HSBC 2007 Annual Report Download - page 266

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Insurance operations > Life / Non-life / Insurance risk
264
Risk management of insurance
operations
(Audited)
HSBC operates a bancassurance model which
provides insurance products for customers with
whom the Group has a banking relationship. Many
of these products are manufactured by HSBC
subsidiaries, but where the Group considers it
operationally more effective, third parties are
engaged to manufacture and provide insurance
products which HSBC sells through its banking
network. The Group works with a limited number of
market-leading partners to provide these products.
When manufacturing products, the Group
underwrites the insurance risk and retains the risks
and rewards associated with writing insurance
contracts. HSBC’s exposure to risks associated with
manufacturing insurance contracts in its subsidiaries
and its management of these risks are discussed
below.
One advantage of the bancassurance model to
HSBC is that, where the Group manufactures
products to sell to customers, the underwriting profit
is retained within the Group as is the commission
paid by the manufacturer to the bank distribution
channel. When HSBC sells products provided by
third parties, it earns a commission. HSBC sells
insurance products across all its customer groups,
mainly utilising its retail branches, the internet and
phone centres. Personal Financial Services
customers attract the majority of sales and comprise
the majority of policyholders. HSBC offers its
customers a wide range of insurance and investment
products, many of which complement other bank and
consumer finance products.
HSBC’s bancassurance business operates in all
five of the Group’s geographical regions with over
35 legal entities manufacturing insurance products.
The majority of these insurance operations are
subsidiaries of banking legal entities and comply
with their management control procedures. In
addition to local management requirements, the
insurance operations follow guidelines issued by the
Group Insurance Head Office. The Group Insurance
Head Office is headed by the Group’s Managing
Director of Insurance, supported by a Chief
Operating Officer and Chief Finance Officer. The
role of Group Insurance Head Office includes setting
the control framework for monitoring and measuring
insurance risk in line with existing Group practices,
and defining insurance-specific policies and
guidelines for inclusion in the Group Instruction
Manuals. The control framework for monitoring risk
includes the Group Insurance Risk Committee, to
which four Group Insurance sub-committees report,
focusing on operational risk, insurance risk,
market and liquidity risk, and credit risk. The
sub-committees of the Group Insurance Risk
Committee were introduced during 2007. The
processes and controls employed to monitor
individual risks are described under their respective
headings below. The main contracts manufactured
by HSBC are described below.
Life insurance business
(Audited)
Life insurance contracts with discretionary
participation features (‘DPF’) allow policyholders
to participate in the profits generated from such
business, which may take the form of annual
bonuses and a final bonus, 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. In addition, certain minimum return
levels are guaranteed.
Credit life insurance business is written to
underpin banking and finance products. The policy
pays a claim if the holder of the loan is unable to
make repayments due to early death or
unemployment.
Annuities are contracts providing regular
payments of income from capital investment for
either a fixed period or during the annuitant’s
lifetime. Payments to the annuitant either begin on
inception of the policy (immediate annuities) or at a
designated future date (deferred annuities).
Term assurance and critical illness policies
provide cover in the event of death (term assurance)
and serious illness.
Linked life insurance contracts pay benefits to
policyholders which are typically determined by
reference to the value of the investments supporting
the policies.
Investment contracts with DPF allow
policyholders to participate in the profits generated
by such business. The largest portfolio is written in
France. Policyholders are guaranteed to receive a
return on their investment plus any discretionary
bonuses. In addition, certain minimum return levels
are guaranteed.
Unit-linked investment contracts are those
where the principal benefit payable is the value of
assigned assets.
Other investment contracts include pension
contracts written in Hong Kong.