets and liabilities due to changes in market interest rates. From the perspective of contracts within the scope of IFRS 17, the Group does not identify any significant interest rate risk. For nearly all products, the payment of claims and benefits remains independent of the current interest rate structure. Accordingly, the Group is not exposed to any significant concentration risk in the area of interest rate risk for contracts that are within the scope of IFRS 17. Changes in interest rates affect the measurement of liabilities and assets for insurance contracts and reinsurance contracts. Due to the applied decomposition of finance income and expenses into a portion reported in the income statement (based on rates at initial recognition) and a portion presented in other comprehensive income, the effect of changes in interest rates is not reflected in the profit or loss.

The Group does not identify share price risk in the area of contracts within the scope of IFRS 17 because the liabilities that depend on the valuation of the investment portfolio are fully secured with appropriate assets. As a result, fluctuations in the measurement of liabilities arising from changes in the prices of shares and units are fully reflected in fluctuations in the measurement of assets held.