Due to the scope of PZU Group’s business (insurance sector in Poland, Baltic states and Ukraine, mutual and pension funds sector, banking), the main factors that will shape the environment in which the Group will operate and may have direct influence on the development and results of the Group in the medium term, in particular in 2020, can be divided into three categories: macroeconomic and geopolitical, legal and regulatory, and market factors, specific to individual sectors / businesses in which the Group is involved.
The dynamics, level and structure of the key macroeconomic factors in Poland and abroad (GDP, inflation, interest rates) translate into the growth rate of business in all sectors in which the PZU Group operates and the profitability of individual sectors. On the one hand, they determine, directly or indirectly, and with a certain time lag, the gross written premium growth rate in non-life insurance, changes in demand for credit and accumulation of deposits and inflow of assets in funds. On the other hand, they impact the loss ratios in non-life insurance, investment results, determine the fund management results and the key measures affecting the performance of the banking sector (interest margin and costs of risk).
In the Polish economy there are presently no clear signs of disruption to the balance where during the upcoming quarters they could bring about a strong cyclical slowdown. However Poland enter the declining period of the use of EU funds from the 2014-2020 financial framework, on top of which local governments plan to curtail expenditures on investments. This will likely slow down the pace of economic growth. At the same time, in the euro area, especially in Germany, a relatively low GDP growth rate continues. In 2020 the situation in the labor market and increased social benefits and tax cuts should support increasing consumption in households. However, with the inflation picking up y/y and increasing consumer concerns regarding the economic slowdown, the consumption increase rate from 2019 may be difficult to maintain in 2020. The internal factors that may curtail GDP growth in Poland include problems with hiring properly qualified staff, decline in propensity to invest (suggested by business climate research) or a higher than expected increase in inflation eroding households’ real incomes.
The consumption growth rate in 2020 will likely remain robust, although probably lower than last year. Public investments funded from the central budget should continue to grow, though the shortage of qualified employees and higher costs may lead to delays in the execution of some projects. Businesses, in turn, in the face of uncertainties related to demand for their goods and services, may curtail their investments, which is suggested by the NBP business climate research carried out in January. GDP growth in and around the Polish economy clearly slowed down in 2019. Especially the growth rate of industrial production in the euro area and Germany fell off. The slowdown in global trade has become visible. The main danger for global growth and market sentiment is spreading epidemic of COVID-19. Pandemic may disrupt not only global supply chains, but also worsen consumer and entrepreneurs sentiments, limit travelling, and lead to temporary shutdown of public institutions. Global insecurity is also related to future negotiations on UE-UK economic relations after Brexit.
It therefore appears that – although certain symptoms of improving business climate in global industry can been seen – the possibility of a serious slowdown in GDP growth in the euro area and the overall global economy, and hence the occurrence of unfavorable phenomena on the financial markets, is the most important macroeconomic risk in 2020. We expect that the pace of GDP growth in Poland in 2020 will be approximately 3.0%. Moreover, if the impact of the coronavirus epidemic on global economic growth turned out to be significant, we should take into account the slower GDP growth in Poland – especially in the first half of 2020. However, it may turn into higher GDP growth worldwide in 2021.
|Polish economy highlights||2017||2018||2019||2020*|
|Real GDP growth in % (y/y)||4.9||5.1||4.1||3.0|
|Individual consumption growth in % (y/y)||4.5||4.3||3.9||3.3|
|Growth of gross fixed capital formation in % (y/y)||4.0||8.9||6.9||2.7|
|Consumer price index in % (y/y, annual average)||2.0||1.6||2.3||3.6|
|Nominal salary growth in the national economy in % (y/y)||5.7||7.1||7.2||7.3|
|Unemployment rate in % (end of period)||6.6||5.8||5.2||5.3|
|NBP’s prime rate in % (end of period)||1.50||1.50||1.50||1.50|
* Projection of 2 March 2020
Source: PZU’s Department of MacroeconomicAnalyses
The above macroeconomic factors and the geopolitical situation in the world (tensions in the Middle East, presidential elections in the US, scale of spreading of the Wuhan coronavirus) may affect the behavior of global central banks and, as a consequence, the overall conditions in the global and national financial market. The climate and direction of the changes in the financial markets is, in turn, important for the attractiveness of the products offered by the PZU Group, in particular unit-linked funds. It also affects the level of assets and management fees charged by the Group companies for asset management.
The PZU Group’s activity is subject to the impact of local regulations and European legal acts. From the perspective of the insurance business, the Group’s activity will be affected by any legal changes that may contribute to an increase in the insurance companies’ burden, e.g. court verdicts on payout of general damages under TPL insurance, or completion of the legislative work on the act on provision of services regarding pursuance of claims for damages. The adopted solutions may translate into the amount of the claims paid by the PZU Group.
Also the market practice regarding liability for annuities in third party liability insurance for motor vehicle owners will be important. Increase in the annuities supported by the Insurance Guarantee Fund may have significant impact on the profitability of insurance companies and this, in turn, may translate into motor insurance prices.
Increasing awareness regarding the climate, environmental protection and sustainable development will drive not only an increase in regulatory burdens but also impact the behaviors of consumers, businesses and financial institutions.
Potential intervention of the supervisory authority in the unit-linked segment, that may lead to a reduction of sales or changes in product structure, may also have an impact on the Group's operations.
In 2019, the ruling of European Union Court of Justice (CJEU) dated of 3 October, 2019 regarding foreign currency loans, was important for banks operating in Poland. Further legal decisions or judgments referring to foreign currency loans may have strong negative impact on results of the banking sector in Poland, in particular for banks with the large portfolio of loans denominated or indexed to CHF. According to various estimates, the total costs for the sector can reach tens of billions of zlotys, but they are difficult to estimate and will be spread out over time. Because the exposure to foreign currency loans of PZU Group banks that is relatively low compared to other banks in Poland, the direct impact on Group’s results should be negligible. However, any statutory or systemic regulations, among others related to potential capital weakness of some banks in the sector, that would translate into higher financial burdens of the entire sector could also affect the banks of the PZU Group. Much will depend on the actual number of lawsuits (number of borrowers that will decide to take court proceedings), judgements of local courts in individual cases (in reference to the opinion of the CJEU), actions of the national supervisory authorities or activities of the banks themselves.
All material changes in the laws, introduced and expected, are described in REGULATIONS PERTAINING TO THE INSURANCE MARKET AND THE FINANCIAL MARKETS IN POLAND.
In addition to the above factors which influence the conditions of operation and the Group’s results, the situation in individual areas of activity is influenced by sector-specific factors and their changes.
The most important one is the level of competition in individual product groups constituting the core of PZU Group’s business. Due to the deteriorating technical results on the non-life insurance market in Poland, increase in costs of claims processing and the necessity to comply with the price adequacy principle, probability of the return to more stable pricing policy, in particular in motor TPL insurance seems to be higher in 2020 than in the previous year. It is expected that price competition will continue at the similar level in 2020 in non-motor insurance, in life insurance products and in health insurance.
The situation in the insurance and banking sector may also change in connection with new entrants and trends associated with development of new technologies, among others operators of big databases / clients and the so-called insurtechs / fintechs1. The sharing economy trends and increasing environmental awareness result in dynamic development of the shared mobility industry. City dwellers increasingly frequently choose solutions which allow them to quickly and efficiently move around and change the means of transport depending on the situation on the road. Shared mobility is not only about cars but also other types of personal transport devices (e.g. scooters, segways, skymasters, electric monocycles), rented using mobile technologies. The new risks create a potential for development of insurance for individual users and businesses. Additionally, client expectations change – they largely shift in the direction of personalized offers, both in the insurance and in the health segment.
PZU Group’s activity and results in the short and longer time horizon will be shaped by demographic trends, mortality and fertility rates (life insurance segment) and fortuitous factors – occurrence of catastrophic phenomena, such as floods, cyclones etc. (non-life insurance segment).
A detailed description of the factors that may influence the Group’s activity in 2020 broken down into individual operating segments is presented in OPERATION OF THE PZU GROUP.
PZU Group grasps how new technologies are changing the insurance and banking industry, carefully keeps track of the dynamic social and demographic changes and constantly analyzes the threats and opportunities affecting the development of the markets in which it operates. The PZU strategy for 2017-2020 published on 9 January 2018 and entitled “The New PZU – More Than Insurance” is also our response to the ongoing changes. PZU’s goal is to take advantage of the opportunities ensuing from the transformation of the insurance market, address our current clients’ needs better and enhance their satisfaction as well as reach those segments that value digital solutions PZU 2020 – MORE THAN INSURANCE.
1 Fintech - sector of economy encompassing companies operating in the financial and technological industry. Fintech companies most often provide financial services using the Internet. It is also a term for all types of technological or financial innovations. Insurtech is one of the areas of the fintech industry encompassing new technological solutions in insurance.