Due to the scope of PZU Group’s business (insurance sector in Poland, the 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 a direct impact on the development and results of the Group in the medium term, in particular in 2021, may be divided into the following three categories:
The growth rate, 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. They determine, directly or indirectly, albeit with a certain time lag, the gross written premium growth rate in nonlife insurance, changes in demand for credit, accumulation of deposits and inflow of assets into funds. Moreover, they influence the loss ratio in non-life insurance and the investment result. They also determine the fund management results and key measures affecting the performance of the banking sector (interest margin and costs of risk).
According to all indications, 2021 will be a time of recovery for both the global economy and the Polish economy following the shock caused by the COVID-19 pandemic. The launch of a vaccination program by the end of 2020 is of crucial significance. It is forecasted that Q2 2021 will mark a rebound in economic activity related to spring warming and the lifting of pandemic restrictions as a result of the society acquiring “herd immunity” to COVID-19. Of decisive significance for the economy will be the elimination of the risk of persisting restrictions unfavorably affecting economic activity. According to broadly accepted scenarios, vaccinating health care workers, members of professional groups of key significance for the functioning of the state and individuals most exposed to coronavirus infection will lead to neutralization of the negative impact of the pandemic on the economy in H2 2021. The impulses for a GDP rebound will include the release of withheld consumer demand, the restoration of the service sector to full freedom of operation and the revival of global trade while maintaining quantitative easing-based fiscal and monetary policies.
Based on these assumptions, GDP growth in Poland may, according to PZU’s forecasts, reach approx. 4% or even more in 2021. This relatively quick economic recovery in 2021 will also possible due to the measures that prevented the destruction of the production potential in the form of mass bankruptcies and a spike in unemployment. Although certain service industries and smaller companies have found themselves in a challenging situation, the financial and liquidity standing of companies remains relatively good (in light of the decline in GDP in 2020). This was also due to the public aid extended to them during the pandemic. The forecasted economic recovery should create conditions for improvement in the labor market, including improvement in consumer sentiments. This, in turn, with the accumulated household savings and the restoration of a small overall real growth in payroll expenditures reported by companies, which began already in the closing months of last year, provides the basis for the expectation of a major increase in consumption in 2021. The expiration of support programs creates a risk factor, yet we assume that in a recovery environment it will be possible to avoid a deterioration of the situation in the labor market.
Moreover, in the face of the uncertainty related to the pandemic situation persisting in early 2021, enterprises may also delay their investments. However, the second half of the year should bring a clearer rebound of fixed capital formation, supported by the inflow of funds from the EU’s Next Generation reconstruction program at the end of 2021.
A key risk factor for GDP growth remains the uncertainty as to the development of the COVID-19 pandemic going forward. As at the end of January 2021, Poland managed to maintain the improvement in the number of new infections, however in March the “third wave” of the pandemic has appeared. A major risk factor is the emergence of new coronavirus mutations resistant to the currently available vaccines. Other risk factors include a possible delay in vaccinations and “social fatigue” with restrictions. The materialization of these risks would translate into an increase in the number of infections and deaths and an extension of the adverse impact of the pandemic on the economy, including the labor market, with all unfavorable consequences for the PZU Group’s insurance segment, such as a reduction in demand for voluntary non-life insurance and an increase in costs related to the disbursement of life and health insurance claims and, possibly, claims under hospital liability insurance. Another consequence might also be a drop in demand for group insurance and an increase in the loss ratio of contractual and financial insurance.
The aforedescribed macroeconomic factors coupled with the pandemic and the geopolitical situation across the world may affect the behavior of central banks and, as a consequence, the overall conditions in the global and national financial markets. The climate and direction of the changes in the financial markets is, in turn, important for the attractiveness of the financial 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 materialization of the economic recovery scenario should result in a slight increase in T-bond yields both in Poland and in the core markets. However, monetary policies based on a quantitative easing approach, including through asset purchases by central banks, will mean that market interest rates are poised to remain at very low levels. The materialization of this scenario will also drive up stock prices.
Any disruptions in the rollout of the recovery scenario, including the persistence of the pandemic and related restrictions, may also result in additional monetary policy easing, including interest rate cuts by the National Bank of Poland and a suppressed yield curve. This would translate unfavorably into the financial performance of the PZU Group, including its banks. Among others, it would curtail investment income and hinder the achievement of the required rates of return, which might trigger the need to lower the technical rate applied for discounting provisions in life insurance and provisions for the capitalized value of annuities in motor insurance. For banks, a delayed rebound in economic recovery would mean a reduction in interest margins amidst reduced demand for loans.
|Polish economy highlights||2018||2019||2020||2021*|
|Real GDP growth in % (y/y)||5.4||4.5||(2.7)||4.2|
|Individual consumption growth in % (y/y)||4.3||4.0||(3.0)||4.2|
|Growth of gross fixed capital formation in % (y/y)||9.4||7.2||(8.4)||2.4|
|Consumer price index in % (y/y, annual average)||1.6||2.3||3.4||3.1|
|Nominal salary growth in the national economy in % (y/y)||7.1||7.2||5.0||5.5|
|Unemployment rate in % (end of period)||5.8||5.2||6.2||6.0|
|NBP’s prime rate in % (end of period)||1.5||1.5||0.1||0.1|
* Forecast as of 15 March 2021
Source: PZU’s Department of Macroeconomic Analyses
The coming into life of the economic recovery scenario and a reduction in the level of uncertainty across the financial markets should result in a certain degree of appreciation of the Polish zloty in a situation of a large surplus of the balance of payments generated in 2020. This would help reduce expenses related to the prices of spare parts in motor insurance. However, a risk factor in this context is the policy pursued by the National Bank of Poland, which intervened at the turn of the year to weaken the Polish zloty. Accordingly, if the negative pandemic scenario prevails, there will be a high risk of the Polish zloty remaining above 4.50 against the euro.
The PZU Group’s activity and operations are subject to the impact of both national regulations and European legislation.
In 2021, the regulations adopted in the previous year in connection with the outbreak of the COVID-19 pandemic and aimed at combating it, including restrictions on the conduct of business, and measures taken with a view to reducing the adverse impact of the pandemic on the economy, will be of decisive significance.
Moreover, the increasing awareness of sustainable finance, climate change and environmental protection will drive not only an increase in regulatory burdens but will also impact the behaviors of consumers, businesses and financial institutions.
From the perspective of the insurance business, the Group’s activity will be affected by any legal changes and case-law that may contribute to an increase in the insurance companies’ burdens, e.g. court verdicts on payout of general damages under TPL insurance. The adopted solutions may translate into the amount of the claims paid by the PZU Group.
The Group’s business may also be affected by the completion of work by KNF on the so-called ‘product intervention’ concerning unit-linked life insurance products. Sales of unit-linked policies may suffer as a result or the structure of the product may be changed.
Product intervention is a legal measure described in Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products. In accordance with the latter regulation, the competent regulatory authority has the power to impose a general prohibition or restriction of certain activities specified in the intervention and related to financial instruments, structured deposits and insurance based investment products or a specific financial business or financial practice.
One of the more important factors in 2021 in the context of banks continues to be the issue of foreign currency mortgage loans. In the absence of a final systemic solution, the largest impact on the banking system will be exerted by court rulings handed down in lawsuits concerning specific loan agreements. A number of events (among others, the CJEU ruling of 3 October 2019) prompted a growing number of borrowers to adjudicate this dispute through litigation. This will have a strong adverse impact on the performance of banks, in particular banks with a large portfolio of these types of loans. So far, the main area of impact were the provisions recognized by banks in connection with the anticipated legal risk – they had a strong adverse impact on the sector’s results in 2020. According to most forecasts, the total costs for the sector may reach tens of billions of Polish zloty but are difficult to estimate and will be spread over time. Much will depend, among other factors, on the actual number of lawsuits filed (how many borrowers elect to litigate), interpretations adopted by national courts in individual cases, reactions of national regulatory institutions and steps taken by the banks themselves. Also, a scenario cannot be ruled out in which the CHF loan problem will be eventually solved by the adoption of appropriate legislative measures. Because the exposure of the PZU Group’s banks to foreign currency loans is minor compared to other banks operating in Poland, the direct impact of this phenomenon should be limited. However, any statutory or systemic regulations, including those having to do with the capital weakness of certain banks, that would translate into heavier burdens for the whole sector, might also affect the PZU Group’s banks.
The operating conditions and financial performance of the PZU Group in the distinct areas of its business are affected by sector-specific conditions and their evolution. The most important one is the level of competition in individual product groups constituting the core of the Group’s business.
The operation of the markets where the PZU Group is a player is also affected in the short and long term by the social and economic consequences of the pandemic. Certain lines of business experienced this impact immediately. Notably, travel insurance was the first area to take a punch. In the initial phase of the pandemic, the loss ratio increased, whereas following the imposition of travel restrictions, sales of insurance in this product group were suspended.
In connection with the lockdown periods affecting the Polish economy and restrictions in the movement of people, in 2020 the loss ratio decreased in the key market segment of non-life insurance, namely motor own damage insurance and motor third party liability insurance. The frequency of claims decreased (as a result of less intense domestic and international traffic), although at the same time the average claim value increased. This was due to a lower number of minor claims, a shortage of spare parts due to the disruption of supply chains, causing a longer use of replacement vehicles, and higher costs of these parts due to the appreciation of the euro.
The profitability generated on the motor insurance business may trigger competition among insurers for clients through an active pricing policy and, as a result, to a reduction in the rate of growth in gross written premium in this segment. On the other hand, curtailment of the pandemic and the related increase in mobility are likely to elevate the quantity of traffic related claims to earlier levels.
In life insurance, after the first three quarters of 2020, a decrease was recorded in the loss ratio in group and health insurance. It resulted from a lower number of deaths and a lower loss ratio of paramedical risks, chiefly in the areas of inpatient treatment, surgical operations, critical illness and permanent dismemberment, all caused by a lower number of reported claims. A major spike in the loss ratio in life insurance took place in Q4 along with a sharp increase in the number of deaths (+72.8% y/y). The elevated number of deaths persisted into the beginning of Q1 2021.
The slowdown in economic activity due to the COVID-19 pandemic also dampened the financial standing of the banking sector. The quality of the loan portfolio deteriorated, sales of loan products decreased and participation units in mutual funds were frequently redeemed due to the challenging situation on the financial markets. The gradual retreat of the pandemic and the onset of economic recovery should result in an improvement in the situation of the banking sector. Of key significance will be the scale of demand for banking services and the clients’ ability to timely pay their liabilities, itself largely dependent on the clients’ financial situation.
The operations and financial performance the PZU Group in distinct business areas will also be affected by evolving customer expectations. In particular, they concern the personalization of the offering and the provision of a quick and easy access to a comprehensive ecosystem of financial services. Also, other changes may occur in clients’ awareness, expectations and habits.
The pandemic and the accompanying sense of insecurity may cause clients to start generating stronger demand for classic protective life insurance products and health insurance products. These factors have already driven the rapid growth of telemedicine.
The transfer of clients from traditional to remote channels may take place even faster. The change in customer habits which, under normal circumstances, would have taken several years, was a consequence of the lockdowns, which forced the transition to remote work. These factors accelerated the digitization and the use of advanced technologies, especially in the insurance sector. Remote forms of sale, inspection and claims handling became popular relatively rapidly.
The anticipated changes in the insurance and banking sectors will also emerge as a result of the emergence of new entrants and trends associated with development of new technologies, including operators of big databases, insurtechs and fintechs1.
Other global trends, such as the sharing economy or the Internet of Things (IoT), have also created potential for the development, in the medium and long term, of insurance solutions for retail and corporate users.
The quest for convenience and the increasing environmental awareness result in a rapid development of the shared mobility industry. City dwellers increasingly frequently choose means of transport which allow them to quickly and efficiently move around and change the means of transport depending on the situation on the road. In addition to cars, shared mobility also includes scooters, segways, skymasters and electric unicycles, rented via smartphone apps.
In turn, the Internet of Things includes smart-home devices such as washing machines, cleaning robots, refrigerators, bathroom scales, TV sets, air purifiers, light bulbs, wearables, smart watches and smart bands as well as cars fitted with smart features. They all collect, process and exchange huge amounts of data over the Internet. The concept of the Internet of Things also encompasses devices used in production (e.g. of food), sales, energy generation and distribution, waste management and even medical devices. And although smart cities are still a distant prospect, many conurbations are already adopting an increasing number of IoT solutions. Connecting all smart devices to the Internet opens up a lot of new opportunities, but also generates certain cybersecurity risks.
In the longer term, the business and financial performance of the PZU Group will also be increasingly affected by factors related to climate change, resulting in the intensification of chance events, namely the occurrence or absence of catastrophic events, such as floods, droughts, heat waves, torrential rains, hail, cyclones or whirlwinds. Demographic trends, such as mortality and fertility levels, will also play an important role.
1 Fintech – sector of economy encompassing companies operating in the financial and technological industries. 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.