HSBC 2015 Annual Report Download - page 413

HSBC HOLDINGS PLC
411
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business or long-term investment contracts with
discretionary participating features (‘DPF’) and are in force at the balance sheet date is recognised as an asset. The asset represents the
present value of the equity holders’ interest in the issuing insurance companies’ profits expected to emerge from these contracts written
at the balance sheet date. The PVIF is determined by discounting the equity holders’ interest in future profits expected to emerge from
business currently in force using appropriate assumptions in assessing factors such as future mortality, lapse rates and levels of expenses,
and a risk discount rate that reflects the risk premium attributable to the respective contracts. The PVIF incorporates allowances for both
non-market risk and the value of financial options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet
and movements in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.
Present value of in-force long-term insurance business
Movements in PVIF
2015 2014
$m $m
PVIF at 1 January 5,307 5,335
Change in PVIF of long-term insurance business 799 261
Value of new business written during the year1 809 870
Movements arising from in-force business:
–
expected return (552) (545)
–
experience variances2 15 62
–
changes in operating assumptions 129 (69)
Investment return variances 222 (34)
Changes in investment assumptions 138 (75)
Other adjustments 38 52
Transfer of assets classified as held for sale3 (219) (122)
Exchange differences and other (202) (167)
PVIF at 31 December 5,685 5,307
1 ‘Value of new business written during the year’ is the present value of the projected stream of profits from the business.
2 ‘Experience variances’ includes the effect of the difference between demographic, expense and persistency assumptions used in the previous PVIF
calculation and actual experience observed during the year to the extent this affects profits on future business.
3 Relates to the Brazilian insurance operations and the UK pensions business which were classified as held for sale in the first half of 2015 and 2014
respectively. See page 180 for further details.
In the PVIF calculation, expected cash flows are projected after adjusting for a variety of assumptions made by each insurance
operation to reflect local market conditions and management’s judgement of future trends, and after applying risk margins to
reflect any uncertainty in the underlying assumptions. Variations in actual experience and changes to assumptions can
contribute to volatility in the results of the insurance business.
The key drivers of the movement in the value of the PVIF asset are the expected cash flows from:
• new business adjusted for anticipated maturities and assumptions relating to policyholder behaviour (‘value of new
business written during the year’);
• unwind of the discount rate less the reversal of expected cash flows for the period (‘expected return’);
• changes in non-economic operating assumptions such as mortality or lapse rates (‘changes in operating assumptions’);
• the effects of changes in projected future cash flows associated with operating assumption experience variances compared
with those assumed at the start of the period (‘experience variances’);
• changes related to future investment returns (‘changes in investment assumptions’); and
• the effect of actual investment experience on existing assets compared with the assumptions at the start of the period
(‘investment return variances’).
The valuation of the PVIF asset includes explicit risk margins for non-economic risks in the projection assumptions and explicit
allowances for financial options and guarantees using stochastic methods. Risk discount rates are set on an active basis with
reference to market risk-free yields.