HSBC 2010 Annual Report Download - page 158

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Overview of products / Nature and extent of risks / Insurance risk
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Our manufacturing business concentrates on
personal lines, e.g. contracts written for individuals.
This focus on the higher volume, lower individual
value personal lines contributes to diversifying risk.
Overview of insurance products
(Audited)
The main contracts we manufacture are listed below:
Life insurance business
• Life insurance contracts with discretionary
participation features (‘DPF’);
• credit life insurance business;
• annuities;
• term assurance and critical illness policies;
• linked life insurance;
• investment contracts with DPF;
• unit-linked investment contracts; and
• other investment contracts (including pension
contracts written in Hong Kong).
Non-life insurance business
Non-life insurance contracts include motor, fire and
other damage to property, accident and health,
repayment protection and commercial insurance.
Credit non-life insurance is concentrated in
North America and Europe, and is originated in
conjunction with the provision of loans. Following
a decision taken to close the Consumer Lending
network in the US, insurance products written in
conjunction with this business are being run off.
In December 2007, we decided to stop 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 premium 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. We have 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 had to reconsider whether a
ban on firms selling PPI at the point of sale of the
credit product was an appropriate and justified
remedy for the deficiencies it identified in the PPI
market. On 14 October 2010, the CC confirmed that
it intended to proceed with a point of sale ban. It is
anticipated that the Order implementing the CC’s
remedies will be made in late March or early April,
and that the point of sale ban will then come into
effect 12 months after the date of the Order.
Nature and extent of risks
(Audited)
The majority of the risk in our insurance business
derives from manufacturing activities and can be
categorised as insurance risk and financial risks. The
following sections describe how these risks are
managed. Financial risks include market risk, credit
risk and liquidity risk. The assets of insurance
manufacturing subsidiaries are included within the
consolidated credit risk disclosures on pages 93
to 128, although separate disclosures in respect of
insurance manufacturing subsidiaries are provided
below. The consolidated liquidity risk and market
risk disclosures focus on banking entities and
disclosures specific to the insurance manufacturing
subsidiaries are provided in the sections below.
Operational risk is covered by the Group’s overall
operational risk management process.
The insurance manufacturers set their own
control procedures in addition to complying with
guidelines issued by the Group Insurance Head
Office. 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 of this Committee focus on products
and pricing, market and liquidity risk, credit risk,
operational risk and insurance risk, respectively.
Similar risk committees exist at regional and entity
levels. Any issues requiring escalation from the
Group Insurance Risk Committee would be reported
to the GMB via the Risk Management Meeting.
In addition, local ALCOs and Risk Management
Committees monitor certain risk exposures, mainly
for life business where the duration and cash flow
matching of insurance assets and liabilities are
reviewed.
All insurance products, whether manufactured
internally or by a third party, are subjected to a
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 approval process
is formalised through the Product and Pricing
Committee, which comprise the heads of the relevant
risk functions within insurance.