HSBC 2005 Annual Report Download - page 164

HSBC HOLDINGS PLC
Financial Review (continued)
162
Reputational risk management
(Unaudited information)
The safeguarding of HSBC’s reputation is of
paramount importance to its continued prosperity
and is the responsibility of every member of staff.
Reputational risks can arise from social, ethical or
environmental issues, or as a consequence of
operational risk events. As a banking group, HSBC’s
good reputation depends upon the way in which it
conducts its business, but it can also be affected by
the way in which clients, to whom it provides
financial services, conduct themselves.
Reputational risks are considered and assessed
by the Board, the Group Management Board, the
Risk Management Meeting, subsidiary company
boards, board committees and/or senior management
during the formulation of policy and the
establishment of HSBC standards. Standards on all
major aspects of business are set for HSBC and for
individual subsidiaries, businesses and functions.
These policies, which are an integral part of the
internal control systems, are communicated through
manuals and statements of policy and are
promulgated through internal communications and
training. The policies set out operational procedures
in all areas of reputational risk, including money
laundering deterrence, environmental impact, anti-
corruption measures and employee relations.
Management in all operating entities is required
to establish a strong internal control structure to
minimise the risk of operational and financial failure,
and to ensure that a full appraisal of reputational
implications is made before strategic decisions are
taken. The Group Internal Audit function monitors
compliance with policies and standards.
Risk management of insurance
operations
(Forms part of the audited financial statements)
Insurance risk
Within its service proposition, HSBC offers its
personal and commercial customers a wide range of
insurance products, many of which complement
other bank and consumer finance products.
Both life and non-life insurance is underwritten.
Underwriting occurs in nine countries through 27
licensed insurers, principally in the UK, Hong Kong,
Mexico, Brazil, the US and Argentina.
Life insurance contracts include participating
business (with discretionary participation features)
such as endowments and pensions, credit life
business in respect of income and payment
protection, annuities, term assurance and critical
illness covers.
Non-life insurance contracts include motor, fire
and other damage, accident, repayment protection
and a limited amount of commercial and liability
business.
The principal insurance risk faced by HSBC is
that the costs of claims combined with acquisition
and administration costs may exceed the aggregate
amount of premiums received and investment
income. HSBC manages its insurance risks through
the application of formal underwriting, reinsurance
and claims procedures. These procedures are
designed also to ensure compliance with regulations.
The Group’s overall approach to insurance risk
is to maintain a good diversification of insurance
business by type and geography, and to focus on
risks that are straightforward to manage and
frequently are directly related to the underlying
banking activity (for example, with credit life
products). The following tables provide an analysis
of the insurance risk exposures by geography and by
type of business. These tables demonstrate the
Group’s diversification of risk and the strong
emphasis on personal lines. Personal lines tend to be
higher volume and with lower individual value than
commercial lines, which further diversifies the risk.
Separate tables are provided for life and non-life
business, reflecting their very distinct risk
characteristics. Life business tends to be longer term
than non-life and also frequently involves an element
of savings and investment in the premium. For this
reason, the life insurance risk table provides an
analysis of the insurance liabilities as the best
available overall measure of the insurance exposure.
By contrast for non-life business, the table uses
written premium as representing the best available
measure of risk exposure.
Both life and non-life business insurance risks
are controlled through a combination of local and
central procedures and policies. These include a
centralised approach to the authorisation to write
certain classes of business, with restrictions applying
particularly to commercial and liability non-life
business. For life business in particular, use is also
made of ALCOs in order to monitor the risk
exposures. Market risk limits are also applied
centrally as an additional control over the extent of
insurance risk that is retained.
As indicated in the specific comments relating
to particular classes, use is also made of reinsurance
as a means of further mitigating exposure, in
particular to aggregations as a result of catastrophe
risk.