Approach to climate change

The PZU Group conducts regular stress tests and sensitivity analyses under its annual own risk and solvency assessment (ORSA) and stress tests consistent with the requirements of the regulatory authority. The sensitivity analyses are described in the ORSA report. The results of the stress tests are submitted to the UKNF. As part of the ORSA assessment, sensitivity analyses include stress scenarios affecting both assets and liabilities. Insurance entities and banking groups were included in the sensitivity analyses. Stress tests at the PZU Group level, in turn, are performed by domestic entities. The stress tests selected for this evaluation cover the most critical business areas and risk profile of the Group. They address the most significant risks, particularly the short-term impact of extreme weather events (catastrophic losses) and the increase in claims severity on PZU Group’s capital position. The results of the sensitivity analyses and stress tests for 2025 show that the PZU Group had its own resources necessary to maintain its solvency ratio above its risk appetite.

In addition to the processes for managing individual risk categories, PZU, as the parent company, conducts a cyclical process of identifying and analyzing risks and identifying key risks. All risks identified in the course of this process are evaluated in terms of frequency and scale of materialization (taking into account the financial aspect and impact on reputation). In particular, risks related to climate change are analyzed, both in terms of physical risks and transformation risks. The process allows for analyzing risks over a medium-term horizon. Subsequent analyses identify risks in the remaining horizons. The analysis is updated at least once a year.

The resilience analysis included in the double materiality assessment is based on the process of identifying and analyzing risks, particularly key risks. In the course of this process, as a result of the analyses conducted, the PZU Group identified the climate change risk factors in the insurance sector as shown in the table; these factors may affect the PZU Group’s business model and financial performance.

The time horizons specified in this section, in the table, are definitionally the same as the time horizons listed in the General Disclosure section.

The scenario analysis presents the impact of identified risks related to sustainable development, and especially the impact related to climate change, on the PZU Group. The response to the identified risks is a change in the direction of a sustainable product offering that does not just correspond to client needs and the identified climate-related challenges but above all that offers an opportunity for business development and building a market edge.

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.

The scenario structure proposed by NGFS (The Network of Central Banks and Supervisors for Greening the Financial System) was used as a starting point for the analysis conducted at the PZU Group. The scenarios are structured according to the degree of achievement of climate goals and the transformation pattern. In addition, two long-term temperature increase scenarios (above and below 2°C) assigned by the EIOPA (European Insurance and Occupational Pensions Authority), to the four global pictures defined by the NGFS, were used.

Climate risk identification as well as exposure and vulnerability assessments were based on high-emission scenarios.

Group examined:

1. the “Greenhouse effect” scenario in which physical risks play the main role, which in a simplified approach involve the assumption of a zero impact exerted by transition risks;
2. the “Unorganized” scenario in which the transition risks play the main role, which in a simplified approach involve the assumption of a zero impact exerted by physical risks.

The following assumptions and risk factors were considered:

1. the greenhouse effect scenario:

• occurrence of extreme catastrophic events:
  • floods, hurricanes and hail where the value of loss 1 to 200 years is set out in line with the standard formula used to determine the capital solvency requirement;
  • forest fires in suburban areas and croplands – maximum loss on deductible in respect of 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 (Solvency Capital Requirement) due to the rise in the net best estimate of liabilities (net BEL).

• higher mortality in cities due to extreme weather events and higher temperatures in the cities compared to surrounding areas:

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. the unorganized 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 related to the readjustment of standard formula parameters used to set the capital solvency requirement.

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.

Classifying the occurrence of extreme flooding, hurricanes and hail as a physical risk is the most severe factor. This is a long-term risk associated with temperature increases above 2ºC.

Annual renewals of contracts, analysis of current data and forecasts coupled with the selection of the appropriate reinsurance program make it possible to reduce considerably the possible impact this risk can exert 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-term and medium-term horizon, the probability of realizing the risk associated with the process of transforming the global economy to low-emission (transformation risk) is higher than the probability of realizing the most extreme physical risk associated with climate change.

In business banking, providing financing to high emitters was identified as a risk, as it can be seen as inconsistent with climate goals and stakeholder expectations. The result can be a loss of reputation, pressure from investors and social organizations, and limited ability to raise capital. Failure to adapt lending policies to the transition risks affecting customers operating in highemission industries could reduce the PZU Group’s profitability and competitiveness.