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Insurance contracts and private pension

12 Months Ended

Dec. 31, 2019

Note 27 – Insurance contracts and private pension

ITAÚ UNIBANCO HOLDING, through its subsidiaries, offers to the market insurance and private pension products, with the purpose of assuming risks and restoring the economic balance of the insured’s assets. Products are offered through insurance brokers (independent and captive brokers), Itaú Unibanco’s electronic channels and branches, in compliance with the regulatory requirements, of the National Council of Private Insurance – CNSP and the Superintendence of Private Insurance – SUSEP.

I – Insurance

A contract entered into by the parties to protect the customer’s assets, upon payment of a premium, by means of replacement or

pre-established

financial compensation, against damage their property or their person. As backing, ITAÚ UNIBANCO HOLDING insurance companies set up technical reserves, through specialized areas within the conglomerate, with the objective of indemnifying policyholders’ losses in the event of claims of insured risks.

The insurance risks sold by ITAÚ UNIBANCO HOLDING’s insurance companies are divided into property and casualty insurance, covering loss, damage or liabilities for assets or persons, and life insurance that includes coverage for death and personal accidents.

II – Private pension

Designed to ensure the maintenance of the quality of life of participants, as a supplement to the government plans, through long term investments, private pension products are divided into three major groups:

•

PGBL – Free Benefit Generating Plan:

The main objective of this plan is the accumulation of financial resources, but it can be purchased with additional risk coverage. Recommended for customers that file the full version of the income tax return, because they can deduct contributions paid for tax purposes up to 12% of their annual taxable gross income.

•

VGBL – Free Benefit Generating Life Plan:

This is insurance structured as a pension plan. Its taxation differs from the PGBL; in this case, the tax basis is the earned income.

•

FGB – Benefit Generator Fund:

This is a pension plan with minimum income guarantee, and possibility of receiving earnings from asset performance. Although there are plans still in existence, they are no longer sold.

III – Technical provision for insurance and private pensions

The technical provisions for insurance and private pensions are recognized according to the technical notes approved by SUSEP and criteria established by current legislation, as follows:

•

Provision for unearned premiums (PPNG) –

this provision is recognized, based on insurance premiums, to cover amounts payable for future claims and expenses. In the calculation, the term to maturity of risks assumed and issued and risks in effect but not issued (PPNG-RVNE) in the policies or endorsements of contracts in force is taken pro rata on a daily basis;

•

Provision for unsettled claims (PSL) –

this provision is recognized to cover expected amounts to reported and unpaid claims, including administrative and judicial claims. It includes amounts related to indemnities, reserve funds and

past-due

income, all gross of reinsurance operations and net of coinsurance operations. When necessary, it must cover adjustments for IBNER (claims incurred but not sufficiently reported) for the total of claims reported but not yet paid, a total which may change during the process up to final settlement;

•

Provision for claims incurred and not reported (IBNR) –

this provision is recognized for the coverage of expected amount for settlement of claims incurred but not reported up to the calculation base date, including administrative and judicial claims. It includes amounts related to indemnities, reserve funds and income, all gross of reinsurance operations and net of coinsurance operations;

•

Mathematical provisions for benefits to be granted (PMBAC) –

recognized for the coverage of commitments assumed to participants or policyholders, based on the provisions of the contract, while the event that gives rise to the benefit and/or indemnity has not occurred;

•

Mathematical provisions for benefits granted (PMBC) –

recognized for the coverage of commitments to payment of indemnities and/or benefits to participants or insured parties, based on the provisions of the contract, after the event has occurred.

•

Provision for financial surplus (PEF) –

it is recognized to guarantee amounts intended for the distribution of financial surplus, if provided for in the contract. Corresponds to the financial income exceeding the minimum return guaranteed in the product;

•

Supplemental Coverage Reserve (PCC) –

recognized when technical reserves are found to be insufficient, as shown by the Liability Adequacy Test, provided for in the regulations;

•

Provision for redemptions and other amounts to be regularized (PVR) –

this provision is recognized for the coverage of amounts related to redemptions to be regularized, returned premiums or funds, transfers requested but, for any reason, not yet transferred to the recipient insurance company or open private pension entity, and where premiums have been received but not quoted;

•

Provision for related expenses (PDR) –

recognized for the coverage of expected amounts related to expenses on benefits and indemnities, due to events which have occurred or will occur.

IV - Main information related to Insurance and Private Pension operations

a) Indexes


	Sales ratio %								Loss ratio %
Main Insurance Lines	01/01 to 12/31/2019		01/01 to 12/31/2018		01/01 to 12/31/2017		01/01 to 12/31/2019		01/01 to 12/31/2018		01/01 to 12/31/2017
Group accident insurance		35.1		34.3		38.0		6.8		9.4		7.8
Individual accident insurance		18.8		14.1		12.5		24.1		20.8		23.5
Commercial multiple peril		21.2		21.1		21.2		29.8		29.3		36.4
Domestic Credit Insurance		0.6		0.7		0.9		56.8		134.5		139.6
Critical or terminal diseases		27.0		16.1		10.7		24.4		17.5		21.1
Extended Guarantee		61.8		62.0		62.1		5.5		13.9		16.0
Credit Life Insurance		23.7		20.4		18.7		18.0		18.3		16.9
Random Events		23.5		20.3		16.3		26.3		17.1		18.4
Multiple Peril		46.4		48.1		57.8		60.2		53.3		27.2
Mortagage Insurance in market policies – Credit Life		20.0		20.4		20.7		17.3		15.3		13.0
Group life		23.2		15.1		8.3		34.4		33.2		24.2

b) Revenues from insurance premiuns and private pension


	Premiums and contributions
Main lines	01/01 to 12/31/2019		01/01 to 12/31/2018		01/01 to 12/31/2017
Group accident insurance		867		689		666
Individual accident		222		280		289
Commercial multiple peril		50		52		53
Internal Credit		68		78		64
Serious or terminal diseases		211		188		172
Disability Savings Pension		269		291		319
PGBL		2,282		2,193		2,084
Credit Life		946		879		621
Income from aleatory events		227		235		177
Multiple risks		290		209		151
Home Insurance in Market Policies – Credit Life		324		288		272
Traditional		115		122		129
VGBL		12,335		17,154		20,318
Group life		947		937		990
Other lines		471		502		571
Total		19,624		24,097		26,876

c) Technical provisions balances


	12/31/2019						12/31/2018
	Insurance		Private Pension		Total		Insurance		Private Pension		Total
Unearned premiums (PPNG)		2,343		13		2,356		2,111		13		2,124
Mathematical reserve for benefits to be granted (PMBAC) and benefits granted (PMBC)		205		212,272		212,477		195		195,348		195,543
Redemptions and Other Unsettled Amounts (PVR)		13		318		331		12		298		310
Financial surplus (PEF)		2		611		613		2		605		607
Unsettled claims (PSL)		570		48		618		642		43		591
Claims / events incurred but not reported (IBNR)		277		22		299		254		25		373
Related Expenses (PDR)		28		89		117		31		98		129
Other		250		1,273		1,523		562		948		1,510
Total		3,688		214,646		218,334		3,809		197,378		201,187

d) Change in technical provisions


	12/31/2019									12/31/2018
	Insurance			Private pension			Total			Insurance			Private pension			Total
Opening balance		3,809			197,378			201,187			3,464			177,768			181,232
(+) Additions arising from premiums / contributions		4,634			15,008			19,642			4,340			19,764			24,104
(-) Risk adjustments		(4,216	)		(273	)		(4,489	)		(3,937	)		(297	)		(4,234	)
(-) Payment of claims / benefits		(1,349	)		(566	)		(1,915	)		(1,184	)		(580	)		(1,764	)
(+) Reported claims		1,465			—			1,465			1,325			—			1,325
(-) Redemptions		—			(15,623	)		(15,623	)		(1	)		(13,771	)		(13,772	)
(+/-) Net Portability		—			1,754			1,754			—			3,758			3,758
(+) Adjustment of reserves and financial surplus		10			16,507			16,517			9			11,622			11,631
(+/-) Other (increase / reversal)		(665	)		461			(204	)		(207	)		(886	)		(1,093	)
Closing balance		3,688			214,646			218,334			3,809			197,378			201,187

Through actuarial models based mainly on the portfolio historical experience and on macroeconomic projections, ITAÚ UNIBANCO HOLDING establishes the assumptions that influence the assessment of technical provisions. The assumptions are reassessed annually by experts of the actuarial and risk area, and are subsequently submitted to the executive’s approval. The effects on assumptions are recognized in income for the period in which they occurred.

V – Deferred acquisition costs

They are recorded in assets and charges are shown in the table below:


	12/31/2019			12/31/2018
Opening Balance		409			253

Increase		1,156			1,001
Amortization		(1,070	)		(845	)

Closing Balance		495			409

Balance to be amortized in up to 12 months		389			334
Balance to be amortized after 12 months		106			75

VI - Table of Claims Development

The amounts shown in the tables express the position at 12/31/2019, since the actuarial calculations are made on a half-yearly basis:


Provision for unsettled claims (PSL)	618
(-) IBNER	258
(-) Reinsurance	37
(-) Retrocession and other estimates	(17	)
Liability claims presented in the claims development table (a + b)	340

a) Administratives claims


Occurrence date	12/31/2015		12/31/2016		12/31/2017		12/31/2018		12/31/2019		Total
At the end of reporting period		1,009		938		934		993		1,149
After 1 year		1,054		981		977		1,012
After 2 years		1,082		1,001		975
After 3 years		1,091		1,078
After 4 years		1,084
Current estimate		1,084		1,078		975		1,012		1,149
Accumulated payments through base date		1,075		1,061		961		994		1,028		5,119
Liabilities recognized in the balance sheet		10		17		14		18		121		180
Liabilities in relation to prior periods												17
Total administratives claims												197

b) Judicial claims


Occurrence date	12/31/2015		12/31/2016		12/31/2017		12/31/2018		12/31/2019		Total
At the end of reporting period		30		26		28		16		20
After 1 year		41		35		40		33
After 2 years		52		43		51
After 3 years		64		55
After 4 years		71
Current estimate		71		55		51		33		20
Accumulated payments through base date		61		44		44		27		14		190
Liabilities recognized in the balance sheet		10		11		8		7		6		42
Liabilities in relation to prior periods												101
Total judicial claims												143

The breakdown of the claims development table into administrative and judicial shows the reallocation of admininstrative claims up to a certain base date and that become judicial claims afterwards, which may give the wrong impression of need for adjusting the provisions in each breakdown.

VII – Liability Adequacy Test

ITAÚ UNIBANCO HOLDING tests for Liability Adequacy, by comparing the amount recognized for its technical reserves with the current estimate of cash flow of its future obligations. The estimate should include all cash flows related to the business, which is the minimum requirement for carrying out the adequacy test.

The Liability Adequacy Test did not indicate significant insufficiency in the reporting periods 2019, 2018 and 2017.

The assumptions used in the test are periodically reviewed and are based on best practices and an analysis of subsidiaries’ experience, thus representing the best estimates for cash flow projections.

Methodology and test grouping

Specifically for insurance products, cash flows were projected using the method known as the

run-off

triangle for quarterly frequency periods. For pension products, cash flows for the deferral and concession phases are tested separately.

The risk grouping criteria include groups subject to similar risks that are jointly managed as a single portfolio.

Demographic tables

Demographic tables are instruments to measure the demographic risk represented by the probability of death, survival or disability of a participant.

For death and survival estimates, the latest Brazilian Market Insurer Experience tables

(BR-EMS)

are used, adjusted according to Scale G life expectancy development, and the Álvaro Vindas table is used to estimate benefit requests for disability.

Risk-free interest rate

The relevant risk-free forward interest-rate structure (ETTJ) is an indicator of the pure time value of money used to price the set of projected cash flows.

The ETTJ was obtained from the curve of securities deemed to be credit risk free, available in the Brazilian financial market and determined by ITAÚ UNIBANCO HOLDING using its own method, plus a spread, which takes into account the impact of the market result of securities classified as Financial assets at amortized cost in the Guarantee assets portfolio.

Annuity conversion rate

The annuity conversion rate represents the expected conversion of balances accumulated by participants in retirement benefits. The decision by participants convert into an annuity is influenced by behavioral, economic and tax factors.

Other assumptions

Related expenses, cancellations and partial redemptions, future additions and contributions, are among the assumptions that affect the estimate of projected cash flows since they represent expenses and income arising from insurance agreements assumed.