HSBC 2007 Annual Report Download - page 277

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is measured in terms of the change in profit after tax
and net assets under the stress-tested assumptions,
after taking into consideration tax and accounting
treatments where material and relevant.
The following table illustrates the effect on the
aggregated profit for the year and net assets under
various interest rate, equity price, foreign exchange
rate and credit spread scenarios. Where appropriate,
the impact of the stress on the PVIF is included in
the results of the stress tests. The relationship
between the value of certain assets and liabilities and
the risk factors may be non-linear and, therefore, the
results disclosed cannot be extrapolated to measure
sensitivities to different levels of stress. The
sensitivities are stated before allowance for the effect
of management actions which may mitigate changes
in market rates, and for any factors such as
policyholder behaviour that may change in response
to changes in market risk.
Sensitivity of HSBC’s insurance subsidiaries to risk factors
(Audited)
2007 2006
Impact on
profit for
the year
Impact on
net assets
Impact on
profit for
the year
Impact on
net assets
US$m US$m US$m US$m
+ 100 basis points parallel shift in yield curves ........... 67 (29) (13) (111)
– 100 basis points parallel shift in yield curves ........... (71) 49 24 103
10 per cent increase in equity prices ............................ 147 151 93 95
10 per cent decrease in equity prices ............................ (145) (149) (86) (87)
10 per cent increase in US dollar exchange rate
compared to all currencies ....................................... 12 12 (10) (10)
10 per cent decrease in US dollar exchange rate
compared to all currencies ....................................... (12) (12) 10 10
Sensitivity to credit spread increases ........................... (15) (30) (7) (12)
The sensitivity of the net profit of HSBC’s
insurance subsidiaries to the effects of increases in
credit spreads is a fall of US$15 million (2006:
US$7 million fall). The sensitivity is expressed on an
after tax basis consistent with the other sensitivities
noted above and has been calculated using simplified
assumptions based on one-day movement in credit
spreads over a two-year period. A confidence level
of 99 per cent, consistent with the Group’s VAR, has
been applied. The impact of movements in credit
spreads has become more significant in 2007 due to
increased volatility in credit spreads.
Credit risk
(Audited)
Credit risk can give rise to losses through default
and can lead to volatility in income statement and
balance sheet figures through movements in credit
spreads, principally on the US$29.8 billion (2006:
US$14.1 billion) non-linked bond portfolio. The
exposure of the income statement to the effect of
changes in credit spreads is small (see the table
above). 36 per cent of the financial assets held by
insurance subsidiaries are classified as either held to
maturity or available for sale, and consequently any
changes in the fair value of these financial
investments would have no impact on the profit
after tax.
HSBC’s exposure to credit risk in its insurance
manufacturing subsidiaries primarily arises from
their portfolios of invested assets held, their
reinsurance transactions and any credit protection
products they write.
HSBC sells certain unit-linked life insurance
contracts via a co-insurance agreement with a third
party. The insurance contracts issued under the
co-insurance agreement include market return
guarantees, which are underwritten by the third
party. HSBC has a credit risk exposure arising on the
guarantees were the counterparty unable to meet the
terms of the guarantees. At 31 December 2007, the
exposure to the counterparty was small.
The exposure to credit risk products and the
management of the risks associated with credit
protection products are included in the analyses of
life and non-life insurance risk from page 266 to
267.
Management of HSBC’s insurance
manufacturing subsidiaries is responsible for the
credit risk, quality and performance of their
investment portfolios. Investment credit mandates
and limits are set locally by the insurance
manufacturing subsidiaries and approved by their
local insurance ALCO and Credit Risk function
before receiving concurrence centrally from Group
Credit Risk. The form and content of the mandates