HSBC 2009 Annual Report Download - page 283

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Credit risk also arises when part of the insurance
risk incurred by HSBC is assumed by reinsurers. The
credit risk exposure to reinsurers is monitored by
Group Insurance Head Office and is reported
quarterly to the Group Insurance Risk Committee
and the Group Insurance Credit Risk Meeting.
The split of liabilities ceded to reinsurers and
outstanding reinsurance recoveries, analysed by
credit quality, is shown below. The definitions of the
five credit quality classifications are provided on
page 225. The Group’s exposure to third parties
under the reinsurance agreement described in the
Credit Risk section above is included in this table.
Reinsurers’ share of liabilities under insurance contracts
(Audited)
Neither past due nor impaired Past due
Strong
Medium-
good
Medium-
satisfactory
Sub-
standard
but not
impaired
Total
US$m US$m US$m US$m US$m US$m
At 31 December 2009
Linked insurance contracts67 ......................... 27 804 – – – 831
Non-linked insurance contracts67 .................. 1,133 10 90 5 – 1,238
1,160 814 90 5 – 2,069
Reinsurance debtors ....................................... 24 2 11 6 17 60
At 31 December 2008
Linked insurance contracts67 ......................... 9 947 – – – 956
Non-linked insurance contracts67 .................. 1,001 12 50 – 4 1,067
1,010 959 50 – 4 2,023
Reinsurance debtors ....................................... 30 – 20 – 10 60
For footnote, see page 291.
Liquidity risk
(Audited)
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount of
claims liabilities that may arise, and the timing of
their settlement and this leads to liquidity risk.
There are three aspects considered in liquidity
risk. The first of these arises in normal market
conditions and is referred to as funding liquidity risk;
specifically, the capacity to raise sufficient cash
when needed to meet payment obligations. Secondly,
market liquidity risk arises when the size of a
particular holding may be sufficiently large that a
sale cannot be completed around the market price.
Finally, there is standby liquidity risk, which refers
to the capacity to meet payment terms in abnormal
conditions.
HSBC’s insurance manufacturing subsidiaries
primarily fund cash outflows arising from claim
liabilities from the following sources:
• cash inflows arising from premiums from new
business, policy renewals and recurring
premium products;
• cash inflows arising from interest and dividends
on investments and principal repayments of
maturing debt investments;
• cash resources; and
• cash inflows from the sale of investments.
HSBC’s insurance manufacturing subsidiaries
manage liquidity risk by utilising some or all of the
following techniques:
• matching cash inflows with expected cash
outflows using specific cash flow projections or
more general asset and liability matching
techniques such as duration matching;
• maintaining sufficient cash resources;
• investing in good credit-quality investments
with deep and liquid markets to the degree to
which they exist;
• monitoring investment concentrations and
restricting them where appropriate, for example,
by debt issues or issuers; and
• establishing committed contingency borrowing
facilities.
Each of these techniques contributes to
mitigating the three types of liquidity risk described
above.
Every quarter, HSBC’s insurance manufacturing
subsidiaries are required to complete and submit
liquidity risk reports to Group Insurance Head Office