7.3 Risk appetite, risk profile and risk tolerance

The process of determining the risk appetite and risk limits for separate categories of risk consistent with the Group’s process has been implemented in PZU Group’s insurance companies. The Management Board of each company determines the risk appetite, risk profile and tolerance limits reflecting its strategic plans and the objectives of the entire PZU Group.

Risk appetite is defined as the level of risk that a company is prepared to accept in pursuit of its business objectives. The measure of risk appetite is the level of potential financial losses, the decline in asset value or the growth in the amount of liabilities within one year. The level of risk appetite is defined as the minimum capital requirement coverage ratio. Risk appetite defines the maximum level of permissible risk while setting limits and restrictions for the various partial risks and the level above which remedial actions are taken to curtail further risk expansion.

The risk profile involves quantitative limits, which offer a more precise definition of the risk appetite. Tolerance limits are additional limits introduced for the individual risks types to mitigate potential risk.

This approach ensures the adequacy and effectiveness of the risk management system in the PZU Group and prevents the acceptance of risk levels that could jeopardize the financial stability of individual companies and the entire PZU Group. The management board of each company is responsible for setting the appropriate risk level for that company, whereas a review of the risk appetite values is conducted once a year by the unit responsible for risk. All actions are coordinated at the PZU Group level.

The key assumptions of market and liquidity risk management strategy applied by banks are included in the relevant asset and liability management policies, which are drafted on an annual basis and presented by the banks’ management boards to the supervisory boards for approval. In the banking business, exposure to market and liquidity risks is formally restricted by the system of periodically updated limits that include all the measures of those risks.