Approach to climate change

1. The discrepancy between the pace of transformation of the Polish economy and changes in the reinsurance market has resulted in reduced availability of reinsurance offers for projects related to the mining industry and coal-based energy. The realization of this risk may lead to the following consequences:
   • Limited sales of insurance for such projects:
     • Horizon: medium / long term
     • Risk category in the risk management system: business risk (key risk analysis process)
     • Actions taken: As part of contract renewals, negotiations are conducted with reinsurers and clients. Clients are offered insurance coverage tailored to the available reinsurance offers. Liability limits need to be restricted. Additionally, a gradual transformation of PZU’s portfolio in line with the transformation of the Polish economy is assumed.
   • Increase in reinsurance protection prices
     • Horizon: short term
     • Risk category in the risk management system: business risk (key risk analysis process)
     • Actions taken: As part of contract renewals, negotiations are conducted with reinsurers and clients. Clients are offered insurance coverage tailored to the available reinsurance offers. Liability limits need to be restricted. Additionally, a gradual transformation of PZU’s portfolio in line with the transformation of the Polish economy is assumed.
   • Increase in capital requirement for counterparty default risk due to placing part of the portfolio with reinsurers with lower ratings.
     • Horizon: medium term
     • Risk category in the risk management system: credit risk
     • Actions taken: The credit quality of reinsurers is assessed based on data obtained from external sources, including financial strength ratings by credit rating agencies, as well as an internal model. The model classifies reinsurers into several categories depending on the estimated risk level. Only entities with a risk lower than the established cutoff point and a rating not lower than A- are accepted. Acceptance is not automatic, and the analysis is supplemented by assessments from reinsurance brokers. As part of credit risk monitoring, the assessment of a given entity is updated quarterly.
2. Decline in stock prices and valuations of corporate bonds of companies in selected sectors due to increased regulatory burdens
   • Horizon: medium term
   • Risk category in the risk management system: market / credit risk
   • Actions taken: Market risk is subject to constant monitoring and an internal limit framework. For credit risk, a comprehensive system for assessing counterparties and setting limits (including industry limits) is in place. Internal credit ratings are assigned for assessing the credit risk of a given entity (the approach to assigning ratings varies depending on the type of entity). Ratings are based on both quantitative and qualitative analysis and are one of the fundamental elements of the exposure limit-setting process. The credit quality of counterparties and issuers is subject to periodic monitoring. One of the key elements of monitoring is the periodic update of internal ratings.
3. Increase in capital requirements due to the revision of standard formula parameters for selected risks
   • Horizon: medium term
   • Risk category in the risk management system: compliance risk
   • Actions taken: The PZU Group continuously monitors regulatory changes, participates in ongoing consultations, and analyzes the impact of implemented or planned changes on its capital situation.

1. Intensification of extreme weather events, which may also lead to an increase in reinsurance prices.
   • Horizon: short / long term
   • Risk category in the risk management system: actuarial risk
   • Actions taken: The risk management system in the PZU Group ensures cyclical monitoring of exposure, and the reinsurance program used allows for significant reduction of the potential catastrophic loss on own retention to acceptable levels that do not threaten the financial stability of PZU.
2. Occurrence of intense wildfires in suburban and rural areas due to increasing drought
   • Horizon: short / long term
   • Risk category in the risk management system: actuarial risk
   • Actions taken: The risk management system in the PZU Group ensures cyclical monitoring of exposure, and the reinsurance program used allows for significant reduction of the potential catastrophic loss on own retention to acceptable levels that do not threaten the financial stability of PZU.
3. Increased mortality, particularly in cities, caused by extreme weather events that raise urban temperatures compared to surrounding areas, which may lead to increased payouts and the need to revise future assumptions by raising mortality rates used in the best estimate of liabilities (BEL).
   • Horizon: long term
   • Risk category in the risk management system: actuarial risk
   • Actions taken: Analysis and monitoring of risk exposure indicators in selected product groups. Actuarial control cycle, i.e., setting appropriate assumptions.

The analysis presents the impact of key risks related to sustainable development, particularly the impact of climate change on the PZU Group. However, the response to identified risks enables a shift towards a sustainable product offering that not only meets customer needs and identified climate challenges but is primarily an opportunity for business development and building market advantage. The Group undertakes actions aimed at reducing the likelihood of realizing transformation-related risks through investments in a low-emission economy, shaping its offer to counteract climate risks, and supporting the adaptive capacity of the Polish economy.

When analyzing the impact of climate on the PZU Group’s operations in the context of development, performance, and capital situation, risks were identified taking into account the guidelines of the Task Force on Climate-Related Financial Disclosures (TCFD) and the European Commission. A scenario analysis concerning climate change was also conducted.

As a starting point for the analyses conducted within the Group, the scenario structure proposed by NGFS (The Network of Central Banks and Supervisors for Greening the Financial System) was adopted. The scenarios are structured according to the degree of achievement of climate goals and the transformation pattern. Meanwhile, the European Insurance and Occupational Pensions Authority (EIOPA) in its document assigned two long-term temperature increase scenarios (above and below 2°C) to the four world views defined by NGFS.

As part of the climate scenario analysis, the PZU Group examined:

1. The „greenhouse effect” scenario, where physical risks play the main role, with the simplification of assuming zero impact from transition risks;
2. The „disorderly” scenario, where transition risks play the main role, with the simplification of assuming zero impact from physical risks.

The following assumptions and risk factors were considered:

1. „Greenhouse effect” scenario:
   • Occurrence of extreme catastrophic events:
     • floods and hurricanes, where the 1-in-200- year loss value is determined according to the standard formula methodology used to calculate the solvency capital requirement,
     • wildfires in suburban areas and agricultural field – maximum loss on own retention from a single event.
       Short term: Payouts for catastrophic risks according to the current reinsurance program – decrease in own funds.
       Long term: Increase in reinsurance prices and higher retention – increase in SCR due to the rise in the net best estimate of liabilities (net BEL).
   • Increased mortality in cities caused by extreme weather events:
     Short term: Payouts due to higher claims in the first year – decrease in own funds.
     Long term: Increased mortality rates used to determine BEL – decrease in own funds and change in the solvency capital requirement (SCR).
2. „Disorderly” scenario:
   • Increased credit risk due to the reinsurance of part of the portfolio with counterparties of lower ratings.
   • Depreciation of stocks and corporate bonds from selected sectors.
   • Regulatory risk associated with the revision of the parameters of the standard formula used to determine the solvency capital requirement.

Scenario assumptions: transformation risks will occur in the short or medium term.

In the event of the assumed scenarios, the solvency of the PZU Group would not be threatened. In both scenarios, both regulatory requirements and the assumptions of the internal limit grid are met.

The most severe factor, classified as physical risks, is the occurrence of an extreme flood-hurricane phenomenon. This is a long-term risk associated with temperature increases above 2ºC.

Annual contract renewals, analysis of current data and forecasts, and selection of an appropriate reinsurance program allow for a significant reduction in the possible impact of this risk on the Group.

Among transformation risks, the most severe is the regulatory risk associated with the change of parameters used to calculate the natural catastrophe risk sub-module. In the short and medium term, the probability of realizing the risk associated with the process of transforming the global economy to lowemission (transformation risk) is higher than the probability of realizing the most extreme physical risk associated with climate change.