HSBC 2006 Annual Report Download - page 243

241
Remaining contractual maturity of long-term investment contract liabilities
(Audited)
Liabilities under investment contracts by
insurance underwriting subsidiaries1
Linked
investment
contracts
Non-linked
investment
contracts
Total
US$m US$m US$m
At 31 December 2006
Remaining contractual maturity:
– due within 1 year ...................................................................................... 274 265 539
– due between 1 and 5 years ....................................................................... 1,238 45 1,283
– due between 5 and 10 years ..................................................................... 856 – 856
– due after 10 years ..................................................................................... 3,312 – 3,312
– undated2 .................................................................................................... 4,323 3,181 7,504
10,003 3,491 13,494
At 31 December 2005
Remaining contractual maturity:
– due within 1 year ...................................................................................... 118 11 129
– due between 1 and 5 years ....................................................................... 1,043 185 1,228
– due between 5 and 10 years ..................................................................... 683 – 683
– due after 10 years ..................................................................................... 2,431 – 2,431
– undated2 .................................................................................................... 2,881 3,093 5,974
7,156 3,289 10,445
1 Excludes investment contracts by insurance underwriting associates Erisa, S.A. and Ping An Insurance.
2 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies.
These may be significantly lower than the amounts shown above.
Present value of in-force long-term
insurance business (‘PVIF’)
(Audited)
The HSBC life insurance business is accounted for
using the embedded value approach, which, inter
alia, provides a comprehensive framework for the
evaluation of insurance and related risks. The value
of the PVIF asset at 31 December 2006 was
US$1,549 million (2005: US$1,400 million). The
present value of the shareholders’ interest in the
profits expected to emerge from the book of in-force
policies at 31 December can be stress-tested to
assess the ability of the life business book to
withstand adverse developments. A key feature of
the life insurance business is the importance of
managing the assets, liabilities and risks in a
coordinated fashion rather than individually. This
reflects the greater interdependence of these three
elements for life insurance than is generally the case
for non-life insurance.
The following table shows the effect on the
PVIF of reasonably possible changes in the main
economic assumptions across all insurance
underwriting subsidiaries:
Sensitivity of PVIF to changes in economic assumptions
(Audited)
PVIF at 31 December
2006 2005
US$m US$m
+ 100 basis points shift in risk-free rate ............................................................................................ 130 90
– 100 basis points shift in risk-free rate ............................................................................................ (141) (100)
+ 100 basis points shift in risk discount rate ..................................................................................... (64) (54)
– 100 basis points shift in risk discount rate ..................................................................................... 70 57
(Audited)
The effects on PVIF shown above are
illustrative only and employ simplified scenarios. It
should be noted that the effects may not be linear
and so the results of the stress-testing cannot be
extrapolated. In calculating the various scenarios, all
other assumptions are left unchanged except for
testing the effect of the shift in the risk-free rate,
when consequential changes to investment returns,
risk discount rate and bonus rates are also
incorporated. In practice, certain correlations
between the above items may be observed. In
addition the scenarios do not incorporate actions that
could be taken by management to mitigate effects
nor do they take account of consequential changes in
policyholder behaviour.