HSBC 2009 Annual Report Download - page 286

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > PVIF > Non-economic assumptions // Capital management and allocation
284
Movements in total equity and PVIF of insurance operations
(Audited)
2009 2008
Tota l
equity
PVIF
included in
total equity
Total
equity
PVIF
included in
total equity
US$m US$m US$m US$m
At 1 January ............................................................................... 7,577 2,033 8,430 1,965
Value of new business written during the year71 ....................... 600 600 452 452
Movements arising from in-force business:
– expected return ................................................................... (123) (123) (186) (186)
– experience variances72 ........................................................ (44) (44) (36) (36)
– change in operating assumptions ....................................... 48 48 (7) (7)
Investment return variances ....................................................... 16 16 (94) (94)
Changes in investment assumptions .......................................... 19 19 12 12
Return on net assets ................................................................... 522 – (310) –
Exchange differences and other ................................................. (83) 231 (93) (73)
Capital transactions .................................................................... 48 – (591) –
At 31 December ......................................................................... 8,580 2,780 7,577 2,033
For footnotes, see page 291.
Non-economic assumptions
(Audited)
The policyholder liabilities and PVIF are determined
by reference to non-economic assumptions which
include, for non-life manufacturers, claims costs and
expense rates and, for life manufacturers, mortality
and/or morbidity, lapse rates and expense rates. The
table below shows the sensitivity of profit for the
year to, and total equity at, 31 December 2009 to
reasonably possible changes in these non-economic
assumptions at that date across all insurance
manufacturing subsidiaries, with comparatives for
2008.
The cost of claims is a risk associated with non-
life insurance business. An increase in claims costs
would have a negative effect on profit. The main
exposures to this scenario are in the UK, Hong
Kong, Latin America and Bermuda.
Mortality and morbidity risk is typically
associated with life insurance contracts. The effect of
an increase in mortality or morbidity on profit
depends on the type of business being written. For a
portfolio of term assurance contracts, an increase in
mortality usually has a negative effect on profit as
the number of claims increases. For a portfolio of
annuity contracts, an increase in mortality rates
typically has a positive effect on profit as the period
over which the benefit is being paid to the
policyholder is shortened. However, when an
annuity contract includes life cover, the positive
effect on profit of the increase in mortality may be
offset by the benefits payable under the life
insurance. The largest exposures to mortality and
morbidity risk exist in France, Hong Kong, the UK
and the US.
Sensitivity to lapse rates is dependent on the
type of contracts being written. For insurance
contracts, the cost of claims is funded by premiums
received and income earned on the investment
portfolio supporting the liabilities. For a portfolio of
term assurance, an increase in lapse rates typically
has a negative effect on profit due to the loss of
future premium income on the lapsed policies. For a
portfolio of annuity contracts, an increase in lapse
rates has a positive effect on profit as the obligation
to pay future benefits on the lapsed contracts is
extinguished. France, Hong Kong, the UK and the
US are the sites which are most sensitive to a change
in lapse rates.
Expense rate risk is the exposure to a change in
expense rates. To the extent that increased expenses
cannot be passed on to policyholders, an increase in
expense rates will have a negative impact on profits.