HSBC 2006 Annual Report Download - page 230

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Insurance operations > Life insurance / Non-life insurance / Insurance risk
228
Risk management of insurance
operations
(Audited)
Within its service proposition, HSBC offers its
customers a wide range of insurance products, many
of which complement other bank and consumer
finance products.
Both life and non-life insurance is underwritten,
principally in the UK, Hong Kong, Mexico, Brazil,
the US and Argentina.
Life insurance business
(Audited)
There are a number of major sub-categories of life
assurance business, of which the main ones are
discussed below:
Life insurance contracts with discretionary
participation features allow policyholders to
participate in the profits generated from such
business in addition to providing cover on death. The
largest portfolio, which is in Hong Kong, is a book
of endowment and whole-life policies, with annual
bonuses awarded to policyholders. Market risk is
managed in conjunction with other risks through the
investment policy and adjustment to bonus rates. In
practice this means that the majority of the market
risk is borne by policyholders. The main risk
associated with this product is the value of assigned
assets falling below that required to support benefit
payments. HSBC manages this risk by conducting
regular actuarial investigations on the sustainability
of the bonus rates.
Credit life insurance provides protection in the
event of death or unemployment. Credit life
insurance business is written for banking and finance
products. The insurance risk relates to mortality and
morbidity risk which is restricted to the duration of
the loans advanced. Claims experience is required to
be monitored and premium rates adjusted
accordingly.
Annuities are contracts providing regular
payments of income from capital investment 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 while, for immediate annuities, payments
begin on inception of the policy. The principal risks
of annuity business relate to mortality and market
risk, the latter arising from the need to match
investments to the anticipated cash flow profile of
the policies. The investment strategy seeks to match
the anticipated cash flow profile, and the mortality
risk is regularly monitored.
Term assurance provides cover in the event of
death. Critical illness cover provides cover in the
event of critical illness. The major components of
the ‘Term assurance and other long-term contracts’
category are term assurance and critical illness
policies written in the UK. The principal risks are in
respect of mortality and morbidity. These risks are
managed through a combination of underwriting
practices, premium adjustment in light of changes in
experience and reinsurance.
Linked life insurance business pays benefits to
the policyholder which is typically determined by
reference to the value of the investments supporting
the policy. For linked life insurance business, the
market risk is substantially borne by policyholders.
The principal risk retained by HSBC relates to
expenses incurred in managing this product. They
are recovered by management charges deducted
from the policyholder over the lifetime of the policy.
However, if the policy is terminated early,
deductions made to that point may be less than the
costs incurred for managing the product. This risk is
mitigated by retaining the ability to apply charges on
early surrender. Mortality, disability and morbidity
risks can also arise with this product and are
managed by applying the techniques set out above
for non-linked lines of business.
Non-life insurance business
(Audited)
Non-life insurance contracts include motor, fire and
other damage, accident and health, repayment
protection and commercial and liability business.
Within accident and health insurance, 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. Reinsurance
protection is required to be arranged where
necessary to avoid excessive exposure to larger
losses, particularly those relating to personal injury
claims.
Fire and other damage business is written in all
major markets, most significantly in Europe. The
predominant focus in most markets is insurance for
home and contents while cover for selected
commercial customers is largely written in Asian
and Latin American markets. Portfolios at risk from
catastrophic losses are required to be protected by
reinsurance in accordance with information obtained
from professional risk-modelling organisations.
A very limited portfolio of liability business is
written in major markets.