HSBC 2009 Annual Report Download - page 268

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > Non-life business / Insurance risk
266
• 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. Any benefits payable to
policyholders related to insurance risk are not
significant on these contracts.
• Other investment contracts include pension
contracts written in Hong Kong.
Non-life insurance business
(Audited)
Non-life insurance contracts include motor, fire and
other damage to property, accident and health,
repayment protection and commercial insurances.
Motor insurance business covers vehicle
damage and liability for personal injury. For fire and
other damage to property, the main focus in most
markets is providing individuals with home and
contents insurance. Cover is also provided for
selected commercial customers, largely written in
Asia and Latin America.
A very limited portfolio of liability business is
written, other than that included in the motor book.
Credit non-life insurance is concentrated in
North America, and is originated in conjunction with
the provision of loans. Following a decision taken to
close the Consumer Lending business in the US,
insurance products written in conjunction with this
business will now be run off. In December 2007, the
group decided to cease selling payment protection
insurance (‘PPI’) products in the UK and a phased
withdrawal was completed across the HSBC, first
direct and M&S Money brands during 2008. HFC
ceased selling single premium PPI in 2008 and sales
of regular PPI will reduce as HFC exits its remaining
retail relationships. HSBC continues to distribute its
UK short-term income protection (‘STIP’) product.
In January 2009, the Competition Commission
(‘CC’) published its report into the PPI market in
which it stipulated that STIP products will also be
subject to their remedies when sold in conjunction
with or as a result of a referral following the sale of a
loan or similar credit product. HSBC has undertaken
an analysis of the required changes to the STIP
product and its sales processes resulting from the
CC’s remedies. Following an appeal to the
Competition Appeal Tribunal, the CC continues to
consult on whether a ban on firms selling PPI at the
point of sale of the credit product is an appropriate
and justified remedy for the deficiencies it identified
in the PPI market.
Given the nature of the contracts written by the
Group, the risks to which HSBC’s insurance
operations are exposed fall into two principal
categories: insurance risk and financial risk. The
following section describes the nature and extent of
these risks and HSBC’s approach to managing them.
The majority of the risk in the insurance business
derives from manufacturing activities, and
consequently the following sections focus on how
the Group manages risk arising in the manufacturing
subsidiaries.
Insurance risk
(Audited)
Insurance risk is a risk, other than financial risk,
transferred from the holder of a contract to the
issuer, in this case HSBC.
The principal insurance risk faced by HSBC
is that, over time, the combined cost of
claims, benefits, administration and
acquisition of the contract may exceed the
aggregate amount of premiums received
and investment income.
The cost of claims and benefits can be
influenced by many factors, including mortality and
morbidity experience, lapse and surrender rates and,
if the policy has a savings element, the performance
of the assets held to support the liabilities.
Performance of the underlying assets is affected by
changes in both interest rates and equity prices (see
page 274).
During 2009, Group Insurance agreed to a
global risk appetite statement in relation to insurance
risks, encompassing limits on the largest exposures
the business will write in normal circumstances. In
addition to the global statement, local businesses
continue to propose their own risk appetites that are
authorised centrally.
Life and non-life business insurance risks are
controlled by high-level policies and procedures set
centrally, supplemented as appropriate with