HSBC 2008 Annual Report Download - page 257

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Risk management of insurance
operations
(Audited)
HSBC operates a bancassurance model which
provides insurance products for customers with
whom the Group has a banking relationship.
Insurance products are sold to all customer groups,
mainly utilising retail branches, the internet and
phone centres. Personal Financial Services
customers attract the majority of sales and comprise
the majority of policyholders. HSBC offers its
customers a wide range of insurance and investment
products, many of which complement other bank and
consumer finance products.
Many of these insurance products are
manufactured by HSBC subsidiaries. The Group
underwrites the insurance risk and retains the risks
and rewards associated with writing insurance
contracts, retaining both the underwriting profit and
the commission paid by the manufacturer to the bank
distribution channel within the Group. HSBC’s
exposure to risks associated with manufacturing
insurance contracts in its subsidiaries and its
management of these risks are discussed below.
Where the Group considers it operationally
more effective, third parties are engaged to
manufacture insurance products for sale through
HSBC’s banking network. The Group works with a
limited number of market-leading partners to provide
the products. These arrangements earn HSBC a
commission.
HSBC’s bancassurance business operates in all
five of the Group’s geographical regions with over
30 legal entities, the majority of which are
subsidiaries of banking legal entities, manufacturing
insurance products. Management of these insurance
manufacturers set their own control procedures in
addition to complying with guidelines issued by the
Group Insurance Head Office. This is headed by
HSBC’s Managing Director of Insurance, supported
by a Chief Operating Officer, Chief Financial
Officer and Chief Risk Officer, the latter appointed
in 2008. The role of Group Insurance Head Office
includes setting the control framework for
monitoring and measuring insurance risk in line with
Group practices, and drawing up insurance-specific
policies and guidelines for inclusion in the Group
Instruction Manuals. The control framework for
monitoring risk includes the Group Insurance Risk
Committee, which oversees the status of the
significant risk categories in the insurance
operations. Four sub-committees report to the
Committee, focusing on market and liquidity risk,
credit risk, operational and insurance risk. The
processes and controls employed to monitor each
risk are described under their respective headings
below.
The main contracts manufactured by HSBC are
as follows:
Life insurance business
(Audited)
Life insurance contracts with discretionary
participation features (‘DPF’) allow policyholders
to participate in the profits generated from such
business, which may take the form of annual
bonuses and a final bonus, in addition to providing
cover on death. Certain minimum return levels are
also guaranteed. The largest portfolio is in Hong
Kong.
Credit life insurance business is written to
underpin banking and finance products. The policy
pays a claim if the holder of the loan is unable to
make repayments due to early death or
unemployment.
Annuities are contracts providing regular
payments of income from capital investment for
either a fixed period or during the annuitant’s
lifetime. Payments to the annuitant either begin on
inception of the policy (immediate annuities) or at a
designated future date (deferred annuities).
Term assurance and critical illness policies
provide cover in the event of death (term assurance)
and serious illness.
Linked life insurance contracts pay benefits to
policyholders which are typically determined by
reference to the value of the investments supporting
the policies.
Investment contracts with DPF allow
policyholders to participate in the profits generated
by such business. The largest portfolio is written in
France. Policyholders are guaranteed to receive a
return on their investment plus any discretionary
bonuses. In addition, certain minimum return levels
are guaranteed.
Unit-linked investment contracts are those
where the principal benefit payable is the value of
assigned assets.
Other investment contracts include pension
contracts written in Hong Kong.