HSBC 2008 Annual Report Download - page 261

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restrictions and deductibles in the policy terms and
conditions), product design, risk selection, claims
handling, investment strategy and reinsurance policy.
The majority of non-life insurance contracts are
renewable annually and the underwriters have the
right to refuse renewal or to change the terms and
conditions of the contract at that time.
Balance sheet of insurance manufacturing
subsidiaries by type of contract
(Audited)
A principal tool used by HSBC to manage its
exposure to insurance risk, in particular for life
insurance contracts, is asset and liability matching.
Models are used to assess the effect of a range of
future scenarios on the values of financial assets and
associated liabilities, and ALCOs employ the
outcomes in determining how the assets and
liabilities should be matched. The scenarios include
stresses applied to factors which affect insurance risk
such as mortality and lapse rates. Of particular
importance is the need to match the expected pattern
of cash inflows with the benefits payable on the
underlying contracts, which can extend for many
years. The table below shows the composition of
assets and liabilities and demonstrates that there
were sufficient assets to cover the liabilities to
policyholders at the end of 2008. It may not always
be possible to achieve a complete matching of asset
and liability durations, partly because there is
uncertainty over policyholder behaviour, which
introduces uncertainty over the receipt of all future
premiums and the timing of claims, and partly
because the duration of liabilities may exceed the
duration of the longest available dated fixed interest
investments. In an environment where interest rates
and yield curves are falling, insurance operations are
exposed to re-investment risk as higher yielding
assets held in the portfolio mature and are replaced
with lower yielding assets. Given the objective to
hold rather than trade investments, the current
portfolio of assets includes debt securities issued at
a time when coupon rates were higher than those
observed in the current market. As a result, the
current yield of the debt securities exceeds that
which may be obtained on current issues.
Management action has been taken in relation to
certain participating contracts to reduce short-term
bonus rates paid to policyholders to manage the
immediate strain on the business. Should interest
rates and yield curves stay low for prolonged
periods, further management actions may be needed.
Insurance contracts Investment contracts
Contracts
with
DPF
Unit-
linked
Annu-
ities
Term
assur-
ance1
Non-life
Contracts
with
DPF2
Unit-
linked Other
Other
assets3 Total
US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m
At 31 December 2008
Financial assets:
– trading assets .............. – – – – 35 – – – 4 39
– financial assets
designated at
fair value .................... 959 4,738 457 496 52 4,597 5,525 1,481 1,970 20,275
– derivatives .................. 27 3 – 26 – 60 170 91 24 401
– financial investments . 9,383 – 1,282 399 860 12,482 – 1,482 2,576 28,464
– other financial assets .. 1,967 400 639 1,288 1,106 173 443 685 2,110 8,811
Total financial assets .......... 12,336 5,141 2,378 2,209 2,053 17,312 6,138 3,739 6,684 57,990
Reinsurance assets ............. 6 956 311 320 430 – 60 2,083
PVIF4 ................................. – – – – – – – – 2,033 2,033
Other assets and
investment properties .... 121 3 32 71 257 459 55 54 935 1,987
Total assets ......................... 12,463 6,100 2,721 2,600 2,740 17,771 6,193 3,793 9,712 64,093
Liabilities under investment
contracts designated at
fair value ........................ – – – – – – 6,012 3,271 – 9,283
Liabilities under investment
contracts carried at
amortised cost ................ – – – – – – – 284 – 284
Liabilities under
insurance contracts ........ 12,444 6,067 2,575 2,351 2,480 17,766 – – – 43,683
Deferred tax ....................... 8 7 22 30 1 1 – 3 515 587
Other liabilities .................. – – – – – – – – 2,679 2,679
Total liabilities ................... 12,452 6,074 2,597 2,381 2,481 17,767 6,012 3,558 3,194 56,516
Total equity ........................ – – – – – – – – 7,577 7,577
Total equity and liabilities5 12,452 6,074 2,597 2,381 2,481 17,767 6,012 3,558 10,771 64,093