HSBC 2015 Annual Report Download - page 109

HSBC HOLDINGS PLC
107
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Risks Arising from Measurement, monitoring and management of risk
Pension risk (page 189)
The risk that contributions from
Group companies and members
fail to generate sufficient funds to
meet the cost of accruing benefits
for the future service of active
members, and the risk that
the performance of assets held
in pension funds is insufficient
to cover existing pension
liabilities.
Pension risk arises from
investments delivering an
inadequate return,
economic conditions leading
to corporate failures,
adverse changes in interest
rates or inflation, or
members living longer than
expected (longevity risk).
Pension risk includes
operational risks listed
above.
Pension risk is:
• measured in terms of the schemes’ ability to generate sufficient
funds to meet the cost of their accrued benefits;
• monitored through the specific risk appetite that has been
developed at both Group and regional levels; and
• managed locally through the appropriate pension risk governance
structure and globally through the RMM.
Sustainability risk (page 190)
The risk that financial services
provided to customers by the
Group indirectly result in
unacceptable impacts on people
or on the environment.
Sustainability risk arises
from the provision of
financial services to
companies or projects
which indirectly result in
unacceptable impacts on
people or on the
environment.
Sustainability risk is:
• measured by assessing the potential sustainability effect of a
customer’s activities and assigning a Sustainability Risk Rating to
all high risk transactions;
• monitored quarterly by the RMM and monthly by Group
Sustainability Risk; and
• managed using sustainability risk policies covering project finance
lending and sector-based sustainability policies for sectors and
themes with potentially high environmental or social impacts.
Our insurance manufacturing subsidiaries are separately
regulated from our banking operations. Risks in the
insurance entities are managed using methodologies and
processes appropriate to insurance activities, but remain
subject to oversight at Group level. Our insurance
operations are also subject to the operational risks and
the other material risk types presented above in relation to
the banking operations, and these are covered by the
Group’s risk management processes.
Description of risks – insurance manufacturing operations
Risks Arising from Measurement, monitoring and management of risk
Financial risks (page 183)
Our ability to effectively match
the liabilities arising under
insurance contracts with the
asset portfolios that back
them is contingent on the
management of financial risks
such as market, credit and
liquidity risks, and the extent
to which these risks are borne by
the policyholders.
Liabilities to policyholders under
unit-linked contracts move in line
with the value of the underlying
assets, and as such the
policyholder bears the majority
of the financial risks.
Contracts with DPF share the
performance of the underlying
assets between policyholders and
the shareholder in line with the
type of contract and the specific
contract terms.
Exposure to financial risks
arises from:
• market risk of changes
in the fair values of
financial assets or their
future cash flows from
fluctuations in variables
such as interest rates,
foreign exchange rates
and equity prices;
• credit risk and the
potential for financial
loss following the default
of third parties in
meeting their
obligations; and
• liquidity risk of entities
not being able to
make payments to
policyholders as they
fall due as there are
insufficient assets that
can be realised as cash.
Financial risks are:
• measured separately for each type of risk:
− market risk is measured in terms of exposure to fluctuations in
key financial variables;
− credit risk is measured as the amount which could be lost if a
customer or counterparty fails to make repayments; and
− liquidity risk is measured using internal metrics including
stressed operational cash flow projections.
• monitored within limits approved by individuals within a
framework of delegated authorities; and
• managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers. Subsidiaries manufacturing products with guarantees
are usually exposed to falls in market interest rates and equity
prices to the extent that the market exposure cannot be managed
by utilising any discretionary participation (or bonus) features
within the policy contracts they issue.