HSBC 2007 Annual Report Download - page 280

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Insurance operations > Financial risks > Liquidity risk
278
Reinsurance
(Audited)
Reinsurers’ share of liabilities under
insurance contracts
Linked
insurance
contracts
Non-linked
insurance
contracts Total
Reinsurance
debtors
US$m US$m US$m US$m
At 31 December 2007
AAA .............................................................................. 7 33 40 1
AA– to AA .................................................................... 28 297 325 26
A– to A+ ....................................................................... – 669 669 16
Lower than A– .............................................................. 22 10 32 2
Unrated ......................................................................... – 249 249 9
Total1 ............................................................................. 57 1,258 1,315 54
At 31 December 2006
AAA .............................................................................. 10 106 116 –
AA– to AA .................................................................... 33 812 845 37
A– to A+ ....................................................................... – 586 586 5
Lower than A– .............................................................. 15 37 52 3
Unrated ......................................................................... – 170 170 3
Total2 ............................................................................. 58 1,711 1,769 48
1 Does not include reinsurers’ share of liabilities under insurance contracts and reinsurance debtors of insurance manufacturing
associate, Ping An Insurance.
2 Does not include reinsurers’ share of liabilities under insurance contracts and reinsurance debtors of insurance manufacturing
associates, HSBC Assurances and Ping An Insurance.
Liquidity risk
(Audited)
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount
and the timing of settlement of claims liabilities that
may arise, and this leads to liquidity risk.
To fund the cash outflows arising from claims
liabilities, HSBC’s insurance manufacturing
subsidiaries utilise liquidity primarily from the
following sources:
• cash inflows arising from premiums from new
business, policy renewals and recurring
premium products;
• cash inflows arising from interest and dividends
on investments and principal repayments of
maturing debt investments;
• cash resources; and
• cash inflows from the sale of investments.
HSBC’s insurance manufacturing subsidiaries
manage liquidity risk by utilising some or all of the
following techniques:
• matching cash inflows with expected cash
outflows using specific cash flow projections or
more general asset and liability matching
techniques such as duration matching;
• maintaining sufficient cash resources;
• investing in good credit-quality investments
with deep and liquid markets to the degree to
which they exist;
• monitoring investment concentrations and
restricting them where appropriate, for example,
debt issues or issuers; and
• establishing committed contingency borrowing
facilities.
During 2007, a quarterly process has been
introduced whereby HSBC’s insurance
manufacturing subsidiaries are required to complete
and submit liquidity risk reports to Group Insurance
Head Office for collation and review by the Group
Insurance Market and Liquidity Risk Meeting.
Liquidity risk is assessed in these reports by
measuring changes in expected cumulative net cash
flows under a series of stress scenarios designed to
determine the effect of reducing expected available
liquidity and accelerating cash outflows. This is
achieved by, for example, assuming new business or
renewals are lower, and surrenders or lapses are
greater than expected.
As indicated in the table headed ‘Expected
maturity of insurance contract liabilities’ below and
in the analyses of life and non-life insurance risks on
pages 266 to 267, a significant proportion of the
Group’s non-life insurance business is viewed as
short term, with the settlement of liabilities expected
to occur within one year of the period of risk. There
is a greater spread of expected maturities for the life
business where, in a large proportion of cases, the