close

Navigation Map

Download our best practices
Interactive navigation is a tool that goes beyond the standard navigation of the integrated content (available in the report drop-down bar). New approach allowed to navigate in the two additional business dimensions of the PZU Group, i.e .:
  • strategy (insurance, health, investments, finances);
  • sustainable development (sales, employees, social responsibility, natural environment and ethics).
The above-mentioned areas were additionally supplemented with related GRI indicators, within each selected issue.
Employees
Society
Ethics
Environment
Products
Overview
Health
Banking
Investments
Insurance
Business
practices

In the Chapter

GRIs

7.5 Risk profile (c.d.)

Annual Report 2019 > Results 2019 > Supplementary Information and Notes > 7 Risk Management > 7.5 Risk profile (c.d.)
Facebook Twitter All
Integrated Navigation
Insurance
Health
Investments
Banking
Best Pratices in PZU
Page tools:

7.5.3.  Market risk

Market risk means the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, credit spread, value of liabilities and financial instruments.

Market risk types in the PZU Group include:

  • equity risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of equities;
  • unquoted equity risk – the possibility of incurring loss as a result of changes in the valuation of unquoted shares;
  • property risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of real estate;
  • commodity price risk – the possibility of incurring loss as a result of changes in the values of assets, liabilities and financial instruments caused by changes in the level or in the volatility of market prices of commodities;
  • inflation risk – the possibility of incurring loss associated with the level of information, especially inflation of prices of goods and services as well as expectations as to the future inflation level, which affect the valuation of assets and liabilities;
  • liquidity risk – the risk of being unable to realize investments and other assets without affecting their market prices in order to settle financial liabilities when they fall due;
  • interest rate risk – the possibility of incurring a loss as a result of changes in the value of financial instruments or other assets and a change in the present value of projected cash flows from liabilities, caused by changes in the term structure of market rates or in the volatility of risk-free market interest rates;
  • basis risk – the possibility of incurring a loss as a result of changes in the value of financial instruments or assets and a change in the present value of projected cash flows from liabilities, caused by changes in the term structure of spreads between market interest rates and risk-free rates or in the volatility of such spreads, excluding credit spreads;
  • foreign exchange risk – the possibility of incurring loss as a result of changes in the value of assets, liabilities and financial instruments, caused by changes in the level or in the volatility of currency exchange rates;
  • credit spread risk – the possibility of incurring loss as a result of changes in the value of assets, liabilities and financial instruments, caused by changes in the level or in the volatility of credit spreads over the term structure of the interest rates on debt securities issued by the State Treasury;
  • concentration risk – the possibility of incurring loss stemming either from lack of diversification in the asset portfolio or from large exposure to default risk by 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 purposes of risk profile, risk tolerance, and market risk ratio reporting. The risk management process has, however, a different set of traits from the process of managing the other sub-categories of market risk and has been described in section 7.5.1.1 along with the process for managing counterparty insolvency risk.

The market risk in the PZU Group originates from three major sources:

  • operations associated with asset and liability matching (ALM portfolio);
  • operations associated with active allocation, i.e. designating the optimum medium-term asset structure (AA portfolios);
  • banking operations in Pekao Alior Bank – generating material exposure to interest rate risk.

A number of documents approved by supervisory boards, management boards and dedicated committees govern investment activity in the PZU Group’s companies.

Risk units take part in the risk identification process, measure, monitor and report on the risks. Market risk is measured using the model of calculating economic capital of market risk based on the value at risk method (VaR) or the standard formula in accordance with the principles defined by the Solvency II Directive. In order to effectively manage market risk, risk limits are adopted in a form of a capital amount allocated to each market risk and limits for individual market risk factors.

In Pekao, the market risk management system forms the structural, organizational and methodological framework, which aims to maintain the balance sheet and off-balance sheet structure in line with the accepted strategic objectives. The market risk management process and the governing procedures include the separation into the banking and trading books.

In managing its trading book’s market risk, Pekao strives to optimize the financial performance and ensure the highest possible quality of service of the bank’s clients in respect to market-making, while remaining within the limits approved by the management board and the supervisory board.

When managing interest rate risk in its banking book, Pekao endeavors to secure the economic value of equity and to achieve its intended net interest income target within the accepted limits.

In Alior Bank, the exposure to market and liquidity risk is restricted by the system of periodically updated limits introduced by the resolution of the supervisory board or the management board that include all risk measures. In Alior Bank, there are three types of limits that differ in respect to their functioning – basic, supplementary and stress-test limits. Market risk management focuses on limiting potential adverse changes in economic value of equity and optimizing the financial result.

Exposure to market risk

Carrying amount Note 31 December 2019 31 December 2018
    Assets at Group’s risk Assets at the client’s risk Total Assets at Group’s risk Assets at the client’s risk Total
      including banks’ assets       including banks’ assets    
Financial assets and cash exposed to interest rate risk   309,124 267,846 1,167 310,291 295,402 252,859 1,303 296,705
Fixed-income debt securities 35 62,965 32,858 1,101 64,066 52,534 24,169 1,134 53,668
Variable-income debt securities 35 31,144 29,494 15 31,159 31,298 28,333 77 31,375
Loan receivables from clients 33 194,868 194,868 - 194,868 182,054 182,054 - 182,054
Term deposits with credit institutions 35 1,405 599 49 1,454 2,679 976 90 2,769
Loans 35 4,490 - - 4,490 4,535 - - 4,535
Cash 38 7,786 6,759 2 7,788 17,053 15,288 2 17,055
Buy-sell-back transactions 35 4,064 897 - 4,064 3,278 158 - 3,278
Derivatives 34 2,402 2,371 - 2,402 1,971 1,881 - 1,971
Financial assets exposed to other price risk   2,163 1,079 4725 6,888 2,347 816 4,209 6,556
Equity instruments 35 1,501 486 4682 6,183 1,859 356 4,181 6,040
Derivatives 34 662 593 43 705 488 460 28 516
Total    311,287 268,925 5,892 317,179 297,749 253,675 5,512 303,261
 

The following table presents financial assets of banks and at client’s risk, by the item in which they are classified in the consolidated financial statements:

Financial assets of banks and financial assets at client’s risk Note 31 December 2019 31 December 2018
    Pekao andAlior Bank Financial assets at client’s risk Pekao andAlior Bank Financial assets at client’s risk
Loan receivables from clients 33 194,868 - 182,054 -
Financial derivatives   2,964 43 2,341 28
Investment financial assets   64,334 5,847 53,992 5,482
Measured at amortized cost   21,130 49 18,569 90
Debt securities   19,634 - 17,435 -
Government securities   13,944 - 11,395 -
Domestic   13,944 - 11,395 -
Fixed rate   11,094 - 8,491 -
Floating rate   2,850 - 2,904 -
Other   5,690 - 6,040 -
Fixed rate   797 - 1,231 -
Floating rate   4,893 - 4,809 -
Buy-sell-back transactions   897 - 158 -
Term deposits with credit institutions   599 49 976 90
Measured at fair value through other comprehensive income   41,605 - 34,546 -
Equity instruments   276 - 256 -
Quoted on a regulated market   30 - 44 -
Not quoted on a regulated market   246 - 212 -
Debt securities   41,329 - 34,290 -
Government securities   26,960 - 22,509 -
Domestic   26,960 - 21,556 -
Fixed rate   14,525 - 8,955 -
Floating rate   12,435 - 12,601 -
Foreign   - - 953 -
Fixed rate   - - 953 -
Other   14,369 - 11,781 -
Fixed rate   6,186 - 4,233 -
Floating rate   8,183 - 7,548 -
Measured at fair value through profit or loss   1,599 5,798 877 5,392
Equity instruments   181 378 95 358
Quoted on a regulated market   128 378 68 358
Not quoted on a regulated market   53 - 27 -
Participation units and investment certificates   29 4,304 5 3,823
Quoted on a regulated market   23 81 5 61
Not quoted on a regulated market   6 4,223 - 3,762
Debt securities   1,389 1,116 777 1,211
Government securities   1,226 1,101 643 1,211
Domestic   1,226 1,096 643 1,207
Fixed rate   247 1,096 299 1,130
Floating rate   979 - 344 77
Foreign   - 5 - 4
Fixed rate   - 5 - 4
Other   163 15 134 -
Fixed rate   9 - 7 -
Floating rate   154 15 127 -
Cash   6,759 2 15,288 2
Total financial assets of banks and financial assets at client’s risk   268,925 5,892 253,675 5,512
 

In its investing activities, the PZU Group uses derivatives as a tool to mitigate risk (with or without hedge accounting) and to facilitate efficient management of the investment portfolio.

The PZU Group’s exposure to derivatives is presented in section 34.  

Exposure to debt securities issued by governments other than the Polish government

Carrying amount of debt securities issued by governments other than the Polish government 31 December 2019 31 December 2018
Lithuania 756 638
Latvia 149 90
Romania 134 157
Croatia 132 152
Ukraine 130 90
Indonesia 86 71
Columbia 83 42
Brazil 80 57
Bulgaria 74 75
Panama 74 36
Russia 70 69
Philippines 59 42
Hungary 57 117
Dominican Republic 56 42
Oman 54 41
South Africa 52 35
Uruguay 50 42
Other 347 1 2,297 2
Total 2,443 4,093

1 The Other line item states the countries with respect to which the balance sheet exposure does not exceed the equivalent of PLN 50 million: Australia, Azerbaijan, Bahrain, Belarus, Belgium, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, France, Germany, Ghana, Guatemala, Holland, Honduras, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Mexico, Mongolia, Morocco, Namibia, Nigeria, Paraguay, Peru, Qatar, Saudi Arabia, Senegal, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, Uzbekistan, United Kingdom, United States, Vietnam.
2 The Other line item states Albania, Argentina, Armenia, Australia, Azerbaijan, Belarus, Belgium, Bolivia, Cameroon, Chile, Costa Rica, Côte d’Ivoire, Denmark, Egypt, Ethiopia, France, Germany, Ghana, Greece, Guatemala, Holland, Honduras, India, Ireland, Italy, Jamaica, Jordan, Kazakhstan, Kenya, Morocco, Mexico, Mongolia, Namibia, Nigeria, Paraguay, Peru, Portugal, Senegal, Serbia, Slovenia, Spain, Sri Lanka, Sweden, Trinidad and Tobago, Turkey, United Kingdom, United States, Vietnam.

Exposure to debt securities issued by corporations and local government units

Carrying amount of debt securities issued by corporations and local government units 31 December 2019 31 December 2018
Domestic local governments 6,199 5,710
National Bank of Poland 4,815 2,999
Foreign banks 4,717 3,495
Companies from the WIG-Energy Index 2,375 1,183
Manufacturing 1,163 978
Financial and insurance services 761 725
Energy and fuel sector companies (including: WIG-Fuels index companies) 651 1,173
Transportation and storage 615 1,232
Companies from the WIG-Banks Index 558 452
Construction and real estate market service 479 158
Public utility services 410 759
Professional, scientific and technical activity 410 136
Mining and quarrying (including companies included in the WIG-Mining index) 353 130
Arts, entertainment and recreation activity (including WIG – hotels and restaurants index companies) 315 188
Information and communication (including: WIG – Telecommunications index companies) 201 4
Other 147 67
Total 24,169 19,389

7.5.3.1.  Interest rate risk

The following table presents the sensitivity test of the portfolio of financial instruments for which the PZU Group bears the risk (except for loan receivables from clients and deposit liabilities).

Change in portfolio value caused by a +/-100 bp shift in the yield curve, by currency of the instrument 31 December 2019 31 December 2018
  decrease increase decrease increase
Polish zloty 2,090 (1,982) 1,237 (1,174)
Euro 16 (16) 42 (40)
US dollar 127 (111) 169 (153)
other (9) 8 2 (2)
Total 2,224 (2,101) 1,450 (1,369)

The above sensitivity tests do not include the effects of changes in interest rates for technical provisions and liabilities under investment contracts. An analysis of effect of a change in technical rate on measurement of insurance contracts is presented in sections 7.5.2.1 and 7.5.2.2.

The table below presents the contractual level of sensitivity of net interest income (NII) to a 100 bp change in interest rates and sensitivity of the economic value of equity (EVE) of PZU Group’s banks to a 200 bps change in interest rates. The measure (NII) is used for managing interest rate risk in order to reduce variations in net interest income. EVE is defined as the present value of future cash flows that will be generated by the entity’s assets, less the present value of the future cash flows necessary to pay the entity’s liabilities. Both analyses assume an immediate change in market rates. The interest rate on bank products changes according to the contractual provisions, whereas in the case of contractual NII sensitivity, for deposits from retail customers, the declines in interest rates are limited to the zero interest rate level, but not down to negative figures, while for EVE sensitivity the zero-based limitation of interest rate decreases applies to all liabilities. Also, in the case of EVE sensitivity for PLN-denominated current deposits, a model that ensures realistic revaluation is used.

Entity Measure 31 December 2019 31 December 2018 1)
    decrease increase decrease increase
Pekao Group NII -6.98% 4.08% -8.64% 6.22%
  EVE 1.61% -3.04% -0.95% 0.87%
Alior Bank Group NII -6.86% 3.14% -5.97% 2.45%
  EVE -1.70% 1.35% -2.36% 3.31%

1) December 2018 data based on the methodology in effect before the EBA IRRBB requirements were implemented in June 2019

7.5.3.2. Currency

Exposure to FX risk

Assets by currency 31 December 2019 31 December 2018
  PLN EUR USD Other Total PLN EUR USD Other Total
Loan receivables from clients 163,827 25,914 1,423 3,704 1) 194,868 153,035 23,458 1,903 3,658 2) 182,054
Financial derivatives 2,626 368 110 3 3,107 1,818 417 198 54 2,487
Investment financial assets 97,050 7,427 5,748 1,191 111,416 88,455 7,796 5,174 240 101,665
Measured at amortized cost 43,587 1,643 278 430 45,938 42,162 2,580 333 159 45,234
Debt securities 34,837 969 1 123 35,930 33,592 983 1 76 34,652
Government securities 28,975 88 1 123 29,187 27,338 86 1 76 27,501
Other 5,862 881 - - 6,743 6,254 897 - - 7,151
Buy-sell-back transactions 4,064 - - - 4,064 3,278 - - - 3,278
Term deposits with credit institutions 885 175 87 307 1,454 1,286 1,250 150 83 2,769
Loans 3,801 499 190 - 4,490 4,006 347 182 - 4,535
Measured at fair value through other comprehensive income 44,523 5,006 4,965 717 55,211 30,788 3,674 4,272 3 38,737
Equity instruments 504 14 - - 518 509 13 - - 522
Debt securities 44,019 4,992 4,965 717 54,693 30,279 3,661 4,272 3 38,215
Government securities 30,774 3,600 3,099 3 37,476 19,424 3,597 3,143 3 26,167
Other 13,245 1,392 1,866 714 17,217 10,855 64 1,129 - 12,048
Measured at fair value through profit or loss 8,940 778 505 44 10,267 15,505 1,542 569 78 17,694
Equity instruments 567 140 114 24 845 1,057 35 113 15 1,220
Participation units and investment certificates 3,954 604 243 19 4,820 3,556 550 178 14 4,298
Debt securities 4,419 34 148 1 4,602 10,892 957 278 49 12,176
Government securities 4,250 19 123 1 4,393 10,763 918 256 49 11,986
Other 169 15 25 - 209 129 39 22 - 190
Receivables 4,125 1,404 110 98 5,737 4,537 1,611 124 71 6,343
Cash and cash equivalents 4,973 1,542 482 791 3) 7,788 11,741 3,815 778 721 4) 17,055
Total assets 272,601 36,655 7,873 5,787 322,916 259,586 37,097 8,177 4,744 309,604

1) of which PLN 2,695 million in Swiss francs and PLN 533 million in British pounds.
2) of which PLN 2,999 million in Swiss francs and PLN 409 million in British pounds.
3) of which PLN 310 million in British pounds, PLN 144 million in Swiss francs, PLN 70 million in Norwegian kroner, PLN 56 million in Swedish kronor and PLN 39 million in Danish kroner.
4) of which PLN 261 million in British pounds, PLN 157 million in Swiss francs, PLN 69 million in Swedish kronor, PLN 67 million in Norwegian kroner and PLN 52 million in Danish kroner.

 
Liabilities by currency 31 December 2019 31 December 2018
  PLN EUR USD Other Total PLN EUR USD Other Total
                     
Financial liabilities measured at fair value 3,170 379 106 5 3,660 3,445 374 157 41 4,017
Financial derivatives 2,529 378 106 5 3,018 2,793 374 157 41 3,365
Liabilities on borrowed securities (short sale) 293 - - - 293 120 - - - 120
Investment contracts for the client’s account and risk (unit-linked) 258 1 - - 259 266 - - - 266
Liabilities to members of consolidated mutual funds 90 - - - 90 266 - - - 266
Financial liabilities measured at amortized cost 202,387 25,994 11,196 3,253 242,830 188,918 28,534 11,528 3,319 232,299
Liabilities to banks 3,120 3,242 19 223 1) 6,604 2,234 3,474 60 276 2) 6,044
Liabilities to clients under deposits 182,288 22,150 11,123 3,027 3) 218,588 172,162 20,962 11,468 3,043 4) 207,635
Liabilities on the issue of own debt securities 9,006 229 38 - 9,273 7,998 4,011 - - 12,009
Subordinated liabilities 6,656 44 - - 6,700 5,974 87 - - 6,061
Liabilities on account of repurchase transactions 503 96 - - 599 540 - - - 540
Investment contracts with guaranteed and fixed terms and conditions - - - - - - - - - -
Finance lease liabilities 814 233 16 3 1,066 10 - - - 10
Other liabilities 6,733 911 331 94 8,069 6,654 511 107 135 7,407
Total liabilities by currency 212,290 27,284 11,633 3,352 254,559 199,017 29,419 11,792 3,495 243,723

1) of which PLN 187 million in Swiss francs.
2) of which PLN 226 million in Swiss francs.
3) of which PLN 1,532 million in British pounds, PLN 648 million in Swiss francs, PLN 234 million in Norwegian kroner, PLN 147 million in Swedish kronor, PLN 86 million in Canadian dollars, PLN 48 million in Czech korunas and PLN 121 million in Japanese yen.
4) of which PLN 1,627 million in British pounds, PLN 584 million in Swiss francs, PLN 174 million in Norwegian kroner, PLN 112 million in Swedish kronor, PLN 89 million in Canadian dollars, PLN 81 million in Czech korunas and PLN 30 million in Japanese yen.

To manage its FX risk, the PZU Group uses also derivatives which allows it to take a selected market exposure in a more efficient manner than by using cash instruments.

The following table presents the sensitivity test of the portfolio of PZU Group’s financial instruments (except for loan receivables from clients and deposit liabilities) in respect to financial instruments for which the PZU Group bears the risk.

Financial assets exposed to exchange risk include investment (deposit) financial assets of the PZU Group and derivative financial assets denominated in foreign currencies.

Change in portfolio value caused by a +/-20% change of the exchange rate 31 December 2019 31 December 2018
  Decrease increase decrease increase
EUR (113) 158 189 (171)
USD (12) 20 (27) 48
GBP 2 (2) (4) 4
Other (19) 19 (9) 9
Total (142) 195 149 (110)

7.5.3.3.  Equity

Level of risk exposure

The value of the portfolio of equity financial instruments is presented in item 35.2.

Sensitivity analysis

The table below presents the sensitivity test of PZU Group’s portfolio of quoted equity instruments for which the PZU Group bears the risk.

 

Impact of a change in the measurement of quoted equity instruments on equity 31 December 2019 31 December 2018
increase in measurement of quoted equity instruments by 20% 112 190
decrease in measurement of quoted equity instruments by 20% (112) (190)

7.5.3.4.  Liquidity risk

Financial liquidity risk means the possibility of losing the capacity to settle, on an ongoing basis, the PZU Group’s liabilities to its clients or business partners. The aim of the liquidity risk management system is to maintain the capacity of fulfilling the entity’s liabilities on an ongoing basis. Liquidity risk is managed separately for the insurance part and the bancassurance part.

The risk identification involves analysis of the possibility of occurrence of unfavorable events, in particular:

  • shortage of liquid cash to satisfy current needs;
  • lack of liquidity of financial instruments held;
  • the structural mismatch between the maturity of assets and liabilities.

Risk assessment and measurement are carried out by estimating the shortage of cash to pay for liabilities. The risk estimate and measurement is carried out from the following perspectives:

  • liquidity gaps (static, long-term financial liquidity risk) – by monitoring a mismatch of net cash flows resulting from insurance contracts executed until the balance sheet date and inflows from assets to cover insurance liabilities in each period, based on a projection of cash flows prepared for a given date;
  • potential shortage of financial funds (medium-term financial liquidity risk) – through analysis of historical and expected cash flows from the operating activity;
  • stress tests (medium-term financial liquidity risk) – by estimating the possibility of selling the portfolio of financial investments in a short period to satisfy liabilities arising from the occurrence of insurable events, including extraordinary ones;
  • current statements of estimates (short-term financial liquidity risk) – by monitoring demand for cash reported by business units of a given insurance undertaking in the PZU Group by the date defined in regulations which are in force in that entity.

The banks in the PZU Group employ the liquidity risk management metrics stemming from sector regulations, including Recommendation P issued by the KNF.

To manage the liquidity of the banks in the PZU Group, liquidity ratios are used for different periods ranging from 7 days, to a month, to 12 months and to above 12 months.

Within management of liquidity risk, banks in the PZU Group also perform analyses of the maturity profile over a longer term, depending to a large extent on the adopted assumptions about development of future cash flows connected with items of assets and equity and liabilities. The assumptions take into consideration:

  • stability of equity and liabilities with indefinite maturities (e.g. current accounts, cancellations and renewals of deposits, level of their concentration);
  • possibility of shortening the maturity period for specific items of assets (e.g. mortgage loans with an early repayment option);
  • possibility of selling items of assets (liquidity portfolio).

Monitoring and controlling financial liquidity risk involves analyzing the utilization of the defined limits.

Reporting involves communicating the level of financial liquidity to various decision-making levels. The frequency of each report and the scope of information provided therein are tailored to the information needs at each decision-making level.

The following measures aim to reduce financial liquidity risk:

  • maintaining cash in a separate liquidity portfolio at a level consistent with the limits for the portfolio value;
  • maintaining sufficient cash in a foreign currency in portfolios of investments earmarked for satisfying insurance liabilities denominated in the given foreign currency;
  • provisions of the Agreement on managing portfolios of financial instruments entered into between TFI PZU and PZU regarding limitation of the time for withdrawing cash from the portfolios managed by TFI PZU to at most 3 days after a request for cash is filed;
  • keeping open credit facilities in banks and/or the possibility of performing sell-buy-back transactions on treasury securities, including those held until maturity;
  • centralization of management of portfolios/funds by TFI PZU;
  • limits of liquidity ratios in the banks belonging to the PZU Group.

Risk exposure

Carrying amount of debt instruments, by maturity 31 December 2019 31 December 2018
  up to 1 year 1 – 2years 2 – 3years 3 – 4years 4 – 5years Over5 years Total up to 1 year 1 – 2years 2 – 3years 3 – 4years 4 – 5years Over5 years Total
Loan receivables from clients 53,167 19,432 18,451 14,267 14,130 75,421 194,868 53,823 18,022 13,302 14,537 12,512 69,858 182,054
Investment (deposit) debt instruments 16,298 15,935 13,048 9,315 15,156 35,481 105,233 16,429 8,028 11,300 15,091 9,231 35,546 95,625
Measured at amortized cost 7,884 3,526 4,908 5,170 6,675 17,775 45,938 9,485 2,497 2,717 5,005 5,540 19,990 45,234
Debt securities 2,347 3,470 3,950 4,259 4,510 17,394 35,930 3,629 2,253 2,663 3,803 4,411 17,893 34,652
Government securities 1,581 2,770 3,377 3,296 3,815 14,348 29,187 2,032 1,765 2,218 3,245 3,429 14,812 27,501
Other 766 700 573 963 695 3,046 6,743 1,597 488 445 558 982 3,081 7,151
Buy-sell-back transactions 4,064 - - - - - 4,064 3,278 - - - - - 3,278
Term deposits with credit institutions 1,398 56 - - - - 1,454 2,532 170 54 - - 13 2,769
Loans 75 - 958 911 2,165 381 4,490 46 74 - 1,202 1,129 2,084 4,535
Measured at fair value through other comprehensive income 8,221 10,847 7,504 3,568 7,851 16,702 54,693 5,923 4,600 5,952 7,791 2,471 11,478 38,215
Government securities 2,590 6,742 6,958 2,735 6,281 12,170 37,476 1,413 4,002 2,581 7,006 1,666 9,499 26,167
Other 5,631 4,105 546 833 1,570 4,532 17,217 4,510 598 3,371 785 805 1,979 12,048
Measured at fair value through profit or loss 193 1,562 636 577 630 1,004 4,602 1,021 931 2,631 2,295 1,220 4,078 12,176
Government securities 73 1,549 629 573 607 962 4,393 944 887 2,619 2,275 1,215 4,046 11,986
Other 120 13 7 4 23 42 209 77 44 12 20 5 32 190
Total 69,465 35,367 31,499 23,582 29,286 110,902 300,101 70,252 26,050 24,602 29,628 21,743 105,404 277,679
   

The following table presents future undiscounted cash flow from assets and liabilities.

Liquidity risk 31 December 2019 31 December 2018
  Up to 1 year 1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years 5 – 10 years Over 10 years Total Up to 1 year 1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years 5 – 10 years Over 10 years Total
Assets 101,092 34,483 34,809 25,583 28,717 64,451 54,939 344,074 103,494 31,994 27,926 28,309 22,599 58,494 59,863 332,679
Cash and cash equivalents 3,410 151 109 90 78 290 3,694 7,822 13,195 142 103 85 74 274 3,258 17,131
Receivables 3,725 1,188 352 8 145 321 - 5,739 4,955 1,192 26 7 29 1 180 6,390
Loan receivables from clients 49,666 25,154 23,366 16,679 16,973 39,462 42,200 213,500 47,576 23,979 19,287 16,650 13,761 36,998 42,209 200,460
Debt securities 38,328 7,483 9,936 7,628 9,180 23,974 9,045 105,574 31,560 6,184 8,115 9,997 7,069 19,079 14,056 96,060
Loans 444 366 986 1,074 2,223 382 - 5,475 298 331 254 1,510 1,562 2,093 160 6,208
Buy-sell-back transactions 4,064 - - - - - - 4,064 3,278 - - - - - - 3,278
Term deposits with credit institutions 1,455 141 60 104 118 22 - 1,900 2,632 166 141 60 104 49 - 3,152
Liabilities (119,954) (14,179) (6,524) (4,813) (4,317) (17,388) (128,819) (295,994) (106,726) (13,218) (7,707) (4,824) (3,664) (17,013) (117,603) (270,755)
Technical provisions (13,107) (2,002) (1,373) (1,103) (903) (3,405) (20,965) (42,858) (7,122) (1,806) (1,316) (1,081) (905) (2,501) (21,225) (35,956)
Lease liabilities (234) (221) (147) (146) (65) (119) (376) (1,308) n/a n/a n/a n/a n/a n/a n/a n/a
Other financial liabilities (102,215) (11,572) (4,994) (3,555) (3,319) (13,816) (106,516) (245,987) (95,013) (11,138) (6,378) (3,732) (2,740) (14,476) (95,724) (229,201)
Other liabilities (4,398) (384) (10) (9) (30) (48) (962) (5,841) (4,591) (274) (13) (11) (19) (36) (654) (5,598)
Gap (18,862) 20,304 28,285 20,770 24,400 47,063 (73,880) 48,080 (3,232) 18,776 20,219 23,485 18,935 41,481 (57,740) 61,924

The following table presents future undiscounted cash flows from banks’ off-balance sheet liabilities (by contractual terms)

Off-balance sheet liabilities granted 31 December 2019 31 December 2018
  up to 1 month 1 – 3 months 3 months to 1 year 1 – 5 years over 5 years Total up to 1 month 1 – 3 months 3 months to 1 year 1 – 5 years over 5 years Total
Financing 44,499 - - - - 44,499 48,769 - - - - 48,769
Guarantees 13,481 - - - - 13,481 7,702 - - - - 7,702
Total 57,980 - - - - 57,980 56,471 - - - - 56,471
      

7.5.4. Operational risk

Operational risk is the possibility of suffering loss resulting from improper or erroneous internal processes, human activities, system failures or external events.

Operational risk management has the purpose of optimizing the level of operational risk and operating efficiency 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. Information on operational risk levels is regularly reported to relevant internal authorities.

Operational risk is identified in particular by:

  • accumulation and analysis of information on operational risk incidents and the reasons for their occurrence;
  • self-assessment of operational risk;
  • scenario analyses.

Operational risk is assessed and measured by:

  • calculating the effects of the occurrence of operational risk incidents;
  • estimating the effects of possible occurrence of operational risk incidents.

Monitoring and control of operational risk is performed mainly through an established system of operational risk indicators and limits enabling assessment of changes in the level of operational risk over time and assessment of factors that affect the level of this risk in the business.

Reporting involves communicating the level of operational risk, the effects of monitoring and control to various decision-making levels. The frequency of each report and the scope of information provided therein are tailored to the information needs at each decision-making level.

Management actions involving reactions to any identified and assessed operational risks involve, in particular:

  • taking actions aimed at minimizing risks, for instance by strengthening the internal control system;
  • risk transfer – in particular, by entering into insurance agreements;
  • risk avoidance by refraining from undertaking or withdrawing from a particular type of business in cases where too high a level of operational risk is ascertained and where the costs involved in risk mitigation are unreasonable;
  • risk acceptance – approval of consequences of a possible realization of operational risk unless they threaten to exceed the operational risk tolerance level.

7.5.5. Compliance risk

Compliance risk is the risk of legal sanctions, financial losses or loss of reputation or credibility arising from a failure of PZU Group companies, their employees or entities acting on their behalf to comply with the law, internal regulations or standards of conduct, including ethical standards.

The demarcation of responsibilities with respect to systemic and ongoing compliance risk management is based on internal regulations.

Systemic management entails in particular: developing solutions for implementing compliance risk management principles, monitoring the compliance risk management process and promoting and monitoring compliance with internal regulations and standards of conduct in respect to compliance.

Ongoing compliance risk management entails: identifying, assessing and measuring and adaptation to regulatory requirements.

7.5.6. Model risk

Model risk is the risk of incurring financial losses, incorrectly estimating data reported to the regulatory authority, taking incorrect decision or losing reputation as a result of errors in the development, implementation or application of models. Taking into account the growing importance of the scope of use of models and the fact that model risk was classified as material risk for the PZU Group; the formal process of identifying and evaluating this risk was continued in 2019. The process aims to ensure high quality of risk management practices applied to this risk and is currently being developed by PZU and PZU Życie. Within the framework of this process, the models were monitored and independently validated in 2019.

Model risk is very important for banking sector entities and therefore management of this risk has already been implemented in the course of adaptation to the requirements of Recommendation W issued by the KNF. Both banks have defined standards for the model risk management process, including the rules for developing models and evaluating the quality of their operation and have ensured appropriate corporate governance solutions.