HSBC 2008 Annual Report Download - page 258

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > Non-life business / Insurance risk
256
Non-life insurance business
(Audited)
Non-life insurance contracts include motor, fire and
other damage to property, accident and health,
repayment protection and commercial insurances.
Motor insurance business covers vehicle
damage and liability for personal injury. For fire and
other damage to property, the main focus in most
markets is providing individuals with home and
contents insurance, with cover for selected
commercial customers largely written in Asia and
Latin America.
A very limited portfolio of liability business is
written, other than that included in the motor book.
Credit non-life insurance is concentrated in
North America and Europe, and is originated in
conjunction with the provision of loans. Payment
protection insurance (‘PPI’) products were
suspended in the UK pending a final report from the
Competition Commission on their provision by the
financial services industry. The report was issued in
early 2009. The business is in the process of
assessing the impact of the reported findings on
credit protection products in the UK.
Given the nature of the contracts written by the
Group, the risks to which HSBC’s insurance
operations are exposed fall into two principal
categories: insurance risk and financial risk. The
following section describes the nature and extent of
these risks and HSBC’s approach to managing them.
The majority of the risk in the insurance business
derives from manufacturing activities.
Insurance risk
(Audited)
Insurance risk is a risk, other than financial risk,
transferred from the holder of a contract to the
issuer, in this case HSBC. The principal insurance
risk faced by HSBC is that, over time, the combined
cost of claims, administration and acquisition of the
contract may exceed the aggregate amount of
premiums received and investment income. The cost
of a claim can be influenced by many factors,
including mortality and morbidity experience, lapse
and surrender rates and, if the policy has a savings
element, the performance of the assets held to
support the liabilities. Performance of the underlying
assets is affected by changes in both interest rates
and equity prices (see page 263).
HSBC’s insurance risk appetite is proposed by
local businesses and authorised centrally. The Group
manages its exposure to insurance risk by applying
formal underwriting, reinsurance and claims-
handling procedures designed to ensure compliance
with regulations. This is supplemented with stress
testing.
Insurance contracts sold by HSBC relate, in the
main, to core underlying banking activities, such as
savings and investment products, and credit life
products. The Group’s manufacturing focuses on
personal lines, i.e. contracts written for individuals,
which tend to be of higher volume and lower
individual value than commercial lines. They thus
contribute to diversifying insurance risk.
Life and non-life business insurance risks are
controlled by high-level policies and procedures set
centrally, supplemented as appropriate with
measures which take account of specific local
market conditions and regulatory requirements. For
example, manufacturing entities are required to
obtain authorisation from Group Insurance Head
Office to write certain classes of business, with
restrictions applying to commercial and liability non-
life insurance, in particular.
Local ALCOs and Risk Management
Committees are required to monitor certain risk
exposures, mainly for life business where the focus
is on reviewing the risks associated with the duration
and cash flow matching of insurance assets and
liabilities.
Reinsurance is also used as a means of
mitigating exposure, in particular to aggregations of
catastrophe risk. Specific examples are as follows:
• Accident and health insurance. Potential
exposure to concentrations of claims arising
from isolated events, such as earthquakes or a
pandemic, are mitigated by the purchase of
catastrophe reinsurance.
• Motor insurance. Reinsurance protection is
arranged to avoid excessive exposure to larger
losses, particularly from personal injury claims.
• Fire and other damage to property. Portfolios at
risk from catastrophic losses are protected by
reinsurance in accordance with information
obtained from professional risk-modelling
organisations.
Although reinsurance provides a means of
managing insurance risk, such contracts expose the
Group to counterparty risk, the risk of default by the
reinsurer (see page 267).
The following tables provide an analysis of
HSBC’s insurance risk exposures by geographical
region and by type of business. By definition, HSBC
is not exposed to insurance risk on investment