HSBC 2009 Annual Report Download - page 267

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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. When the
Group chooses to manage its exposure to insurance
risk through the use of third-party reinsurers, the
associated revenue and manufacturing profit is ceded
to them. 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 six 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 role of Group
Insurance Head Office includes forming and
communicating the strategy for insurance, 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. Five sub-
committees report to the Committee, focusing on
products and pricing, market and liquidity risk,
credit risk, operational and insurance risk.
All insurance products, whether manufactured
internally or by a third party, are subjected to a
detailed product approval process. Approval is
provided by the Regional Insurance Head Office or
Group Insurance Head Office depending on the type
of product and its risk profile. The process consists
of an analysis of the inherent risks of a product,
including but not limited to market risk, credit risk,
insurance and pricing risk and regulatory risk.
Certain products, for example those of a particularly
complex nature or those providing a guarantee, are
reviewed by the Product and Pricing Committee as
part of the approval process. The committee
comprises the heads of the relevant risk functions
within insurance and sits at both regional and Group
Insurance levels.
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).