8.5 Risk profile

A major change in PZU Group risk profile took place in 2015 and was related to consolidation of Alior Bank and disclosing the acquired loan and deposit portfolio in the statement of financial position. As a result, interest rate risk and credit risk related to these portfolios became significant risk components.

PZU Group is exposed to the following main types of risk: actuarial risk, market risk (with emphasis on interest rate risk), credit risk, concentration risk, operational risk and non-compliance risk.

The key event, from the point of view of the risk profile of PZU Group, was the integration of the risk management process in PZU Group's insurance companies, as well as the implementation of Solvency II requirements in these companies.

8.5.1 Actuarial risk (non-life and life insurance)

Actuarial risk – a possibility of loss or unfavorable change in the value of liabilities that can result from insurance contracts and insurance guarantee agreements, from incorrect assumptions regarding measurement and recognition of technical provisions.

Actuarial risk includes:

	Non-life insurance	Life insurance
Longevity risk – a possibility of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the mortality factor if its increase results in a growth of insurance liabilities,	X	X
Cost risk – a possibility of loss or unfavorable change in the amount of insurance liabilities resulting from changes in the level, trend or volatility of costs incurred for insurance or reinsurance contract management.	X	X
Laps Risk – a risk of loss or unfavorable change in the amount of insurance liabilities resulting from changes in the level, trend or volatility of indicators, including withdrawal from contracts, termination or buyout of policies.	X	X
Catastrophe risk – a possibility of loss or unfavorable change in the value of insurance liabilities resulting from significant uncertainty of the assumptions regarding measurement and technical provisions for extreme or exceptional events.	X	X
Premium risk – a risk of improper estimation of tariff rates and the possibility of deviation from the expected written premium levels, resulting from volatility of occurrence, frequency and scale of insured events.	X	N/A
Provision risk – a risk of improper estimation of the level of technical provisions, as well as the possibility of fluctuations in the actual damage within the extent of its statistical average due to the stochastic nature of future claim payments.	X	N/A
Annuity revision risk – a risk of loss or unfavorable change in the value of insurance liabilities resulting from changes in the level, trend or volatility of annuity revision indicators related to changes in the legal environment or the health of the insured.	X	N/A
Mortality risk – a possibility of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the mortality factor if its increase results in a growth of insurance liabilities,	N/A	X
Disability risk – a risk of loss or unfavorable change of insurance liabilities resulting from changes in the level, trend or volatility of the disability factor and occurrence of illnesses/diseases.	N/A	X

risk_management_1_pzu2015.xlsx

PZU Group manages actuarial risk i.a. by way of:

calculating and monitoring the adequacy of technical provisions;
tariff strategy and monitoring of the current estimates and evaluation of premium adequacy;
underwriting;
reinsurance.

Calculation and monitoring of adequacy of technical provisions

PZU Group manages the adequacy risk of technical provisions through application of appropriate calculation technology and control of processes related to determining of provisions. The provisioning policy is based on:

prudent approach to determining technical provisions,
continuity principle, consisting in the changelessness of the methods of technical provisioning, provided there are no significant circumstances which justify introduction of changes.

For non-life insurance, the level of technical provisions is evaluated once a month and in specific circumstances (making a payment, obtaining new information from liquidators or lawyers) their amount is updated. History of development and payments per balance sheet year is used to analyze the amount of technical provisions. The analysis results in assessment of precision of actuarial methods.

For life insurance products, public statistics (life expectancy tables) made available by specialized entities supported by historic data derived from insurance portfolios provide the main source of data to estimate the projected frequency of claims. Periodic statistical analyzes of claims incidence are made at the level of product groups, individual insurance portfolios and well-defined homogeneous risk groups. These analyzes allow determining relative frequency of claims compared to public statistics. The use of appropriate statistical methods allows to determine the significance of the determined statistics. If necessary, determined appropriate security charges are applied when creating technical provisions and risk evaluation.

Estimating of technical provisions in PZU Group is supervised by main actuaries.

Tariff strategy, monitoring of current estimates and premium adequacy assessment

The purpose of the tariff policy is to ensure an adequate premium level, sufficient to cover the existing and future liabilities arising on concluded policies and expenses. Along with developing a tariff, simulations are carried out with regard to the projected insurance profit/loss in subsequent years. Additionally, regular premium adequacy and portfolio yield studies are regularly carried out for each insurance type based on, among others, evaluation of the technical result on a product for a given financial year. Frequency of analyzes is adjusted to the materiality of the product and possible result fluctuation. If the course of insurance is unfavorable, activities are undertaken to restore a defined profitability level, involving adjusting premium tariffs or the insured risk profile through modifying general insurance terms.

Underwriting

Regarding corporate customers and SME, a separate underwriting process independent from the sales function is carried out. The process of selling insurance for corporate customers is preceded with an analysis and assessment of risk carried out by dedicated underwriting teams. The underwriting process includes a three-stage risk acceptance system depending on competency scopes and limits granted.

Reinsurance

The objective of the reinsurance program in PZU Group in non-life insurance is to secure its core business by mitigation of catastrophic risk that may negatively impact the financial standing of PZU Group. The task is performed in the form of concluding obligatory contracts with additional facultative reinsurance

PZU Group limits its risk i.a. by way of:

non-proportional excess of loss treaties which protect the portfolios against catastrophic losses (e.g. flood, hurricane);
non-proportional excess of loss treaties which protect property, technical, marine, aviation, TPL and MTPL portfolios against the effects of large single losses;
proportional treaties which protects the financial insurance portfolio.

Optimization of the reinsurance program in terms of protection against catastrophic claims is based on the results of internal analyses and uses third-party models.

8.5.1.1 Exposure to insurance risk in non-life products

Primary cost ratios in non-life insurance	1 January – 31 December 2015	1 January – 31 December 2014
Expense ratio	29.96%	28.94%
Claims ratio, net of reinsurance	63.82%	66.39%
Reinsurer’s retention ratio	3.54%	3.84%
Combined ratio	93.78%	95.32%

risk_management_2_pzu2015.xlsx

The expense ratio is calculated by dividing the total acquisition costs, administrative expenses, reinsurance commissions and share in reinsurers’ profits by the net premiums earned.

The claims ratio net of reinsurance is calculated by dividing claims and the net change in technical provisions by the net premiums earned.

The reinsurer's retention ratio is calculated by dividing a reinsurer’s share in gross written premiums by the gross written premiums.

Combined ratio is defined as the ratio of the total of acquisition costs, administrative expenses, reinsurance commissions and share in reinsurers’ profits, claims and changes in net technical provisions to the net earned premiums.

The following tables present development of technical provisions and payments in subsequent financial years.

Claims development in direct property and personal insurance, gross (by financial year)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Provision at the end of the financial year	7,540,570	7,898,097	8,292,721	8,698,661	9,380,501	9,870,123	10,989,024	11,782,567	13,311,566	13,162,561
The provision and the total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year):
- calculated one year later	7,300,086	7,697,588	8,382,022	8,560,746	9,680,960	10,298,173	11,285,586	12,241,486	13,031,673
- calculated two years later	7,286,968	7,833,155	8,409,631	8,855,827	10,192,492	10,752,650	11,958,413	12,179,921
- calculated three years later	7,436,865	7,852,001	8,757,918	9,346,313	10,718,813	11,589,871	11,973,179
- calculated four years later	7,443,246	8,140,607	9,215,412	9,874,432	11,574,390	11,738,383
- calculated five years later	7,661,124	8,599,531	9,723,948	10,712,439	11,735,090
- calculated six years later	8,102,772	9,076,948	10,558,365	10,875,392
- calculated seven years later	8,523,330	9,842,325	10,747,125
- calculated eight years later	9,224,422	10,027,933
- calculated nine years later	9,416,220
Total provision and claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	9,416,220	10,027,933	10,747,125	10,875,392	11,735,090	11,738,383	11,973,179	12,179,921	13,031,673
The total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	4,684,166	4,835,703	4,996,462	4,628,205	4,904,361	4,169,497	3,675,277	2,957,342	2,237,974
Provision recognized in the statement of financial positions	4,732,054	5,192,230	5,750,663	6,247,187	6,830,729	7,568,886	8,297,902	9,222,579	10,793,699
Difference between the first year provision and the run-off result estimated at the end of reporting year	(1,875,650)	(2,129,836)	(2,454,404)	(2,176,731)	(2,354,589)	(1,868,260)	(984,155)	(397,354)	279,893
The above difference as a percentage of the first year provision	-25%	-27%	-30%	-25%	-25%	-19%	-9%	-3%	2%

risk_management_3_pzu2015.xlsx

Claims development in direct property and personal insurance, net of reinsurance (by financial year)	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Provision at the end of the financial year	6,356,239	6,916,099	7,433,410	7,972,938	8,639,044	9,304,621	10,413,376	11,453,315	12,813,985	12,652,743
The provision and the total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year):
- calculated one year later	6,145,931	6,790,822	7,568,099	7,843,760	8,838,330	9,731,139	10,722,247	11,787,321	12,524,663
- calculated two years later	6,201,722	6,968,715	7,597,785	8,091,605	9,344,945	10,185,213	11,282,329	11,703,615
- calculated three years later	6,396,354	6,991,045	7,909,625	8,558,410	9,872,521	10,946,654	11,277,787
- calculated four years later	6,405,273	7,246,292	8,343,715	9,106,236	10,672,033	11,071,268
- calculated five years later	6,589,073	7,683,193	8,874,588	9,891,566	10,817,590
- calculated six years later	7,008,662	8,189,106	9,656,518	10,037,345
- calculated seven years later	7,457,627	8,904,032	9,826,508
- calculated eight years later	8,108,651	9,070,206
- calculated nine years later	8,280,359
Total provision and claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	8,280,359	9,070,206	9,826,508	10,037,345	10,817,590	11,071,268	11,277,787	11,703,615	12,524,663
The total claim payments (from the end of the first financial year to the end of the current financial year, excluding payments made before the end of the first financial year)	3,745,809	4,075,856	4,281,212	3,996,811	4,211,923	3,760,879	3,308,752	2,858,444	2,176,622
Provision recognized in the statement of financial positions	4,534,550	4,994,350	5,545,296	6,040,534	6,605,667	7,310,389	7,969,035	8,845,171	10,348,041
Difference between the first year provision and the run-off result estimated at the end of reporting year	(1,924,120)	(2,154,107)	(2,393,098)	(2,064,407)	(2,178,546)	(1,766,647)	(864,411)	(250,300)	289,322
The above difference as a percentage of the first year provision	-30%	-31%	-32%	-26%	-25%	-19%	-8%	-2%	2%

risk_management_4_pzu2015.xlsx

Increase in the negative value of the run-off result in 2015 is mainly the result of identifying the claims relating to personal claims for previous years claims.

Motor insurance products (MTPL and own damage) account for the major part of PZU Group portfolio. Both types of insurances are usually concluded for a year, during which a claim must occur to be covered. The own damage insurance is based on a claim-made principle, so it is not a source of uncertainty. It is unlike MTPL, which is an occurrence insurance (there is up to 30 years for making a claim). The amount of property claims is particularly sensitive to the number of court claims made and court decisions regarding individual cases. In case of MTPL contracts, new types of claims emerge along with additional deferred claims, which significantly add to the complexity of estimating the technical provisions amount.

Risk concentration in non-life insurance

Due to the climatic conditions of the region where PZU Group operates, the concentration risk may occur in the case of catastrophic damage such as floods or hurricanes. For this reason, presented below is catastrophic damage PZU Group is exposed to.

Depending on the percentage of the value of paid out flood and hurricane damage in the total value of claims paid in the period in which the catastrophic events occurred, i.e. the floods or hurricanes, three groups of regions have been distinguished. Next, relevant insurance sums and the number of policies was defined for each region, thus arriving at flood and hurricane risk concentration.

Risk concentration in non-life insurance – flood claims exposure

Risk concentration in non-life insurance – flood claims exposure as at 31 December 2015		Sum insured					Total
		0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2,000 thousand PLN	over 2,000 thousand PLN
A group regions – where flood claims constitute 0 to 5% of total claims	Sum insured	6.5%	10.0%	4.3%	1.9%	9.8%	32.5%
	Number of policies	32.2%	10.3%	2.1%	0.5%	0.3%	45.4%
B group regions – where flood claims constitute 5 to 15% of total claims	Sum insured	1.1%	1.5%	0.8%	0.6%	7.1%	11.1%
	Number of policies	5.8%	1.6%	0.4%	0.1%	0.2%	8.1%
C group regions – where flood claims constitute over 15% of total claims	Sum insured	6.4%	10.3%	3.9%	2.1%	33.7%	56.4%
	Number of policies	33.1%	10.6%	1.9%	0.5%	0.4%	46.5%
Total	Sum insured	14.0%	21.8%	9.0%	4.6%	50.6%	100.0%
Total	Number of policies	71.1%	22.5%	4.4%	1.1%	0.9%	100.0%

risk_management_5_pzu2015.xlsx

Risk concentration in non-life insurance – flood claims exposure as at 31 December 2014		Sum insured					Total
		0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2 ,000 thousand PLN	over 2,000 thousand PLN
A group regions – where flood claims constitute 0 to 5% of total claims	Sum insured	3.8%	6.6%	2.5%	1.2%	12.4%	26.5%
	Number of policies	18.6%	5.6%	1.2%	0.3%	0.3%	26.0%
B group regions – where flood claims constitute 5 to 15% of total claims	Sum insured	2.5%	2.8%	1.1%	0.9%	6.4%	13.7%
	Number of policies	12.3%	2.8%	0.5%	0.2%	0.2%	16.0%
C group regions – where flood claims constitute over 15% of total claims	Sum insured	8.2%	12.9%	4.9%	2.4%	31.4%	59.8%
	Number of policies	41.8%	13.0%	2.3%	0.5%	0.4%	58.0%
Total	Sum insured	14.5%	22.3%	8.5%	4.5%	50.2%	100.0%
Total	Number of policies	72.7%	21.4%	4.0%	1.0%	0.9%	100.0%

risk_management_6_pzu2015.xlsx

Risk concentration in property and personal insurance - hurricane claims exposure

Risk concentration in non-life insurance – hurricane claims exposure as at 31 December 2015		Sum insured					Total
		0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2 ,000 thousand PLN	over 2,000 thousand PLN
A group regions – where hurricane claims constitute 0 to 5% of total claims	Sum insured	6.2%	9.9%	4.3%	2.0%	14.9%	37.3%
	Number of policies	32.9%	10.2%	2.0%	0.5%	0.3%	45.9%
B group regions – where hurricane claims constitute 5 to 15% of total claims	Sum insured	4.6%	8.0%	3.1%	1.6%	25.5%	42.8%
	Number of policies	23.1%	8.2%	1.5%	0.4%	0.6%	33.8%
C group regions – where hurricane claims constitute over 15% of total claims	Sum insured	2.9%	4.0%	1.7%	1.0%	10.3%	19.9%
	Number of policies	15.1%	4.1%	0.8%	0.2%	0.1%	20.3%
Total	Sum insured	13.7%	21.9%	9.1%	4.6%	50.7%	100.0%
Total	Number of policies	71.1%	22.5%	4.3%	1.1%	1.0%	100.0%

risk_management_7_pzu2015.xlsx

Risk concentration in non-life insurance – hurricane claims exposure as at 31 December 2014		Sum insured					Total
		0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2 ,000 thousand PLN	over 2,000 thousand PLN
A group regions – where hurricane claims constitute 0 to 5% of total claims	Sum insured	8.9%	15.6%	6.0%	3.0%	38.3%	71.8%
	Number of policies	46.3%	14.5%	2.8%	0.7%	0.8%	65.1%
B group regions – where hurricane claims constitute 5 to 15% of total claims	Sum insured	4.7%	5.8%	2.2%	1.3%	9.8%	23.8%
	Number of policies	22.8%	5.9%	1.0%	0.3%	0.3%	30.3%
C group regions – where hurricane claims constitute over 15% of total claims	Sum insured	0.7%	0.9%	0.3%	0.2%	2.3%	4.4%
	Number of policies	3.5%	0.9%	0.2%	0.0%	0.0%	4.6%
Total	Sum insured	14.3%	22.3%	8.5%	4.5%	50.4%	100.0%
Total	Number of policies	72.6%	21.3%	4.0%	1.0%	1.1%	100.0%

risk_management_8_pzu2015.xlsx

Transfer of risk to the areas of a higher percentage of hurricane claims results from a larger number of events subject to insurance caused by hurricanes in 2015 versus the events of 2014.

Risk concentration in non-life insurance: general liability insurance

Risk concentration in property and casualty general liability insurance measured by the gross written premium amount is presented sorted by guarantee amount and type of coverage.

Gross written premium in non-life insurance – TPL as at 31 December 2015	Sum insured					Total
	0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2 ,000 thousand PLN	over 2,000 thousand PLN
General TPL in personal life and other	18.4%	3.4%	2.3%	2.9%	12.7%	39.7%
Medical TPL	0.5%	1.2%	1.1%	6.0%	26.3%	35.1%
Professional TPL except from medical and agricultural (legal, consulting, etc.)	8.0%	3.6%	1.7%	2.1%	4.4%	19.8%
TPL of farmers and their movable property	0.0%	0.0%	0.0%	5.3%	0.0%	5.3%
Product TPL	0.0%	0.0%	0.0%	0.0%	0.1%	0.1%
Total	26.9%	8.2%	5.1%	16.3%	43.5%	100.0%

risk_management_9_pzu2015.xlsx

Gross written premium in non-life insurance – TPL as at 31 December 2014	Sum insured					Total
	0-200 thousand PLN	200-500 thousand PLN	500-1 ,000 thousand PLN	1,000-2 ,000 thousand PLN	over 2,000 thousand PLN
General TPL in personal life and other	15.5%	3.4%	2.5%	2.9%	14.1%	38.4%
Medical TPL	0.6%	1.0%	1.2%	6.4%	33.1%	42.3%
Professional TPL except from medical and agricultural (legal, consulting, etc.)	5.5%	2.9%	1.3%	1.5%	3.7%	14.9%
TPL of farmers and their movable property	0.0%	0.0%	0.0%	4.3%	0.0%	4.3%
Product TPL	0.0%	0.0%	0.0%	0.0%	0.1%	0.1%
Total	21.6%	7.3%	5.0%	15.1%	51.0%	100.0%

risk_management_10_pzu2015.xlsx

Capitalized annuity amount

The below results do not take into account the impact of changes in valuation of deposits taken into consideration in the calculation of the provision value.

Gross change in the assumptions for the provision for capitalized value of annuities amount in non-life insurance	Effect of change in the assumptions on net financial profit/loss		Effect of changes in assumptions on equity
	31 December 2015	31 December 2014	31 December 2015	31 December 2014
Technical rate – increase by 0.5 p.p.	426,594	426,244	426,594	426,244
Technical rate – decrease by 1.0 p.p.	(1,103,521)	(1,101,344)	(1,103,521)	(1,101,344)
Mortality at 110% of the currently assumed rate	131,619	132,268	131,619	132,268
Mortality at 90% of the currently assumed rate	(146,720)	(147,984)	(146,720)	(147,984)

risk_management_11_pzu2015.xlsx

Change in the assumptions for the provision for capitalized value of annuities amount – net of reinsurance in property and personal insurance	Effect of change in the assumptions on net financial profit/loss		Effect of changes in assumptions on equity
	31 December 2015	31 December 2014	31 December 2015	31 December 2014
Technical rate – increase by 0.5 p.p.	411,837	415,451	411,837	415,451
Technical rate – decrease by 1.0 p.p.	(1,063,628)	(1,073,704)	(1,063,628)	(1,073,704)
Mortality at 110% of the currently assumed rate	127,435	128,940	127,435	128,940
Mortality at 90% of the currently assumed rate	(142,011)	(144,263)	(142,011)	(144,263)

risk_management_12_pzu2015.xlsx

8.5.1.2 Exposure to insurance risk in life products

PZU Group has not presented information on the development of claims in life insurance due to the fact that the uncertainty regarding amounts and claim payment periods usually stops within one year.

Risk concentration in this group is related to the concentration of contracts or sums insured. For traditional individual insurance products, where risk of concentration is related to occurrence probability of the covered event or to potential claims amounts arising on a single event, risk assessment is based on case by case approach. The assessment includes both medical risk and – in justified cases – financial risk. Such an approach allows selection of risks (evaluation of an individual concluding an insurance contract) and defining of the maximum acceptable risk level.

In group products, concentration risk occurrence is limited by the contract portfolio size. This allows for significant reduction of the level of distraction resulting from random insurance course. Additionally, the form of a contract, under which all the

insured have the same sum insured and coverage is a material risk-mitigating factor. Therefore, some risks are not concentrated within a portfolio.

In the case of group insurance contracts, allowing adjusting of coverage at the level of each group of contracts, a simplified risk assessment is applied. It is carried out on the basis of information about the industry of a given employer, assuming appropriate participation limits of the insured in respect of all persons employed in the workplace. In such cases, premium and charges are based on statistical analyzes carried out in relation to the frequency of claims on the level of defined homogeneous risk groups, including relative frequency of events compared to public statistics.

It should be noted that for most contracts the claim amount is clearly defined in the contract. Therefore, compared to typical non-life insurance contracts, the concentration risk decreases, i.e. occurrence of single events necessitating large claims is relatively low.

Annuity insurance products in life insurance

Changes in the annuity insurance in life insurance portfolio	Effect of change in the assumptions on net financial profit/loss		Effect of changes in assumptions on equity
	31 December 2015	31 December 2014	31 December 2015	31 December 2014
Technical interest rate – decrease by 1.0 p.p.	(31,501)	(34,259)	(31,501)	(34,259)
Mortality at 90% of the currently assumed rate	(11,704)	(12,318)	(11,704)	(12,318)

risk_management_13_pzu2015.xlsx

Assumptions regarding liabilities arising from insurance and investment contracts with DPF in life insurance excluding annuity insurance

Change in assumptions regarding provisions for insurance and investment contracts with DPF in life insurance excluding annuity products	Effect of change in the assumptions on net financial profit/loss			Effect of changes in assumptions on equity
	31 December 2015	31 December 2014	31 December 2015		31 December 2014
Technical interest rate – decrease by 1.0 p.p.	(2,157,032)	(2,194,319)	(2,157,032)		(2,194,319)
Mortality at 110% of the currently assumed rate	(901,924)	(922,805)	(901,924)		(922,805)
110% morbidity and accident rate	(178,931)	(187,082)	(178,931)		(187,082)

risk_management_14_pzu2015.xlsx

Effects of customers’ withdrawing from life insurance products

Calculation of technical provisions for life insurance does not include the risk of the insured's withdrawal. Below please find the effects of hypothetical withdrawal of 10% of total customers with life insurance products in PZU Życie.

Item in financial statements	31 December 2015	31 December 2014
Change in technical provisions	2,116,763	2,093,927
Claims and benefits paid	(803,356)	(782,563)
Change in deferred acquisition costs	(7,002)	(6,256)
Gross financial profit/loss	1,306,406	1,305,109
Net financial profit/loss	1,058,189	1,057,138
Equity	1,058,189	1,057,138

risk_management_15_pzu2015.xlsx

8.5.2 Market risk

Market risk is a risk of a loss or an unfavorable change in the financial position, resulting directly or indirectly from changes in the level or volatility of market prices of assets, credit spread, value of liabilities and financial instruments.

Market risk in PZU Group includes:

share price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market share prices or their volatility;
unlisted share price – a possibility of incurring a loss following changes in the value of unlisted shares;
property price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market prices or their volatility;
goods price risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in market prices or their volatility;
inflation risk – a possibility of incurring a loss resulting from inflation, in particular inflation of goods and services prices, as well as expectations regarding the future inflation level which impact valuation of assets and liabilities;
liquidity risk – the inability to realize investments and other assets with no impact on their market prices in order to settle one's financial liabilities when they fall due;
interest rate risk – a possibility of incurring a loss following changes in the value of financial instruments or assets and fluctuations in the present value of projected cash flows on liabilities following changes in term of structure of market interest rates or volatility of these risk-free rates;
basis risk – a possibility to incur a loss following changes in the value of financial instruments or assets and fluctuations in the present value of projected cash flows on liabilities following changes in term structure of market interest rate spreads as compared to risk-free rates or volatility of these spreads – with the exception of credit spreads;
currency risk – a possibility of incurring a loss following changes in the value of assets, liabilities and financial instruments as a result of changes in exchange rates or their volatility.
credit spread risk – the possibility of incurring losses due to changes in the value of assets, liabilities and financial instruments arising from changes in the level of credit spreads with regard to the time structure debt instruments issued by the State Treasury or their volatility;
concentration risk – a risk arising from lack of diversification in the portfolio of assets or from high exposure to counterparty risk including a single issuer of securities or a group of related issuers.

Concentration risk and credit spread risk are regarded as an integral part of market risk when measuring risk for the purpose of evaluating a risk profile, risk tolerance, and reporting indicators of market risk. However, the process of managing these risks is different in nature than in case of other subcategories of market risk, and is described in Note 8.5.3 along with the process of managing the counterparty risk.

Market risk in PZU Group originates from three key sources:

matching of assets and liabilities (ALM portfolio);
strategic allocation of assets, i.e. determining an optimum medium-term structure of assets (AA portfolios);
Alior Bank bank activity – as the result of which PZU Group significantly increased exposure to interest rate risk and credit risk).

The investment activity in the PZU Group entities is regulated in a number of documents approved by the Supervisory Boards, the Management Boards and dedicated Committees.

Departments of risk take part in the risk identification process, measure those risks, monitor and report them. Market risk is measured by the Value at Risk method. The total market risk value is determined by aggregated amounts of individual risks based on a pre-defined correlation matrix. In order to effectively manage market risk, limits in a form of capital amounts allocated to each market risk, as well as limits for separate market risk factors are determined.

In Alior Bank the exposure to market and liquidity risk is mitigated by the system of periodically updated limits introduced by the resolution of the Supervisory Board or the Management Board, which cover all measures of risk. In Alior Bank there are three types of limits which differ in scope and functioning method – basic, supplementary and stress-test limits. The market risk management focuses on potential changes in economic result.

Market risk exposure

Carrying amount as at 31 December 2015	Note	Risk covering assets of the Group	Unit-linked assets	Total
Financial assets and cash exposed to interest rate risk		82,838,239	1,625,086	84,463,325
Fixed interest debt instruments	35.1,35.2 ,35.3, 35.4	30,962,178	1,429,723	32,391,901
Floating interest debt instruments	35.1,35.2 ,35.3, 35.4	7,963,895	103,956	8,067,851
Loan receivables from clients	35.4	30,331,615	-	30,331,615
Term deposits with credit institutions	35.4	5,187,637	91,407	5,279,044
Loans	35.4	1,929,045	-	1,929,045
Cash	40	2,439,863	-	2,439,863
Buy sell-back transactions	35.4	3,132,740	-	3,132,740
Derivative instruments		891,266	-	891,266
Financial assets exposed to other price risk		3,671,814	3,541,002	7,212,816
Shares listed on the regulated market	35.2,35.3	2,984,125	519,322	3,503,447 ¹⁾
Participation units and certificates in investment funds	35.2 ,35.3	466,001	3,021,680	3,487,681 ²⁾
Derivative instruments	35.3	221,688	-	221,688
Total		86,510,053	5,166,088	91,676,141

1) Difference of the values presented as equity instruments listed on the regulated market in Notes 35.2 and 35.3 amounting to PLN 19,153 thousand regards listed units and investment certificates in the line below.

2) Difference of the values presented as equity instruments not listed on the regulated market in the Notes 35.2 and 35.3 and amounting to PLN 33,700 47,374 thousand regards listed units and investment certificates (PLN 19,153 thousand) and non-listed equity instruments other than units and investment certificates not included in that item (PLN 52,853 thousand).

risk_management_16_pzu2015.xlsx

Carrying amount as at 31 December 2014	Note	Risk covering assets of the Group	Unit-linked assets	Total
Financial assets and cash exposed to interest rate risk		48,991,002	1,557,038	50,548,040
Fixed interest debt instruments	35.1,35.2 ,35.3, 35.4	30,686,636	1,368,931	32,055,567
Floating interest debt instruments	35.1,35.2 ,35.3, 35.4	5,851,652	105,969	5,957,621
Term deposits with credit institutions	35.4	6,061,643	82,138	6,143,781
Loans	35.4	2,309,972	-	2,309,972
Cash	35.4	324,007	-	324,007
Buy sell-back transactions	40	3,250,173	-	3,250,173
Derivative instruments	35.4	506,919	-	506,919
Financial assets exposed to other price risk		3,110,178	3,422,151	6,532,329
Shares listed on the regulated market		2,831,054	532,352	3,363,406 1)
Participation units and certificates in investment funds	35.2,35.3	239,640	2,889,799	3,129,439 2)
Derivative instruments		39,484	-	39,484
Total		52,101,180	4,979,189	57,080,369

1) Difference of the values presented as equity instruments listed on the regulated market in notes 35.2 and 35.3 amounting to PLN 10,529 thousand regards listed units and investment certificates in the line below.

2) Difference of the values presented as equity instruments not listed on the regulated market in the notes 35.2 and 35.3 amounting to PLN 10,073 thousand regards listed units and investment certificates (PLN 10,529 thousand) and non-listed equity instruments other than units and investment certificates not included in that item (PLN 456 thousand).

risk_management_17_pzu2015.xlsx

As at 31 December 2015 there were no financial assets and liabilities held for sale.

Carrying amount of financial assets and cash held for sale	Note 42	31 December 2014
Financial assets and cash exposed to interest rate risk		314,284
Fixed interest debt instruments		217,852
Term deposits with credit institutions		88,085
Cash		8,347
Financial assets exposed to other price risk		36,702
Shares listed on the regulated market		16,366
Participation units and certificates in investment funds		20,336
Total		350,986

risk_management_18_pzu2015.xlsx

In its investing activities PZU Group uses derivatives to manage various investment risks. Most of the aforesaid instruments reduce exposure to individual types of risks.

The table below presents PZU Group’s derivatives as at 31 December 2015 and 31 December 2014.

Interest rate derivatives	Base amount by maturity as at 31 December 2015					Assets at fair value as at 31 December 2015	Liabilities at fair value as at 31 December 2015
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total
Instruments presented as cash flows hedges – OTC, including:	100,000	6,060,000	4,635,000	-	10,795,000	139,578	-
- SWAP transactions	100,000	6,060,000	4,635,000	-	10,795,000	139,578	-
Instruments presented as held for trading, including:	4,539,937	9,150,822	41,305,044	8,479,530	63,475,333	751,688	846,515
Instruments listed on the regulated market, including:	413,148	1,236,454	411,090	-	2,060,692	-	20,362
- futures	413,148	1,236,454	411,090	-	2,060,692	-	20,362
OTC instruments, including:	4,126,789	7,914,368	40,893,954	8,479,530	61,414,641	751,688	826,153
- futures	2,449,411	162,123	6,543	-	2,618,077	22,168	19,905
- SWAP transactions	1,299,586	6,872,059	40,069,037	8,359,530	56,600,212	725,722	802,450
- call options	188,896	440,093	409,187	60,000	1,098,176	3,798	-
- put options	188,896	440,093	409,187	60,000	1,098,176	-	3,798
Total interest rate derivatives	4,639,937	15,210,822	45,940,044	8,479,530	74,270,333	891,266	846,515

risk_management_19_pzu2015.xlsx

Interest rate derivatives	Base amount by maturity as at 31 December 2014					Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total
OTC instruments, including:	5,405,303	13,317,880	27,608,149	5,145,782	51,477,114	506,919	556,426
- futures	2,500,000	6,417,880	-	-	8,917,880	7,203	5,735
- SWAP transactions	2,905,303	6,900,000	27,608,149	5,145,782	42,559,234	499,716	550,691
Total interest rate derivatives	5,405,303	13,317,880	27,608,149	5,145,782	51,477,114	506,919	556,426

risk_management_20_pzu2015.xlsx

Derivatives linked to currency exchange rates	Base amount by maturity as at 31 December 2015					Assets at fair value as at 31 December 2015	Liabilities at fair value as at 31 December 2015
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total
OTC instruments, including:	6,661,014	2,619,764	1,654 394	68,016	11,003,188	170,129	63,213
- futures	1,448,763	573,313	295,341	-	2,317,417	54,620	7,747
- SWAP transactions	4,892,809	1,622,877	1,235,293	68,016	7,818,995	106,385	46,339
- call options	159,721	211,787	61,880	-	433,388	9,124	-
- put options	159,721	211,787	61,880	-	433,388	-	9,127
Total derivatives linked to currency exchange rates	6,661,014	2,619,764	1,654,394	68,016	11,003,188	170,129	63,213

risk_management_21_pzu2015.xlsx

Derivatives linked to currency exchange rates	Base amount by maturity as at 31 December 2014				Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Total
Instruments listed on the regulated market, including:	-	620,808	1,030,540	1,651,348	-	9,516
- futures	-	620,808	1,030,540	1,651,348	-	9,516
OTC instruments, including:	3,899,010	175,360	-	4,074,370	14,975	48,266
- futures	1,292,039	-	-	1,292,039	720	15,633
- SWAP transactions	2,606,971	-	-	2,606,971	13,016	32,633
- call options	-	87,680	-	87,680	994	-
- put options	-	87,680	-	87,680	245	-
Total derivatives linked to currency exchange rates	3,899,010	796,168	1,030,540	5,725,718	14,975	57,782

risk_management_22_pzu2015.xlsx

Security price derivatives	Base amount by maturity as at 31 December 2015					Assets at fair value as at 31 December 2015	Liabilities at fair value as at 31 December 2015
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Over 5 years	Total
Instruments listed on the regulated market, including:	514	28,987	-	-	29,501	131	-
- futures	514	-	-	-	514		-
- call options (sale)	-	28,987	-	-	28,987	131	-
OTC instruments, including:	119,893	736,339	384,091	3,177,910	4,418,233	51,428	30,756
- call options	119,893	385,223	384,091	1,588,955	2,478,162	51,428	-
- call options (sale)	-	351,116	-	1,588,955	1,940,071	-	30,756
Total security price derivatives	120,407	765,326	384,091	3,177,910	4,447,734	51,559	30,756

risk_management_23_pzu2015.xlsx

Security price derivatives	Base amount by maturity as at 31 December 2014				Assets at fair value as at 31 December 2014	Liabilities at fair value as at 31 December 2014
	Up to 3 months	Over 3 months and up to 1 year	Over 1 year and up to 5 years	Total
Instruments listed on the regulated market, including:	-	734,930	1,030,540	1,765,470	1,843	9,516
- futures	-	620,808	1,030,540	1,651,348	-	9,516
- call options	-	114,122	-	114,122	1,843	-
OTC instruments, including:	215,110	102,539	365,732	683,381	22,666	2,120
- futures	153,443	-	-	153,443	-	2,120
- call options	61,667	102,539	365,732	529,938	22,666	-
Total security price derivatives	215,110	837,469	1,396,272	2,448,851	24,509	11,636

risk_management_24_pzu2015.xlsx

Risk concentration

	31 December 2015 (PLN thousand )	31 December 2015 (% of financial asset value)	31 December 2014 (PLN thousand )	31 December 2014 (% of financial asset value)
Involvement in treasury instruments issued and guaranteed by the Polish State Treasury and buy-sell-back transactions on these instruments	32,996,823	36.7%	36,161,177	63.7%
PZU Group's involvement in shares listed on the Warsaw Stock Exchange	4,896,218	5.4%	2,713,587	4.8%
Involvement in assets related to one bank (PKO Bank Polski SA - bank deposits, debt instruments and shares of that bank)	2,231,099	2.5%	1,953,044	3.4%
General involvement bank assets - bank deposits, debt instruments issued by banks, shares of banks and derivative transactions concluded with banks	14,431,537	16.1%	13,201,504	23.3%
Involvement in financial assets denominated in Polish zloty	79,906,781	88.9%	52,678,740	92.8%

risk_management_25_pzu2015.xlsx

Exposure to debt instruments issued by treasuries other than the Polish Treasury, companies and local government authorities

Table below present the exposure of the PZU Group entities to bonds issued by treasuries other than the Polish Treasury, companies and local government authorities. Financial instruments classified as held to maturity as well as loans and receivables have been presented as measured at amortized cost, while financial instruments classified as available for sale and measured at fair value through profit or loss (both classified as such upon initial recognition and held for trading) have been presented as measured at fair value.

Debt instruments issued by treasuries other than the Polish Treasury

As at 31 December 2015	Currency	Reclassification to portfolio	Cost	Carrying amount	Fair value	Impairment loss
Bulgaria	EUR	at fair value	24,715	25,664	25,664	-
Bulgaria	EUR	at amortized cost	15,361	15,495	15,465	-
Croatia	EUR	at amortized cost	16,910	17,023	16,806	-
Croatia	USD	at fair value	6,092	8,336	8,336	-
Czech Republic	CZK	at fair value	105,555	105,591	105,591	-
Spain	EUR	at fair value	78,536	76,260	76,260	-
Ireland	EUR	at fair value	6,878	6,827	6,827	-
Ireland	EUR	at amortized cost	7,433	7,547	7,800	-
Iceland	USD	at fair value	7,420	10,249	10,249	-
Lithuania	EUR	at fair value	374,017	400,777	400,777	-
Lithuania	EUR	at amortized cost	137,041	139,542	141,846	-
Lithuania	USD	at fair value	4,934	6,944	6,944	-
Latvia	EUR	at fair value	55,953	59,991	59,991	-
Latvia	EUR	at amortized cost	19,024	19,433	19,065	-
Latvia	USD	at fair value	31,236	40,191	40,191	-
Germany	EUR	at fair value	849,833	841,102	841,102	-
Portugal	EUR	at fair value	80,361	78,194	78,194	-
Romania	EUR	at fair value	91,315	101,171	101,171	-
Romania	EUR	at amortized cost	27,179	27,199	27,418	-
Romania	RON	at fair value	78,063	78,455	78,455	-
Romania	USD	at fair value	15,631	22,453	22,453	-
Sri Lanka	USD	at fair value	24,775	23,250	23,250	-
Turkey	USD	at fair value	99,310	103,164	103,164	-
Ukraine	UAH	at fair value	12,509 1)	9,955 ¹⁾	9,955 ¹⁾	-
Ukraine	UAH	at amortized cost	13,512,1)	11,256,¹⁾	11,322,¹⁾	-
Ukraine	USD	at fair value	3,710	3,645	3,645	-
Ukraine	USD	at amortized cost	1,518	1,965	2,071	-
Hungary	EUR	at fair value	111,052	115,176	115,176	-
Hungary	EUR	at amortized cost	12,642	12,935	13,074	-
Hungary	HUF	at fair value	157,196	156,924	156,924	-
Hungary	USD	at fair value	7,801	10,718	10,718	-
United States of America	USD	at fair value	160,062	155,685	155,685	-
other	EUR/USD	at fair value	63,343	63,526	63,526	-
other	EUR	at amortized cost	7,990	8,226	8,297	-
Total			2,708,907	2,764,869	2,767,412	-

1) For these bonds, the principal amount is repaid annually in a fixed amount of UAH 100 (i.e. 10% of the bond nominal value). The cost reveals the actual price paid by the company and does not include the repayments of the principal amount.

risk_management_26_pzu2015.xlsx

As at 31 December 2014	Currency	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
Bulgaria	EUR	at fair value	12,589	13,941	13,941	-
Croatia	USD	at fair value	13,489	15,555	15,555	-
Croatia	EUR	at amortized cost	2,418	2,447	2,478	-
Cyprus	EUR	at fair value	20,663	21,585	21,585	-
Iceland	USD	at fair value	24,745	29,246	29,246	-
Lithuania	EUR	at fair value	61,935	68,565	68,565	-
Lithuania	LTL	at fair value	436,696	458,145	458,145	-
Lithuania	USD	at fair value	14,178	17,113	17,113	-
Lithuania	EUR	at amortized cost	12,964	14,050	15,380	-
Lithuania	LTL	at amortized cost	14,857	15,196	15,786	-
Latvia	EUR	at fair value	66,277	70,051	70,051	-
Latvia	USD	at fair value	31,236	35,048	35,048	-
Latvia	EUR	at amortized cost	1,631	1,679	1,781	-
Romania	EUR	at fair value	143,607	156,896	156,896	-
Romania	RON	at fair value	48,545	50,882	50,882	-
Romania	USD	at fair value	15,631	20,436	20,436	-
Turkey	USD	at fair value	449	477	477	-
Ukraine	USD	at fair value	1,458	1,663	1,663	-
Ukraine	UAH	at fair value	10,183¹⁾	9,343 ¹⁾	9,343 ¹⁾	-
Ukraine	UAH	at amortized cost	25,181 ¹⁾	9,231 ¹⁾	9,196¹⁾	-
Ukraine	USD	at amortized cost	23,692	25,916	25,785	-
Hungary	EUR	at fair value	17,308	20,230	20,230	-
Hungary	HUF	at fair value	160,882	163,499	163,499	-
Hungary	USD	at fair value	7,801	9,456	9,456	-
Hungary	EUR	at amortized cost	570	655	721	-
other	EUR/USD	at fair value	53,492	59,279	59,279	-
Total			1,222,477	1,290,584	1,292,537	-

risk_management_27_pzu2015.xlsx

All debt securities issued by governments other than the government of the Republic of Poland, which have been measured at fair value or for which the fair value has been disclosed (classified as held to maturity) are included in Level I of the fair value hierarchy.

Debt instruments issued by companies and local government authorities.

As at 31 December 2015	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
WIG index companies – Banks	at fair value	322,868	325,778	325,778	-
	at amortized cost	1,520,556	1,534,875	1,564,538	-
WIG index companies – Fuels	at fair value	304,464	309,115	309,115	-
	at amortized cost	700,000	700,686	710,287	-
WIG index companies – Chemical index	at amortized cost	5,795	5,857	5,872	-
WIG index companies – Energy	at amortized cost	315,000	316,322	312,776	-
Not listed domestic banks	at amortized cost	20,000	20,250	22,132	-
Mortgage banks	at fair value	41,983	43,179	43,179	-
Foreign banks	at fair value	3,710	3,876	3,876	-
	at amortized cost	71,985	73,999	76,542	1,142
Local governments	at fair value	45,632	56,592	56,592	-
	at amortized cost	50,000	52,501	59,467	-
WIG index companies – Raw materials	at fair value	51,200	51,367	51,367	-
	at amortized cost	195,000	151,069	151,139	42,836
Other – impaired	at fair value	367,487	342,047	342,047	11,630
	at amortized cost	86,120	87,515	87,466	-
Total		4,101,800	4,075,028	4,122,173	55,608

risk_management_28_pzu2015.xlsx

As at 31 December 2014	Valuation method	Cost	Carrying amount	Fair value	Impairment loss
WIG index companies – Banks	at fair value	184,224	190,676	190,676	-
	at amortized cost	1,616,283	1,630,862	1,711,036	-
WIG index companies – Fuels	at fair value	303,226	314,558	314,558	-
	at amortized cost	700,000	700,746	715,642	-
WIG index companies – Chemical index	at amortized cost	1,211	1,236	1,229	-
WIG index companies – Energy	at amortized cost	400,000	401,778	399,721	-
Not listed domestic banks	at amortized cost	20,000	20,271	23,594	-
Foreign banks	at fair value	23,600	24,081	24,081	-
	at amortized cost	76,359	77,813	82,944	-
Mortgage banks	at fair value	41,983	42,623	42,623	-
Local governments	at fair value	45,632	58,608	58,608	-
	at amortized cost	50,000	52,504	60,884	-
Other	at fair value	38,427	38,942	38,942	-
	at amortized cost	62,751	63,760	64,409	-
WIG index companies – Raw materials – written down	at amortized cost	200,000	193,142	201,339	10,144
Other – impaired	at fair value	11,630	-	-	11,630
Other foreign banks – impaired	at amortized cost	1,142	-	-	1,142
Total		3,776,468	3,811,600	3,930,288	22,916

risk_management_29_pzu2015.xlsx

8.5.2.1 Interest rate risk

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group.

Change in portfolio value	31 December 2015		31 December 2014
	Effect on net financial profit/loss	Effect on equity	Effect on net financial profit/loss	Effect on equity
Market interest rate drop by 100 bp	601,366	148,659	125,668	223,086
Market interest rate increase by 100 bp	(548,302)	(142,455)	(138,436)	(219,307)

risk_management_30_pzu2015.xlsx

The above sensitivity tests do not include effects of changes in interest rates for presented insurance, investment contract liabilities nor Alior Bank receivables from clients. Analysis of effects of a change in technical rate on measurement of insurance and investment contracts is presented in item 8.5.1.

The interest rate risk related to Alior Bank’s liabilities to clients is linked, first of all, to:

risk of revaluation dates mismatch;
base risk, e.g. the influence of uneven change in reference indexes with a similar revaluation date on the profit or loss;
modelling the accounts with indefinite maturity date and interest rate determined for e.g. current deposits;
influence of the non-interest items (e.g. equity, fixed assets).

One of the methods of calculating the exposure to interest rate risk is setting the BPV, which determines the estimated change in measurement of a given transaction/item due to a parallel shift of a yield curve by 1 bp. The estimation of BPV for Alior Bank as at 31 December 2015 has been presented below:

Currency	Up to 6 months	6 months – 1 year	1 year – 3 years	3-5 years	5-10 years	Total
PLN	(192.3)	17.3	369.8	(140.0)	30.3	85.2
EUR	(19.1)	(16.2)	(19.7)	(13.8)	(6.6)	(75.4)
USD	6.1	11.3	(6.2)	(6.8)	(0.4)	4.0
CHF	0.4	(0.1)	(1.4)	00.0	00.0	(1.1)
GBP	0.6	1.7	0.1	00.0	00.0	2.5
Other	(0.5)	(1.6)	00.0	00.0	00.0	(2.1)
Total	(204.8)	12.5	342.6	(160.6)	23.4	13.1

risk_management_31_pzu2015.xlsx

In order to estimate the level of interest rate risk, Alior Bank applies the Value at Risk (VaR) model. 99% VaR with the horizon of 10 days calculated as at 31 December 2015 for the banking records amounted to PLN 6,361 thousand. The banking operations for the interest rate risk management covers instruments (other than acquired for trade), loans, deposits, credits and derivative transactions aimed at hedging the risk of these operations. Alior Bank analyzes the scenarios in terms of i.a. the influence of change in interest rates on the future interest result and economic value of the capital. As a part of these scenarios the internal limits are maintained, whose utlization is measured daily. The use of the limit of change in economic value of capital with the parallel shift of the percentage curve by +/- 200 bps and non-parallel shifts with the scenarios of +/- 100/400 bps (in tenors of 1M/10Y, between them a linear interpolation of the shift) as at 31 December 2015 is presented in the following table:

Scenario (1M/10Y)	Change in economic value of capital
+400 / +100	(170,383)
+100 / +400	(75,552)
+200 / +200	(99,421)
- 200 / - 200	79,039
- 100 / - 400	65,379
- 400 / - 100	78,498

risk_management_32_pzu2015.xlsx

8.5.2.2 Currency risk

Degree of risk exposure

Information regarding exposure to currency risk by class of financial instruments is presented in Note 39.

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group.

Change in portfolio value	31 December 2015		31 December 2014
	Effect on net financial profit/loss	Effect on equity	Effect on net financial profit/loss	Effect on equity
20% increase in FX to PLN rates	88,958	15,317	6,052	118,583
20% decrease in FX to PLN rates	(88,958)¹⁾	(15,317)¹⁾	(6,052)	(118,583)

1) With assumption of decrease by 80% in exchange rates of UAH against PLN (while retaining 20% decrease for other currencies) the negative influence on financial result and equity would amount to, respectively: PLN 46,550,000 and PLN 159,081,000.

risk_management_currency_33_pzu2015.xlsx

Financial assets exposed to FX risk include deposit transactions and debt instruments that hedge outlays for technical provisions denominated in foreign currencies, exposure to equity instruments listed at stock exchanges other than WSE, participation units and investment certificates of investment funds, to derivatives denominated in foreign currencies, as well as financial assets of foreign companies included in consolidation.

In order to measure currency risk, Alior Bank applies a Value at Risk model which means a potential loss of value on the foreign exchange currency positions held, simultaneously maintaining the assumed confidence level and position holding period. To determine VaR, Alior Bank applies a variance and covariance method, maintaining a 99% confidence level. The value is determined daily for given areas responsible for risk taking and managing, separately and jointly. As at 31 December 2015, maximum loss on currency portfolio held by the Bank (managed under a business accounting book), determined on the basis of VaR in a 10-day horizon, could amount to PLN 106 thousand, at the 99% confidence level assumed.

8.5.2.3 Share price risk

Degree of risk exposure

The value of available for sale and measured at fair value through profit or loss instruments portfolio is presented in Note 35.2 and 35.3

Sensitivity analysis

The following table presents sensitivity tests of the non-unit-linked financial assets portfolio of PZU Group.

Change in portfolio value	31 December 2015		31 December 2014
	Effect on net financial profit/loss	Effect on equity	Effect on net financial profit/loss	Effect on equity
increase in measurement of listed equity instruments by 20%	545,254	207,188	345,885	561,156
decrease in measurement of listed equity instruments by 20%	(545,254)	(207,188)	(345,885)	(561,156)

risk_management_currency_34_pzu2015.xlsx

8.5.2.4 Liquidity risk

Financial liquidity risk of PZU Group may result from three types of events:

shortages of liquid funds in ongoing operations;
illiquidity of financial instruments;
a structural mismatch between the maturity of assets and liabilities.

In the liquidity risk management process, liquidity is controlled in the short, medium and long term, i.e.:

short-term liquidity – the balance of funds in the liquidity and currency portfolios is held as not greater than the limit defined. Furthermore, conditional sell-buy-back transactions are used in liquidity management;
medium-term liquidity – PZU and PZU Życie hold adequate liquid investments portfolios;
long-term liquidity and structural mismatch between the maturity of assets and liabilities – Asset Liability Management (ALM), i.e. matching of the structure of financial investments which cover technical provisions to the nature of such provisions is applied.

Another objective of the ALM process is to ensure the capability to pay claims and benefits within the shortest possible time also in unfavorable economic conditions. The level of liquidity risk is measured by estimating the shortages of cash required for liability payments. The estimate is made on the basis of a set of analyzes, including among others, a liquidity gap analysis (a mismatch of net cash flows), an analysis of the distribution of expenditures relating to operating activities and incurred over short periods as well as currency gap analysis.

The policy of liquidity risk management in Alior Bank involves maintaining the liquidity positions so that it is possible to meet payment liabilities at any time, with the available cash in hand, inflows from transactions with a given maturity date or with sale of the assets available for sale, whilst minimizing the costs of maintaining liquidity.

In order to manage Alior Bank’s liquidity, ratios and related to them limits of the following types of liquidity are used:

payment liquidity – the ability to finance assets and meet liabilities on time in the normal course of operations or in other circumstances which can be foreseen, with no need to incur loss. As a part of payment liquidity management, the emphasis is put on the immediate and current (up to 7 days) liquidity analysis;

short-term liquidity – the ability to meet all cash liabilities if the payment due date falls within 30 subsequent days;
medium-term liquidity – the ability to meet all liabilities if the maturity date falls within the period of up to 6 months;
long-term liquidity – monitoring the possibility of meeting all cash liabilities if the payment due date falls within the period of more than 12 months.

As a part of liquidity risk management, the analysis of the long-term maturity profile is made, which largely depends on the assumptions concerning the shaping of future cash flows related to the position of assets and liabilities. The assumptions take into account:

stability of liabilities with indefinite maturity dates (e.g. current accounts, deposit terminations and renewals, their level of concentration);
possibility to shorten the maturity date of certain items of assets (e.g. mortgages with an option of earlier repayment);
possibility to sale an item of assets (liquidity portfolio).

Degree of risk exposure

Future cash flows resulting from assets used as coverage of technical provisions have been presented as the nominal value of the projected future cash flows corresponding to the periods in which such cash flows are expected. As regards debt securities, loans and term deposits, all cash flows which are expected to occur by the date of redemption of such securities, withdrawal of investments or repayment of loans have been taken into consideration. Shares and participation units have been presented in the periods of their expected disposal or redemption.

For the purpose of the analysis the adjustments of cash flows presented in tables on following pages and engagement of PZU Group in investment funds (units and investment certificates) have not been consolidated. This means that they are presented as units and investment certificates rather than assets held by the funds. Such an attitude reflects the liquidity management perspective and ensures coverage of technical provisions with assets at the level of given companies, taking into account statutory limits for type concentration of those assets.

Non-life insurance

The table below presents the match between undiscounted cash flows related to technical provisions in non-life insurance and the assets used as their coverage.

Item	Projected cash flows
	up to 3 months	over 3 months and up to 6 months	over 6 months and up to 1 year	over 1 year and up to 5 years	over 5 years
A. Projected net outflows resulting from insurance contracts concluded by the end of reporting year (I + II)	(2,165,008)	(1,506,727)	(2,118,797)	(5,314,198)	(10,794,855)
I. Outflows	(2,182,454)	(1,516,853)	(2,130,151)	(5,342,773)	(10,853,734)
II. Inflows	17,446	10,126	11,354	28,575	58,879
B. Inflows from assets covering technical provisions	2,361,268	1,617,615	2,108,827	6,158,922	11,869,752
I. Future inflows whose value is known as at the end of reporting year	1,964,880	999,235	627,170	4,742,265	6,188,827
- Treasury bonds	516,048	116,264	153,072	3,169,194	5,852,887
- Other debt securities	19,460	15,071	294,609	322,037	183,543
- Term deposits with credit institutions	792,907	640,279	-	-	-
- Loans	71,528	-	547	995,442	89,135
- Receivables	510,039	89,155	39,971	6,745	-
- Other	54,898	138,466	138,971	248,847	63,262
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year	342,950	615,939	1,478,420	1,413,891	5,639,869
- Treasury bonds	-	-	302,510	61,346	359,331
- Other debt securities	762	-	12,471	17,632	43,205
- Loans	-	-	-	34,598	-
- Shares listed on the regulated market	-	-	-	-	-
- Shares not listed on the regulated market	-	-	-	-	-
- Investment fund units	342,188	615,939	1,163,439	1,300,315	3,436,085
- Investment certificates	-	-	-	-	1,801,248
III. Inflows from other assets	53,438	2,441	3,237	2,766	41,056
C. Balance of projected cash flows (A + B)	196,260	110,888	(9,970)	844,724	1,074,897
D. Balance of accumulated cash flows	196,260	307,148	297,178	1,141,902	2,216,799

risk_management_currency_35_pzu2015.xlsx

The projected net cash flows resulting from non-life insurance contracts concluded by the end of the financial year have been determined using statistical and actuarial mathematical methods, taking into account historical data. Inflows have been calculated on the basis of the gross premium. Outflows include all projected costs to be incurred by the insurance company in connection with insurance contracts concluded.

The duration gap is the measure of a mismatch between the maturity dates of assets (investments) and liabilities (technical provisions). The duration of investments in non-life insurance as at 31 December 2015 was 3.3 (2.9 as at 31 December 2014), whereas the duration of technical provisions as at 31 December 2015 was 5.3 (5.8 as at 31 December 2014).

Life insurance

The table below presents the match between cash flows from technical provisions and liabilities under investment contracts with guaranteed and fixed terms and conditions, and the assets associated with them. The table does not present cash flows relating to unit-linked insurance products and investment contracts.

Item	Projected cash flows
Item	up to 6 months	over 6 months and up to 1 year	over 1 year and up to 5 years	over 5 year and up to 10 years	over 10 year and up to 20 years	over 20 years
A. Projected net outflows resulting from insurance and investment contracts concluded by the end of reporting year (I + II)	-791,451	-221,366	-950,599	-1,297,562	-4,152,117	-5,995,992
I. Outflows	-1,645,098	-1,043,553	-6,755,642	-6,886,259	-11,129,464	-9,691,369
II. Inflows	853,647	822,187	5,805,043	5,588,697	6,977,347	3,695,377
B. Inflows from assets covering technical provisions	2,600,370	851,129	5,572,275	7,864,938	4,113,273	5,942,597
I. Future inflows whose value is known as at the end of reporting year	2,600,367	849,904	5,568,194	6,175,346	4,113,047	2,066,292
- Treasury bonds	1,898,822	637,233	4,977,294	6,097,443	4,113,047	2,066,292
- Other debt securities	6,152	2,766	151,503	18,261	-	-
- Term deposits with credit institutions	695,372	209,884	166,529	57,535	-	-
- Loans	21	21	272,868	2,107	-	-
II. Future inflows whose value depends directly on market interest rates or other ratios and is unknown as at the end of reporting year	3	1,225	4,081	1,689,592	226	3,876,305
- Treasury bonds	-	94	-	-	-	-
- Other debt securities	-	1,128	4,061	902	226	-
- Loans	3	3	20	20	-	-
- Investment fund units	-	-	-	-	-	3,876,305
- Investment certificates	-	-	-	1,688,670	-	-
III. Inflows from other assets	-	-	-	-	-	-
C. Balance of projected cash flows (A + B)	1,808,919	629,763	4,621,676	6,567,376	-38,844	-53,395
D. Balance of accumulated cash flows	1,808,919	2,438,682	7,060,358	13,627,734	13,588,890	13,535,495

risk_management_currency_36_pzu2015.xlsx

The forecast of future claims and future net premiums in life insurance takes into account assumptions regarding mortality, accident and birth rates, the insured's resignation, projected claims and projected inflows from net premiums.

The duration gap is the measure of a mismatch between the maturity dates of assets (investments) and liabilities (technical provisions). The duration of investments in life insurance as at 31 December 2015 was 5.2 (4.9 as at 31 December 2014), whereas the duration of technical provisions as at 31 December 2015 was 19.4 (22.4 as at 31 December 2014).

Banking activity

The below table presents the analysis of maturity of Alior Bank assets and liabilities as per contractual dates. The amounts are expressed in PLN milion.

31 December 2015	1D	1M	3M	6M	1Y	2Y	5Y	10Y+	Total
Assets	7,249	519	937	1,314	2,893	4,449	8,469	14,174	40,003
Cash and Nostro	2,090	-	-	-	-	-	-	-	2,090
Receivables from banks	-	122	-	-	-	184	-	-	306
Receivables from clients	5,160	382	919	1,065	2,322	3,024	6,328	11,722	30,922
Securities	-	15	17	249	570	1,241	2,141	633	4,867
Other assets	-	-	-	-	-	-	-	1,819	1,819
Liabilities and equity	(13,938)	(6,780)	(5,391)	(4,881)	(1,876)	(1,534)	(1,224)	(4,378)	(40,003)
Liabilities to banks	(11)	(804)	-	-	-	(203)	(43)	-	(1,061)
Liabilities to clients	(13,927)	(5,098)	(5,385)	(4,622)	(1,687)	(621)	(47)	(17)	(31,404)
Own issues	-	-	(6)	(259)	(189)	(710)	(1,135)	(847)	(3,145)
Equity	-	-	-	-	-	-	-	(3,514)	(3,514)
Other liabilities	-	(878)	-	-	-	-	-	-	(878)
Balance-sheet gap	(6,689)	(6,262)	(4,454)	(3,567)	1,017	2,915	7,244	9,795	-
Accumulated balance-sheet gap	(6,689)	(12,951)	(17,405)	(20,972)	(19,955)	(17,040)	(9,795)	-
Derivative instruments - inflows	-	2,455	763	536	1,722	1,108	407	60	7,052
Derivative instruments - outflows	-	(2,428)	(753)	(551)	(1,721)	(1,087)	(404)	(59)	(7,002)
Derivative instruments - net	-	27	10	(15)	2	22	3	1	50
Guarantee and financial lines	8,639	3	9	37	134	98	2	20	8,942
Off-Balance-sheet gap	8,639	30	19	22	136	120	5	21	8,991
Total gap	1,950	(6,232)	(4,435)	(3,545)	1,153	3,035	7,249	9,817	8,991
Total accumulated gap	1,950	(4,283)	(8,718)	(12,263)	(11,110)	(8,075)	(826)	8,991

risk_management_currency_37_pzu2015.xlsx

Additionally, Alior Bank carries out liquidity stress tests, prepares a plan to raise funds in emergency situations, and determines and verifies the rules for the sale of liquid assets, taking into account the cost of maintaining liquidity. In accordance with the resolution of the PFSA, Alior Bank determines:

a short-term liquidity gap (minimal current excess liquidity) defined as the difference between the sum of primary and supplementary value of liquidity reserves on the reporting day and the value of unstable external funds. As of 31 December 2015, the value of the excess liquidity was PLN 1,880 million.
the non-liquid funds to own funds cover ratio, calculated as the ratio of bank's own funds less the aggregate value of capital requirements for market risk, delivery settlement risk, and counterparty risk to non-liquid assets. As of 31 December 2015, the value of the ratio was 4.72;
non-liquid and limited liquidity assets to own funds and stable external funds ratio, calculated as the quotient of the total of own funds, less the total value of the capital requirements for market risk, delivery settlement risk, counterparty risk and stable external funds to the sum of non-liquid assets and limited liquidity assets. As of 31 December 2015, the value of the ratio was 1.11;
a short-term liquidity ratio, defined as the ratio of the sum of primary and supplementary liquidity reserves on the reporting day to the value of unstable external funds. As of 31 December 2015, the value of the ratio was 1.53.

Alior Bank conducts also an in-depth analysis of the stability and structure of the funding sources, including the core and concentration level of term deposits and current accounts. Additionally, it monitors the variability of the balance sheet and off-balance sheet items, in particular the values of the expected outflows arising from the guarantees granted to its customers.

8.5.3 Credit risk and concentration risk

Credit risk – a risk of a loss or an unfavorable change in the financial position, resulting from changes in the creditworthiness of issuers of securities, business partners and any debtors.

Credit risk in PZU Group includes:

credit spread risk – the possibility of incurring losses due to changes in the value of assets, liabilities and financial instruments arising from changes in the level of credit spreads with regard to the time structure instruments issued by the State Treasury or their volatility;
counterparty default risk – the risk of losses due to a counterparties' and debtors' failure to meet their obligations;
credit risk in banking activity - credit risk that results from operations in the banking sector which is related mainly with the risk of a borrower or debtor’s failure to meet his/her obligations;
credit risk in financial insurance – credit risk arising from activity in the financial insurance sector, related primarily to the danger of the customer’s company, the debtor's or the borrower's failure to meet obligations towards a third party; this risk may result from unsuccessful venture implementation or the economic environment's unfavorable impact.

Concentration risk – a risk arising from lack of diversification in the portfolio of assets or from high exposure to counterparty risk including a single issuer of securities or a group of related issuers.

Exposure to credit risk in PZU Group arises directly from investment, financial insurance and guarantee, reinsurance and bancassurance related activities. PZU Group distinguishes the following types of credit risk exposure:

bankruptcy of an issuer of financial instruments (e.g. corporate bonds) in which PZU Group invests, or which it trades, e.g. corporate bonds;
risk of a contractor’s failure to meet its obligations, e.g. reinsurance or OTC derivatives, as well as bancassurance activities;
risk of a PZU Group customer’s failure to meet its obligations to a third party, e.g. insurance of monetary receivables, insurance guarantees;
risk of customer's failure to meet its obligations to PZU Group from contracted credits or loans (in banking activity)

Banking activity

Concentration risk

Each month, Alior Bank analyzes the concentration of the deposit base, which aims to identify the potential risks of excessive dependence on funding sources characterized by a low degree of diversification. In order to estimate the concentration level, the Bank sets a high concentration indicator by calculating the ratio of the funds accumulated by the largest depositaries to the value of the deposit base. As of 31 December 2015, the ratio was 2.22%, which indicates a lack of concentration.

In order to reduce the concentration risk, Alior Bank diversifies its structure of the deposit base, dividing its clients into retail, business, financial, central and local government institutions, and monitors the monthly share of each of these groups in the total deposit base.

The management of concentration risk arising from lending activities concerns the risks arising from, among other things:

exposures to individual entities or entities related by capital or management;
exposures to entities in the same industry, economic sector, carrying out the same business activity or trading in similar products;
exposures to entities from the same voivodeship, as well as from the same countries or groups of countries;
exposures secured by the same kind of collateral or secured by the same collateral provider (including the risks arising from collaterals established on securities with similar characteristics);
exposures in the same currency;
exposures to entities referred to in Article 71 of the Polish Banking Act;
product data sheet;
customer segment;
distribution channel;
special offers and promotions;
internal concentration.

In order to prevent adverse events resulting from excessive concentration, Alior Bank reduces concentration risk by setting limits and using concentration standards, both the ones arising from external regulations and the ones that were adopted internally. These include i.a.:

principles for identifying credit concentration risk areas;
a process for determining and updating the concentration limits;
a process for managing the limits, including the manner of proceeding if the permitted limit level is exceeded;
a process for monitoring concentration risk;
control of the process of concentration risk management.

The following table shows the industry concentration of Alior Bank's balance sheet and off-balance sheet exposures, divided by sections of the Polish Classification of Activity (PKD), which takes into account:

the credit amount (balance sheet and off-balance sheet exposures without interest, fees and write-offs), decreased by the value of the paid cash deposits;
unauthorized overdrafts in current accounts;
the treasury limits decreased by the value of the paid deposits, including debt securities whose issuer is an entity of the given section.

Section name as per Classification of Business Activities in Poland	31 December 2015
Industrial processing	4,275,844
Construction	3,707,790
Wholesale and retail, repair of motor vehicles, including motorcycles	3,433,278
Real estate activities	3,379,837
Production and distribution of electricity, gas, steam and air conditioning	1,889,519
Accommodation and food service activities	1,568,126
Financial and insurance activity	1,178,549
Other	3,697,167
Total	23,130,110

risk_management_currency_38_pzu2015.xlsx

The following factors are taken into account during the process of setting and updating concentration limits:

reliable economic and market information related to each of the exposure concentration areas, in particular, macroeconomic ratios, industry ratios, and information on business trends, taking into account projections of the value of interest rates, foreign exchange rates, political risk analyses, ratings of governments and financial institutions;
reliable information on business position of entities, industries, branches, business sectors, overall economic information, including on the economic and political position of countries, and other information necessary to assess the concentration risk;
business and qualitative information relating to the management process within the entities to which the Bank is exposed, which leads to concentration risk;
interest rate risk, liquidity risk, operational risk and political risk related to the identified exposures, which may lead to an increase in concentration risk.

The Bank analyzes risk both on an individual and on a portfolio level. The actions taken by the Bank result in:

minimizing the credit risk of individual loans at a predetermined rate of return;
reducing the total credit risk resulting from owning a specific credit portfolio.

As part of the process of minimizing risk of individual exposures, the following factors are assessed whenever the Bank grants a loan or another credit product:

creditworthiness and credit rating of the exposure, taking into consideration, among other things, a detailed analysis of the sources of its repayment;
collateral, including verifying their formal, legal and economic status, taking into consideration, among other things, LTV (loan to value) adequacy.

In order to improve the risk control over individual exposures, Alior Bank regularly monitors its clients, taking appropriate mitigating actions in the event of identifying increased risk factors.

In terms of minimizing the level of credit risk arising from owning of a specific portfolio, the Bank:

determines and controls concentration limits;
monitors early warning signals;
regularly monitors the credit portfolio, controlling all material credit risk parameters;
regularly performs stress tests.

Risk assessment in the credit process

Credit products are granted in accordance with appropriate crediting methodologies depending on the client segment and product type. Client’s creditworthiness is assessed prior to issuing a decision on granting a credit product using a credit process support system and the following tools: Scoring or rating; external information (such databases as CBD DZ, CBD BR, BIK, BIG) and Alior Bank internal databases. Credit products are issued pursuant to applicable operating procedures that indicate appropriate activities to be performed as part of the credit process, as well as entities in charge and tools to be used.

Credit decisions are met in accordance with the currently applicable system of credit decision system (with competence levels adjusted to a risk level of a particular client or transaction).

In order to conduct regular assessment of credit risk taken and to mitigate potential losses on credit exposures, the client’s situation is under monitoring during the crediting period. This is done by identifying early warning signals, as well as periodic, individual reviews of credit exposures.

The monitoring process is completed upon the issuance of a recommendation on the strategy of further cooperation with the client.

To minimize credit risk, a collateral is established; the collateral is adjusted to the credit risk incurred and flexible with respect to the situation of the client. The establishment of a collateral does not exempt from the duty to examine the client’s creditworthiness.

The aim of a credit collateral is to secure the return of a credit granted along with due interest and costs in the event when the borrower fails to settle its debt in the periods stipulated in a credit agreement, and when restructuring activities fail to bring anticipated effects. Accepted forms of collateral include: guarantees, sureties, bank account freezes, registered pledges, transfers of title, credit insurances, promissory notes, and mortgages. Subjects of a

collateral are verified as part of the credit process with respect to the legal possibilities of efficient collateral security; moreover, their market value is assessed, as well as their potential value to be recovered through the enforcement procedure. Due to collaterals it is possible to reduce the amount of impairment losses and provisions, as well as to apply more favorable risk weights to calculate capital requirements.

The value of collaterals considered when determining impairment losses with respect retail and business credits in 2015 amounted to PLN 994 million. In the case of credits for which no impairment was reported in 2015, it amounted to PLN 13,600 million. The impact of non-recognition of collateral value on the level of impairment losses as at 31 December 2015 would amount to PLN 124 million for impairment losses and PLN 97 million for IBNR respectively.

Credit scoring and rating

Credit scoring is a tool supporting credit decisions for individual clients and microenterprises, whereas credit rating is applied to the segment and small, medium-sized and large enterprises.

Scoring and rating models are under regular monitoring to check whether they operate correctly. The aim of the process is to conclude whether the applied models are able to properly diversify the risk, and whether estimated risk parameters accurately reflect appropriate risk aspects. Furthermore, as part of functional inspections also the correctness of application of those models in the credit process is verified.

Not overdue financial assets	Risk class	31 December 2015
Receivables not overdue and without impairment
Retail segment
Mortgage loans, cash loans, Credit cards, overdraft in current and saving account
(1 – the best class, 6 – the worst class)	1	700,449
	2	691,423
	3	808,399
	4	887,246
	5	51,867
	6	6,851
Borrowings, cash loans, Credit cards, overdraft in current and saving account - standard procedure
(K1 – the best class, K10 – the worst class)	K1	341,778
	K2	426,684
	K3	795,538
	K4	1,084,859
	K5	1,227,531
	K6	1,034,654
	K7	561,920
	K8	201,861
	K9	40,719
	K10	3,809
Mortgage loans
(M1 – the best class, M10 – the worst class)	M1	2,818
	M2	21,767
	M3	103,571
	M4	381,809
	M5	935,591
	M6	1,254,284
	M7	940,449
	M8	613,014
	M9	233,637
	M10	54,473
No scoring		2,151,619
Total retail segment		15,558,620
Business segment
Long-term products, Car loans, Limit in current account
(1 – the best class, 5 – the worst class)	1	7,785
	2	11,784
	3	16,478
	4	6,172
	5	-
Models for microenterprises which carry out abbreviated book-keeping and Models for entities which keep business accounting books, automotive dealers and developers
(Q01 – the best class, Q25 – the worst class)	Q01	21
	Q02	13,370
	Q03	195,015
	Q04	190,236
	Q05	17,095
	Q06	1,074,832
	Q07	402,377
	Q08	161,978
	Q09	1,038,925
	Q10	209,023
	Q11	1,293,114
	Q12	709,894
	Q13	521,595
	Q14	992,276
	Q15	355,544
	Q16	694,126
	Q17	674,844
	Q18	288,928
	Q19	626,156
	Q20	163,146
	Q21	89,767
	Q22	51,762
	Q23	71,686
	Q24	2,108
	Q25	44,906
No rating		687,318
Total business clients		10,612,261
Receivables not overdue and without impairment		26,170,881
Receivables not overdue and with recognized impairment		152,849
Retail segment		37,337
Business segment		115,512
Total not overdue receivables from clients		26,323,730

risk_management_currency_39_pzu2015.xlsx

Credit risk monitoring in terms of individual and business clients

Continuous monitoring of timely service of credits and periodic reviews of financial and economic standing of clients and the value of adopted collaterals ensure constant protection of the credit portfolio. This process is applied to all credit exposures of individual and business clients.

Application of forbearance and related practices

The following tools are applied in the process of the client’s restructuring:

prolongation of the duration of the credit, as a result of which monthly principal and interest payments are reduced (the maximum duration is 120 months in the case of unsecured products);
granting a grace period for the repayment of a full installment or part thereof;
consolidation of several liabilities towards Alior Bank, including changing a personal overdraft into a credit to be repaid in installments.

In particularly justified situations, other tools may be used.

No limitations with respect to forbearance and related practices have been introduced to the process of restructuring of business clients. Given the specificity of our clients, the most commonly applied tools are:

agreement on the change in the schedule of mature exposures;
annex on the reduction of overdraft limit of open-end credits;
annex on the change in conditions of changing repayment date/installment value or grace period for principal amount/interest.

Monitoring the risk connected to forbearance and related practices

As to the application of tools such as forbearance, the following risks are identified:

risk of non-repayment or cessation of repayment;
risk of collaterals loss (movable property in particular) or significant decrease in value thereof;
bankruptcy risk.

Those risks are mitigated, among others, by conducting a client analysis in terms of its financial possibilities and the history of cooperation with the client, as well as field visits and other sources. Prior to the implementation of forbearance tools it is possible to execute collaterals and, as a consequence, significantly reduce the involvement. When forbearance tools are applied, the aim is to provide maximum collateralization of exposures (through mortgages, sureties and pledges).

Impairment assessment with respect to exposures covered by forbearance practices

In the case of exposures subject to forbearance practices, stricter criteria for identification of evidence of impairment are adopted. Regarding such exposures, besides the standard catalogue of evidence, additional criteria are applied which defined as the occurrence of one of the following situations upon taking a decision whether to grant a facility to a client:

delay longer than 30 days;
other impairment evidence;
analyst assessment of the threat of service timeliness (for individual clients);
determination that its economic and financial standing is substandard or worse (for business clients).

Impairment for those exposures is determined in the course of an individual scenario analysis based on historical behavior of similar clients and specific features of a given client.

As at the date of consolidating Alior Bank Group, the credit receivables of clients towards Alior Bank were measured at fair value. An analysis of involvement covered by forbearance presented in the table below was prepared based on the value credits measured at amortized costs, resulting from the consolidated financial statements of Alior Bank Group.

Credits granted to clients subject to forbearance	31 December 2015
Retail segment	100,422
without recognized impairment	50,279
with recognized impairment	79,575
IBNR ¹⁾	(212)
impairment losses	(29,220)
assessed using the case-by-case method	(16,672)
assessed using the portfolio method	(12,548)
Business segment	255,597
without recognized impairment	131,887
with recognized impairment	230,518
IBNR ¹⁾	(26)
impairment losses	(106,782)
assessed using the case-by-case method	(90,487)
assessed using the portfolio method	(16,295)
Total net receivables	356,019

1) Provision created for a group of exposures used to cover incurred and not reported losses. It is created for exposures for which individual evidence of impairment loss was not identified and which are grouped with respect to the homogeneity principle concerning risk profile.

risk_management_currency_40_pzu2015.xlsx

Credits granted to clients subject to forbearance	31 December 2015
With recognized impairment	174,091
including value of collateral	124,648
Without recognized impairment	181,928
including value of collateral	97,742
not overdue	85,305
overdue	96,623
Total net receivables	356,019

risk_management_currency_41_pzu2015.xlsx

Investment activity

The principles of credit risk management in PZU Group regarding risk arising from investing activities is regulated in a number of documents approved by the Supervisory Boards, the Management Boards and dedicated Committees.

Credit and concentration risk limits are set by dedicated Committees.

Limits for banks and other issuers of debt securities are determined based on the level of exposure. The exposure limits are regarded with reference to a single entity or capital group (both credit limits and concentration limits). Exceeding the limit results in an obligation to prepare and submit a plan to reduce exposure.

Credit risk assessment of an entity is based on internal credit ratings (rating approach differs depending on an entity type). Ratings are based on a quantitative and qualitative analysis and provide the basis for determining the limits. The ratings are updated for credit quality monitoring purposes.

Degree of credit risk exposure

The following table presents credit risk exposure of assets charged with credit risk in individual Fitch groups (in absence of these, Standard&Poors or Moody`s standards have been applied). The exposure to credit risk relating to repo transactions has been presented as an exposure towards the issuer.

Reports presenting assets exposed to credit risk do not include loan receivables from clients and insurance receivables. This was due to significant dispersion of the portfolio of assets, resulting, among others, in a significant share of receivables from small enterprises and retail customers who do not have ratings.

Assets exposed to credit risk as at 31 December 2015	Note	AAA	AA	A	BBB	BB	No rating	Unit-linked assets	Total
Debt instruments		996,787	7,583	33,389,390	2,930,295	1,005,990	596,027	1,533,680	40,459,752
- held to maturity	35.1	-	-	17,146,791	137,859	79,058	6,418	-	17,370,126
- available for sale	35.2	519,011	-	5,830,345	384,648	94,046	317,700	-	7,145,750
- measured at fair value	35.3	477,776	7,583	10,208,680	422,146	530,646	32,758	1,533,680	13,213,269
- loans	35.4	-	-	203,574	1,985,642	302,240	239,151	-	2,730,607
Deposits with credit institutions and buy sell-back transactions	35.4	-	-	4,900,606	2,914,301	6,553	498,917	91,407	8,411,784
Other loans	35.4	-	-	68,096	-	158,805	1,702,144	-	1,929,045
Derivative instruments	35.3 8.5.2	-	66,641	762,776	47,499	-	236,038	-	1,112,954
Reinsurers’ share in net claim provisions	31	-	353,232	310,385	534	-	93,446	-	757,597 1)
Reinsurance receivables	38	-	8,436	21,677	1,223	-	17,687	-	49,023
Total		996,787	435,892	39,452,930	5,893,852	1,171,348	3,144,259	1,625,087	52,720,155

1) including PLN 139,578 thousand of instruments presented as transactions hedging cash flows.

risk_management_currency_42_pzu2015.xlsx

Assets exposed to credit risk as at 31 December 2014	Note	AAA	AA	A	BBB	BB	No rating	Unit-linked assets	Total
Debt instruments		-	-	33,685,106	2,415,765	310,188	127,229	1,474,900	38,013,188
- held to maturity	35.1	-	-	19,933,317	50,372	-	-	-	19,983,689
- available for sale	35.2	-	-	2,141,329	261,139	-	32,397	-	2,434,865
- measured at fair value	35.3	-	-	10,533,633	326,441	208,738	60,367	1,474,900	12,604,079
- loans	35.4	-	-	1,076,827	1,777,813	101,450	34,465	-	2,990,555
Deposits with credit institutions and buy sell-back transactions	35.4	-	-	7,195,733	1,746,022	-	370,061	82,138	9,393,954
Other loans	35.4	-	-	-	-	256,763	2,053,209	-	2,309,972
Derivative instruments	35.3	574	14,725	516,252	3,073	-	11,779	-	546,403
Reinsurers’ share in net claim provisions	31	-	208,856	174,539	12,175	-	55,372	-	450,942
Reinsurance receivables	38	-	5,308	12,730	491	-	10,153	-	28,682
Assets held for sale		-	-	305,937	-	-	-	-	305,937
- Debt instruments	41	-	-	217,852	-	-	-	-	217,852
- Bank deposits	41	-	-	88,085	-	-	-	-	88,085
Total		574	228,889	41,890,297	4,177,526	566,951	2,627,803	1,557,038	51,049,078

risk_management_currency_43_pzu2015.xlsx

The following table presents credit risk ratios used by PZU Group to calculate credit risk.

Standard&Poor’s ratings	AAA	AA	A	BBB	BB	No rating 1)
Ratio (%) for 2015	0.74	0.82	1.51	4.06	13.74	25.91
Ratio (%) for 2014	0.74	0.84	1.59	4.33	14.39	26.97

1) In the case of exposure to mortgages with no rating, the ratio of 2% was adopted corresponding to the lowest BBB+ investment rating.

risk_management_currency_44_pzu2015.xlsx

The credit risk, to which PZU Group was exposed as at 31 December 2015 amounted to PLN 1,821,601 thousand (PLN 1,639,172 thousand as at 31 December 2014; after applying the coefficients of 31 December 2015, the risk would amount to PLN 1,562,795 thousand).

Risk related to financial insurance (i.a. credit insurance, surety insurance, guarantees)

Credit risk related to the activities in the financial insurance and guarantee sector (mainly performance bonds and customs guarantees) results from the possibility that a customer defaults under an agreement with a third party.

As regards risks assumed by the Company, the risk appetite is determined by a relevant committee, which approves the threshold exposure to credit risk by exposure type, portfolio, product lines, local PZU offices as well as individual risks and the capital group.

A control function in terms of risk monitoring which is independent from the sales function is established at three levels:

level I – individual level – measurement of risk of financial insurance (i.a. underwriting);
level II – portfolio level – analysis of changes in the exposure value, level of claims related to the portfolio as well as analysis of concentration and exposure to one entity and capital group. Information about the level of risk in the portfolio is transferred and aggregated in order to monitor the overall exposure of PZU Group;
level III – relevant committee.

Degree of risk exposure

As at 31 December 2015, the maximum credit risk exposure relating to insurance guarantees and measured by the amount of sums insured was PLN 3,005 million (PLN 2,673 million as at 31 December 2014).

Reinsurance (from the credit risk perspective of the reinsurer) for insurance activity

PZU Group enters into proportional and non-proportional reinsurance contracts with the objective to reduce liabilities arising from its core business. Reinsurance is exposed to credit risk arising from reinsurers’ default on their obligations.

The assessment of reinsurers’ creditworthiness is conducted on the basis of market data, information obtained from external sources, e.g. S&P, as well as using an internal model. The model divides reinsurers into several groups, depending on the level of risk assessed. Only those entities whose risk is lower than the defined cut-off point are accepted. The acceptance process is not automatic and analyzes are supplemented with assessments conducted by reinsurance brokers. In the credit risk monitoring process, an entity’s model-based assessment is updated on a quarterly basis. Additionally, stress tests are carried out.

The tables below present the credit risk of reinsurers being parties to transactions concluded by the PZU Group entities.

Reinsurer	Reinsurers’ share in (net) technical provisions as at 31 December 2015	Rating assigned by Standard&Poor’s as at 31 December 2015
Reinsurer 1	98,136	A+
Reinsurer 2	70,675	AA-
Reinsurer 3	64,998	AA-
Reinsurer 4	58,238	AA-
Reinsurer 5	48,182	no rating
Reinsurer 6	46,761	AA-
Reinsurer 7	39,635	AA-
Reinsurer 8	31,699	AA-
Reinsurer 9	27,09	AA
Reinsurer 10	23,444	A+
Reinsurer 11	22,064	A-
Reinsurer 12	21,457	A+
Reinsurer 13	20,764	AA-
Reinsurer 14	18,806	AA
Reinsurer 15	16,554	AA+
Reinsurer 16	15,923	A
Reinsurer 17	15,837	AA-
Reinsurer 18	14,868	no rating
Reinsurer 19	13,81	A
Reinsurer 20	12,265	A+
Others ¹⁾	415,646
Total	1,096,852

1) "Others" includes reinsurers’ share in technical provisions whose carrying amounts are lower than those presented above.

risk_management_currency_45_pzu2015.xlsx

Reinsurer	Reinsurers’ share in (net) technical provisions as at 31 December 2014	Rating assigned by Standard&Poor’s as at 31 December 2014
Reinsurer 2	69,49	AA-
Reinsurer 6	50,938	AA-
Reinsurer 12	50,069	A+
Reinsurer 3	46,689	AA-
Reinsurer 7	45,389	AA-
Reinsurer 4	25,556	AA-
Reinsurer 8	20,969	A+
Reinsurer 13	19,689	A+
Reinsurer 11	16,185	BBB+
Reinsurer 18	15,355	no rating
Reinsurer 14	14,803	AA
Reinsurer 10	14,549	A+
Reinsurer 21	14,125	A+
Reinsurer 17	13,603	AA-
Reinsurer 22	12,349	A+
Reinsurer 15	11,126	AA+
Reinsurer 23	10,592	no rating
Reinsurer 24	10,369	AA+
Reinsurer 25	9,736	A
Reinsurer 26	9,183	no rating
Others ¹⁾	292,215
Total ²⁾	772,979

¹⁾ "Others" includes reinsurers’ share in technical provisions whose carrying amounts are lower than those presented above.

²⁾PLN 753,115 thousand was reported in the consolidated statement of financial position in "Reinsurers’ share in technical provisions", and PLN 19,864 thousand was reported in "Assets held for sale". Additional information concerning assets held for sale has been presented in 42.

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8.5.4 Operational risk

Operational risk is a risk of loss resulting from incorrect or erroneous internal processes, human actions, operation of systems or external factors.

The objective of operational risk management is to optimize the level of operational risk and operating effectiveness in the PZU Group’s operations, leading to a reduction of losses and costs arising from such risks and ensuring adequate and effective control mechanisms. Operational risk management complies with defined guidelines which take into account external conditions and gathered information on the level of operational risk are reported to relevant internal authorities periodically.

8.5.5 Compliance risk

Compliance risk is a risk of legal sanctions, financial loss or loss of reputation or credibility resulting from failure to comply by the Company’s employees or entities acting on its behalf with the provisions of law, internal regulations and the adopted standards of conduct, including ethical standards.

Internal regulations impose a division of duties regarding ongoing and system management of non-compliance risk.

System management consists in particular of formulating solutions ensuring that the rules of compliance risk management are followed, monitoring compliance risk management and promoting and monitoring compliance of internal standards and approved compliance procedures.

Ongoing compliance risk management consists in identification, assessment and measurement, as well as ensuring satisfaction of regulatory requirements.