HSBC 2008 Annual Report Download - page 273

271
Liquidity risk
(Audited)
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount of
claims liabilities that may arise, and the timing of
their settlement and this leads to liquidity risk.
To fund the cash outflows arising from claims
liabilities, HSBC’s insurance manufacturing
subsidiaries primarily utilise liquidity 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,
by debt issues or issuers; and
• establishing committed contingency borrowing
facilities.
Every quarter, 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.
The following tables show the expected
undiscounted cash flows for insurance contract
liabilities and the remaining contractual maturity of
investment contract liabilities at 31 December 2008.
As indicated in the analyses of life and non-life
insurance risks on pages 257 to 258, 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 liquidity risk is borne in
conjunction with policyholders (wholly in the case
of unit-linked business).
The profile of the expected maturity of the
insurance contracts as at 31 December 2008
remained comparable with 2007.
Expected maturity of insurance contract liabilities
(Audited)
Expected cash flows (undiscounted)
Within 1 year 1-5 years 5-15 years Over 15 years Total
US$m US$m US$m US$m US$m
At 31 December 2008
Non-life insurance .................................... 1,178 1,186 115 1 2,480
Life insurance (non-linked) ...................... 2,527 7,789 16,695 14,432 41,443
Life insurance (linked) ............................. 1,295 1,251 3,269 5,390 11,205
Total1 ......................................................... 5,000 10,226 20,079 19,823 55,128
At 31 December 2007
Non-life insurance .................................... 1,337 1,352 164 1 2,854
Life insurance (non-linked) ...................... 1,887 5,310 15,986 13,269 36,452
Life insurance (linked) ............................. 507 1,894 3,644 5,014 11,059
Total2 ......................................................... 3,731 8,556 19,794 18,284 50,365
1 Does not include insurance contracts issued by associated insurance company, Ping An Insurance, or joint venture insurance
companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
2 Does not include insurance contracts issued by insurance manufacturing associate, Ping An Insurance.