HSBC 2005 Annual Report Download - page 166

HSBC HOLDINGS PLC
Financial Review (continued)
164
Annuities are contracts providing income from
capital investment paid in a stream of regular
payments for either a fixed period or during the
annuitant’s lifetime. Deferred annuities are those
whose payments to the annuitant begin at a
designated future date as opposed to immediate
annuities where payments begin at once. The
principal risks in respect of annuity business relate to
mortality and market risk in relation to the need to
match investments against the anticipated cash flow
profile of the policies. HSBC has a number of
annuity books, some of which have been in run-off
for several years. The majority of the annuity book is
composed of contracts with a duration of no longer
than five years. Investments are managed to match
the anticipated cash flow profile, and the mortality
risk is regularly monitored. HSBC has annuity
business in the US, Mexico, Cayman Islands and
Argentina.
The major component of the ‘Term assurance
and other long-term contracts’ category is term
assurance and critical illness policies written in the
UK. The principal risks are in respect of mortality
and morbidity, and are mitigated through a
combination of underwriting practices, premium
adjustment in light of changes in experience and
reinsurance.
For linked insurance business, market risk is
usually borne by policyholders. The principal risk
retained by HSBC relates to expenses, although
mortality, disability and morbidity risks are also
associated with this product and are managed
through the application of the techniques set out
above for non-linked lines of business.
Analysis of non-life insurance risk – net written insurance premiums1
Europe
Hong-
Kong
Rest of
Asia-
Pacific
North
America
South
America Tota l
US$m US$m US$m US$m US$m US$m
Accident and health ................... 33 67 3 8 1 112
Motor ......................................... 192201147259529
Fire and other damage ............... 251 34 3 8 58 354
Liability ..................................... 229 17 2 90 15 353
Credit (non-life) ......................... 225 – –202 –427
Marine, aviation
and transport .......................... –16 4 –2242
Other non-life insurance
contracts ................................ 10 29 – 17 12 68
Total net written insurance
premiums ............................... 940 183 23 372 367 1,885
1Net written insurance premiums represent gross written premiums less gross written premiums ceded to reinsurers.
Non-life insurance contracts include liability
and property insurance. However, only a small
proportion of HSBC’s non-life insurance portfolio is
liability insurance which is in general underwritten
as part of a product business proposal. The key risks
associated with non-life business are underwriting
risk and claims experience risk. Underwriting risk is
the risk that HSBC does not charge premiums
appropriate for the cover provided and claims
experience risk is the risk that portfolio experience is
worse than expected. HSBC manages these risks
through prudent pricing (for example, imposing
restrictions and deductibles in the policy terms and
conditions), product design, risk selection, claims
handling, investment strategy and reinsurance
policy. All non-life insurance contracts are annually
renewable and the underwriters have the right to
refuse renewal or to change the terms and conditions
of the contract at renewal.
HSBC underwrites non-life insurance business
in Ireland, the UK, Hong Kong, Argentina, the US,
Mexico and Singapore.
Accident and health insurance business is
underwritten in all major markets with the largest
portfolio being Hong Kong. Potential accumulations
of personal accident risks are mitigated by the
purchase of catastrophe reinsurance.
Motor insurance business covers vehicle
damage and liability for personal injury. It includes a
large portfolio underwritten in Brazil for
US$105 million, which was disposed of during
2005. Other significant portfolios are written in the