HSBC 2008 Annual Report Download - page 276

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > PVIF // Capital management and allocation
274
Sensitivity analysis
(Audited)
Effect on profit for the year
to 31 December
Effect on total equity
at 31 December
Life Non-life Total Life Non-life Total
US$m US$m US$m US$m US$m US$m
2008
20% increase in claims costs .............................. – (122) (122) – (122) (122)
20% decrease in claims costs ............................. – 121 121 – 121 121
10% increase in mortality and/or morbidity
rates ................................................................. (28) – (28) (28) – (28)
10% decrease in mortality and/or morbidity
rates ................................................................. 30 – 30 30 – 30
50% increase in lapse rates ................................. (96) – (96) (96) – (96)
50% decrease in lapse rates ................................ 194 – 194 194 – 194
10% increase in expense rates ............................ (42) (9) (51) (42) (9) (51)
10% decrease in expense rates ........................... 41 9 50 41 9 50
2007
20% increase in claims costs .............................. – (138) (138) – (138) (138)
20% decrease in claims costs ............................. – 138 138 – 138 138
10% increase in mortality and/or morbidity
rates ................................................................. (21) – (21) (21) – (21)
10% decrease in mortality and/or morbidity
rates ................................................................. 9 – 9 9 – 9
50% increase in lapse rates ................................. (16) – (16) (16) – (16)
50% decrease in lapse rates ................................ 61 – 61 61 – 61
10% increase in expense rates ............................ (23) (6) (29) (23) (6) (29)
10% decrease in expense rates ........................... 23 6 29 23 6 29
Capital management and allocation
Capital management
(Audited)
HSBC’s capital management approach is driven by
its strategy and organisational requirements, taking
into account the regulatory, economic and
commercial environment in which it operates. The
Group’s strategy underpins HSBC’s Capital
Management Framework which has been approved
by the Group Management Board. It is HSBC’s
policy to maintain a strong capital base to support
the development of its business and to meet
regulatory capital requirements at all times. Through
its structured internal governance processes, HSBC
also maintains discipline over its investment
decisions and where it allocates its capital, seeking
to ensure that returns on investment are appropriate
after taking account of capital costs. In addition, the
level of capital held by HSBC Holdings and certain
subsidiaries, particularly HSBC Finance, is
determined by rating targets.
HSBC’s strategy is to allocate capital to
businesses based on their economic profit generation
and, within this process, regulatory and economic
capital requirements and the cost of capital are key
factors. The responsibility for global capital
allocation principles and decisions rests with the
Group Management Board. Stress testing is used as
an important mechanism in understanding the
sensitivities of the core assumptions in the capital
plans to the adverse impact of extreme, but plausible,
events. Stress testing allows senior management to
formulate management action in advance of
conditions starting to reflect the stress scenarios
identified. The actual market stresses which occurred
throughout the financial system in 2008 have been
used to inform capital planning and further develop
the stress scenarios employed by the Group. The
Group has identified the following as being the
material risks faced and managed through the
Capital Management Framework; credit, market,
operational, interest rate risk in the banking book,
pension fund, residual and insurance risks. All of
these risks pose a significantly greater challenge in
severe downturn economic conditions and the
management response to these risks has,
correspondingly, been intensified.
During 2008, with the Group now operating
under Basel II, it targeted a tier 1 ratio within the
range 7.5 to 9.0 per cent for the purposes of its long-
term capital planning. In 2007, under the Basel I
approach, HSBC managed its capital against a tier 1
ratio of 8.25 per cent. For 2009 onwards, in light of
revised market expectations on capital strength and
higher volatility of capital requirements resulting
from procyclicality embedded within the Basel II
rules, the upper end of the target tier 1 range is being