HSBC 2009 Annual Report Download - page 279

277
Sensitivity of HSBC’s insurance manufacturing subsidiaries to risk factors
(Audited)
2009 2008
Effect on
profit for
the year
Effect on
total
equity
Effect on
profit for
the year
Effect on
total
equity
US$m US$m US$m US$m
+ 100 basis points parallel shift in yield curves ........... 68 (82) 94 (13)
– 100 basis points parallel shift in yield curves ........... (69) 92 (82) 24
10 per cent increase in equity prices ............................ 19 19 10 10
10 per cent decrease in equity prices ............................ (20) (20) (12) (12)
10 per cent increase in US dollar exchange rate
compared to all currencies ....................................... 20 20 28 29
10 per cent decrease in US dollar exchange rate
compared to all currencies ....................................... (20) (20) (28) (29)
Sensitivity to credit spread increases ........................... (36) (91) (73) (134)
The above table illustrates the effect on the
aggregated profit for the year and total equity 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 values 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.
The sensitivity of the net profit after tax of
HSBC’s insurance subsidiaries to the effects of
increases in credit spreads is a fall of US$36 million
(2008: US$73 million fall). The sensitivity is
calculated using simplified assumptions based on a
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. Credit
spreads experienced some volatility during 2009 but
generally improved from the high level at the end of
2008.
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$40.5 billion (2008:
US$33.2 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). Fifty two 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, absent impairment, would have no
impact on the profit after tax.
The exposure of the income statement to the
effect of changes in credit spread is small.
HSBC sells certain unit-linked life insurance
contracts which are reinsured with a third party.
These insurance contracts include market return
guarantees which are underwritten by the third party.
HSBC is exposed to credit risk to the extent that the
third party (the counterparty) is unable to meet the
terms of the guarantees. As highlighted in ‘Market
Risk’ above, the cost to the Group of market return
guarantees increases when interest rates fall, equity
markets fall or market volatility increases. In
addition, when determined by reference to a
discounted cash flow model in which the discount
rate is based on current interest rates, guarantee costs
increase in a falling interest rate environment. As a
consequence of the improved market conditions in
2009, there has been a reduction in these costs, and
hence the Group’s counterparty exposure to the
guarantees under the reinsurance agreement at
31 December 2009 was lower than at 31 December
2008. The sale of these contracts ceased in 2008,
reflecting the adjusted risk appetite of the business.
Group Insurance Head Office includes a Chief
Credit Risk Officer reporting to the Chief Risk
Officer. Each regional insurance unit includes an
individual responsible for credit risk.
The exposure to credit risk products and the
management of the risks associated with credit
protection products are included in the description of
life and non-life insurance risk on pages 266 to 269.
HSBC’s insurance manufacturing subsidiaries
are responsible for the credit risk, quality and
performance of their investment portfolios.
Investment credit mandates and limits are set by the
subsidiaries and approved by their local insurance
ALCOs and Credit Risk functions before being