HSBC 2008 Annual Report Download - page 268

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Market risk / Credit risk
266
• for interest rate risk, the sensitivities of the net
present values of asset and expected liability
cash flows, in total and by currency, to a one
basis point parallel upward shift in the discount
curves used to calculate the net present values;
• for equity price risk, the total market value of
equity holdings and the market value of equity
holdings by region and country; and
• for foreign exchange risk, the total net short
foreign exchange position and the net foreign
exchange positions by currency.
Although these measures are relatively
straightforward to calculate and aggregate, there are
limitations with them. The most significant
limitation is that a parallel shift in yield curves of
one basis point does not capture the non-linear
relationships between the values of certain assets and
liabilities and interest rates. Non-linearity arises, for
example, from investment return guarantees and
certain product features such as the ability of
policyholders to surrender their policies. If the yields
on investments held to support contracts with
guarantees are less than the investment returns
implied by the guarantees, shortfalls will be to the
account of HSBC.
HSBC recognises these limitations and
augments its standard measures with stress tests
which examine the effect of a range of market rate
scenarios on the aggregate annual profits and total
equity of the insurance manufacturing subsidiaries.
HSBC’s insurance manufacturing subsidiaries report
the results of their stress tests every quarter to Group
Insurance Head Office, where the reports are
consolidated and reviewed by the Group Insurance
Market and Liquidity Risk Meeting and the Group
Stress Test Review Group.
HSBC’s insurance manufacturing subsidiaries
identify the assets and liabilities in their financial
statements whose values are sensitive to each
category of market risk and revalue them at various
market rates. The outcome of the exercise is
expressed in terms of the effect on profit for the year
and total equity under the stress-tested assumptions,
after taking into consideration tax and accounting
treatments where material and relevant.
The following table illustrates the effect on the
aggregated profit for the year and total equity under
various interest rate, equity price, foreign exchange
rate and credit spread scenarios. Where appropriate,
the impact of the stress on the PVIF is included in
the results of the stress tests. The relationship
between the values of certain assets and liabilities
and the risk factors may be non-linear and, therefore,
the results disclosed cannot be extrapolated to
measure sensitivities to different levels of stress. The
sensitivities are stated before allowance for the effect
of management actions which may mitigate changes
in market rates, and for any factors such as
policyholder behaviour that may change in response
to changes in market risk.
Sensitivity of HSBC’s insurance subsidiaries to risk factors
(Audited)
2008 2007
Effect on
profit for
the year
Effect on
total
equity
Effect on
profit for
the year
Effect on
total
equity
US$m US$m US$m US$m
+ 100 basis points parallel shift in yield curves ........... 94 (13) 67 (29)
– 100 basis points parallel shift in yield curves ........... (82) 24 (71) 49
10 per cent increase in equity prices ............................ 10 10 147 151
10 per cent decrease in equity prices ............................ (12) (12) (145) (149)
10 per cent increase in US dollar exchange rate
compared to all currencies ........................................ 28 29 12 12
10 per cent decrease in US dollar exchange rate
compared to all currencies ........................................ (28) (29) (12) (12)
Sensitivity to credit spread increases ............................ (73) (134) (15) (30)