HSBC 2005 Annual Report Download - page 172

HSBC HOLDINGS PLC
Financial Review (continued)
170
addition, in the UK there is an annuity portfolio
where the risk is fully reinsured.
For market performance guarantee business in
the table above, the Group seeks to match the
composition of the investment portfolio with the
composition of the average investment portfolio of
the other market participants. These are published by
the regulator monthly. Reserves have also been
established to cover any potential shortfall although,
since inception, they have never been called upon.
Equity risk
HSBC manages the equity risk arising from its
holdings of equity securities centrally by setting
limits on the maximum market value of equities that
each insurance underwriting subsidiary may hold.
Equity risk is also monitored by estimating the effect
of predetermined movements in equity prices on the
profit and total net assets of the insurance
underwriting subsidiaries.
The following table illustrates the impact on the
aggregated profit for the year and net assets of a
reasonably possible 10 per cent variance in equity
prices:
Profit for
the year Net assets
US$m US$m
10 per cent increase in
equity prices ............................. 61 62
10 per cent decrease in
equity prices .............................. (45) (46)
These equity sensitivities are illustrative only
and employ simplified scenarios. They are based on
US$6,753 million of marketable equity securities
held by insurance underwriting subsidiaries at
31 December 2005, and US$6,137 million of
liabilities under insurance contracts and long-term
investment contracts issued. They do not allow for
any management actions to mitigate the effects of
the equity price decline, nor for any consequential
changes, such as in policyholder behaviour, that
could accompany such a fall.
Foreign exchange risk
HSBC’s insurance underwriting subsidiaries are
exposed to this risk when the assets supporting
insurance liabilities are denominated in currencies
other than the currencies of the liabilities.
HSBC manages the foreign exchange risk
arising from its insurance underwriting subsidiaries
centrally, by establishing limits on the net positions
by currency and the total net short position that each
insurance subsidiary may hold. The risk is also
monitored by tracking the effect of predetermined
exchange differences on the total profit and net
assets of the insurance underwriting subsidiaries.
The following table illustrates the impact on the
aggregated profit for the year and net assets of a
reasonably possible 10 per cent variance in the US
dollar exchange rate:
Profit
for the
year
Net
assets
US$m US$m
10 per cent increase in
US dollar exchange rate ........... 55
10 per cent decrease in
US dollar exchange rate ............ (5) (5)
These sensitivities to movements in the US
dollar are for illustrative purposes only and employ
simplified scenarios applied to local US dollar
positions only. They are based on US$1,444 million
of liabilities under insurance contracts and long-
term investment contracts and US$1,505 million of
assets denominated in US dollars. They do not allow
for actions that could be taken by management to
mitigate the effect of exchange differences, nor for
any consequential changes in policyholder
behaviour.
Credit risk
HSBC’s insurance underwriting subsidiaries are
exposed to credit risk in respect of their investment
portfolios and their reinsurance transactions.
Local management of HSBC’s underwriting
insurance subsidiaries is responsible for the quality
and performance of the investment portfolios.
Investment guidelines are set at Group level. Local
ALCOs set investment parameters appropriate to the
local environment within the framework of the
Group guidelines and review investment
performance and compliance with the guidelines.
Assessment of the creditworthiness of issuers and
counterparties is based primarily upon
internationally recognised credit ratings and other
publicly available information. In addition, to reduce
the impact of individual entity or industry sector
failures, centrally determined issuer and industry
sector concentration limits are complied with.
Investment credit exposures are aggregated and
reported to HSBC’s Group Credit and Risk function
on a quarterly basis.