HSBC 2006 Annual Report Download - page 318

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Notes 2 and 3
316
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance
contracts where premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
contracts to which they relate.
Claims and reinsurance recoveries
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims liabilities.
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Claims arising during the year include maturities, surrenders and death claims.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date
on which, following notification, the policy ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Outstanding claims liabilities for non-life insurance contracts are based on the estimated ultimate cost of all
claims incurred but not settled at the balance sheet date, whether reported or not, together with related claim-
handling costs and a reduction for the expected value of salvage and other recoveries. Liabilities for claims
incurred but not reported are made on an estimated basis, using appropriate statistical techniques.
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on
local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value
which is calculated by reference to the value of the relevant underlying funds or indices.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business and are in force at the
balance sheet date is recognised as an asset.
The present value of in-force long-term insurance business is determined by discounting future cash flows
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 long-term insurance business. Movements in the present value of in-force long-term
insurance business are included in ‘Other operating income’ on a gross of tax basis.
(y) Investment contracts
Customer liabilities under non-linked and unit-linked investment contracts and the linked financial assets are
designated at fair value, and the movements in fair value are recognised in the income statement in ‘Net income
from financial investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted
for as increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under unit-linked investment contracts are at least equivalent to the surrender or transfer value which
is calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.