HSBC 2009 Annual Report Download - page 287

285
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
2009
20% increase in claims costs .............................. – (191) (191) – (191) (191)
20% decrease in claims costs ............................. – 190 190 – 190 190
10% increase in mortality and/or morbidity
rates ................................................................. (51) – (51) (51) – (51)
10% decrease in mortality and/or morbidity
rates ................................................................. 62 – 62 62 – 62
50% increase in lapse rates ................................. (162) – (162) (162) – (162)
50% decrease in lapse rates ................................ 408 – 408 408 – 408
10% increase in expense rates ............................ (52) (11) (63) (52) (11) (63)
10% decrease in expense rates ........................... 52 11 63 52 11 63
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
Capital management and allocation
Capital management
(Audited)
HSBC’s capital management approach is driven by
its strategic and organisational requirements, taking
into account the regulatory, economic and
commercial environment in which it operates.
It is HSBC’s objective to maintain a strong
capital base to support the development of its
business and to meet regulatory capital requirements
at all times. To achieve this, the Group’s policy is to
hold capital in a range of different forms and from
diverse sources and all capital raising is agreed with
major subsidiaries as part of their individual and the
Group’s capital management processes.
The Group’s policy is underpinned by the
Capital Management Framework, which enables
HSBC to manage its capital in a consistent and
aligned manner. The framework, which is approved
by GMB, incorporates a number of different capital
measures including market capitalisation, invested
capital, economic capital and regulatory capital,
defined by HSBC as follows:
• market capitalisation is the stock market value
of the company;
• invested capital is the equity capital invested in
HSBC by its shareholders;
• economic capital is the internally calculated
capital requirement which is deemed necessary
by HSBC to support the risks to which it is
exposed at a confidence level consistent with a
target credit rating of AA; and
• regulatory capital is the capital which HSBC is
required to hold in accordance with the rules
established by the FSA for the consolidated
Group and by HSBC’s local regulators for
individual Group companies.
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 these
risks pose a significantly greater challenge in a
severe economic downturn and management’s
response to these risks has, correspondingly, been
intensified in the current conditions.
Stress testing is incorporated into the Capital
Management Framework and is used as an important
mechanism in understanding the sensitivities of the
core assumptions in the Group’s capital plans to the
adverse effect of extreme, but plausible, events.
Stress testing allows senior management to
formulate its response in advance of conditions
starting to exhibit the stress scenarios identified. The
actual market stresses which occurred throughout the