HSBC 2007 Annual Report Download - page 268

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Insurance operations > Insurance risk
266
Analysis of life insurance risk – liabilities to policyholders
(Audited)
Europe
Hong
Kong
Rest of
Asia-
Pacific
North
America
Latin
America
Total
US$m US$m US$m US$m US$m US$m
At 31 December 2007
Life (non-linked)
Insurance contracts with DPF1 ....................... 940 8,489 231 – – 9,660
Credit life ........................................................ 235 – – 82 – 317
Annuities ........................................................ 413 – 28 1,154 1,532 3,127
Term assurance and other long-term
contracts ..................................................... 675 74 85 125 307 1,266
Total life (non-linked) ........................................ 2,263 8,563 344 1,361 1,839 14,370
Life (linked) ........................................................ 1,720 2,019 467 – 2,193 6,399
Investment contracts with DPF1,2 ....................... 18,954 – 29 – – 18,983
Insurance liabilities to policyholders .................. 22,937 10,582 840 1,361 4,032 39,752
At 31 December 2006
Life (non-linked)
Insurance contracts with DPF1 ........................... 195 6,001 193 – – 6,389
Credit life ........................................................ 130 – – 200 – 330
Annuities ........................................................ 271 – 26 1,106 1,370 2,773
Term assurance and other long-term
contracts ..................................................... 1,134 75 89 – 236 1,534
Total life (non-linked) ........................................ 1,730 6,076 308 1,306 1,606 11,026
Life (linked) ........................................................ 1,270 765 402 – 1,248 3,685
Investment contracts with DPF1,2 ....................... – – 20 – – 20
Insurance liabilities to policyholders .................. 3,000 6,841 730 1,306 2,854 14,731
1 Insurance contracts and investment contracts with discretionary participation features (‘DPF’) can give policyholders the contractual
right to receive, as a supplement to their guaranteed benefits, additional benefits that may be a significant portion of the total
contractual benefits, but whose amount and timing is determined by HSBC. These additional benefits are contractually based on the
performance of a specified pool of contracts or assets, or the profit of the company issuing the contracts. The increase in investment
contracts with DPF resulted from the acquisition in March 2007 of the remaining 50.01 per cent share in HSBC Assurances, the French
insurance business, that the Group did not already own, resulting in the consolidation of the assets and liabilities of HSBC Assurances.
2 Although investment contracts with DPF are financial investments, HSBC continues to account for them as insurance contracts as
permitted by IFRS 4.
(Audited)
The liabilities for long-term contracts are set by
reference to a range of assumptions which include
lapse and surrender rates, mortality and expense
levels. These assumptions are typically set by
reference to the entity’s own experience. Economic
assumptions, such as investment returns and interest
rates, are typically set by reference to market
observable data.
The above table of liabilities to life insurance
policyholders provides an overall summary of
HSBC’s life insurance activity. In particular, the
table highlights that the most significant products are
investment contracts with DPF issued in France,
insurance contracts with DPF issued in Hong Kong,
annuities issued in North America and Latin
America and unit-linked contracts issued in Europe,
Hong Kong and Latin America.
Insurance risk arising from life insurance
depends on the type of business, and varies
considerably. The principal risks are mortality,
morbidity, lapse, surrender and expense levels.
The main contracts which generate exposure to
mortality and morbidity risks are term assurance
contracts and annuities. These risks are monitored on
a regular basis, and are primarily mitigated by
medical underwriting and by retaining the ability in
certain cases to amend premiums in the light of
experience. The risk associated with lapses and
surrenders is generally mitigated by the application
of surrender charges. Expense risk can generally be
managed through pricing. The level of expenses in
the contract will be one of the items considered
when setting premiums rates.