HSBC 2005 Annual Report Download - page 258

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
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(w) Insurance contracts
Through its insurance subsidiaries, HSBC issues contracts to customers that contain insurance risk, financial risk
or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an
insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant.
Insurance contracts are accounted for as follows:
Premiums
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contract attributable to the risks borne during the accounting period. The unearned premium or the proportion of
the business underwritten in the accounting year relating to the period of risk after the balance sheet date is
calculated on a daily or monthly pro rata basis.
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance
contracts where premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
to which they relate.
Claims and reinsurance recoveries
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims reserves. The outstanding claims reserves are based on the estimated ultimate cost of all claims incurred
but not settled at the balance sheet date, whether reported or not, together with related claim-handling costs and a
reduction for the expected value of salvage and other recoveries. Reserves for claims incurred but not reported
are made on an estimated basis, using appropriate statistical techniques.
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
The liabilities under non-linked life insurance contracts (long-term business provision) are calculated by each
life insurance operation based on local actuarial principles. The liabilities under unit-linked life insurance
contracts are at least equivalent to the surrender or transfer value which is calculated by reference to the value of
the relevant underlying funds or indices.
Reinsurance recoveries are accounted for in the same period as the related claim.
Present value of in-force long-term insurance business
A value is placed on insurance contracts that are classified as long-term insurance business and are in force at the
balance sheet date.
The present value of in-force long-term insurance business is determined by discounting future earnings
expected to emerge from business currently in force using appropriate assumptions in assessing factors such as
recent experience and general economic conditions. Movements in the present value of in-force long-term
insurance business are included in ‘Other operating income’ on a gross of tax basis.
(x) Investment contracts
Customer liabilities under non-linked and unit-linked investment contracts and the linked financial assets are
measured at fair value, and the movements in fair value are recognised in the income statement in ‘Net income
from financial investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted
for as increases or decreases in the liability recorded in respect of investment contracts.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are capitalised and amortised over the period during which the investment management
services are provided.