HSBC 2010 Annual Report Download - page 170

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Risk management of insurance operations > Financial risks > Liquidity risk
168
Credit risk also arises when part of the insurance
risk we incur is assumed by reinsurers. The split of
liabilities ceded to reinsurers and outstanding
reinsurance recoveries, analysed by credit quality,
is shown below. Our exposure to third parties under
the reinsurance agreements described in the Credit
Risk section above is included in this table.
Reinsurers’ share of liabilities under insurance contracts
(Audited)
Neither past due nor impaired Past due
Strong Good
Satisfactory
Sub-
standard
but not
impaired
Total
US$m US$m US$m US$m US$m US$m
At 31 December 2010
Linked insurance contracts ................................. 44 716 – – – 760
Non-linked insurance contracts .......................... 997 11 76 12 9 1,105
Total81 ................................................................. 1,041 727 76 12 9 1,865
Reinsurance debtors ............................................ 30 8 30 1 10 79
At 31 December 2009
Linked insurance contracts ................................. 27 804 – – – 831
Non-linked insurance contracts .......................... 1,133 10 90 5 – 1,238
Total82 ................................................................. 1,160 814 90 5 – 2,069
Reinsurance debtors ............................................ 24 2 11 6 17 60
For footnotes, see page 174.
Liquidity risk
(Audited)
Description of liquidity risk
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount of
claims liabilities that may arise and the timing of
their settlement, and this creates liquidity risk.
There are three aspects to liquidity risk. The
first arises in normal market conditions and is
referred to as funding liquidity risk; specifically, the
capacity to raise sufficient cash when needed to meet
payment obligations. Secondly, market liquidity risk
arises when the size of a particular holding may be
so large that a sale cannot be completed around the
market price. Finally, standby liquidity risk refers to
the capacity to meet payment terms in abnormal
conditions.
How liquidity risk is managed
Our insurance manufacturing subsidiaries primarily
fund cash outflows arising from claim liabilities
from the following sources of cash inflows:
• premiums from new business, policy renewals
and recurring premium products;
• interest and dividends on investments and
principal repayments of maturing debt
investments;
• cash resources; and
• the sale of investments.
They manage liquidity risk by utilising some or
all of the following techniques:
• matching cash inflows with expected cash
outflows using specific cash flow projections or
more general asset and liability matching
techniques such as duration matching;
• maintaining sufficient cash resources;
• investing in good credit-quality investments
with deep and liquid markets to the degree to
which they exist;
• monitoring investment concentrations and
restricting them where appropriate, for example,
by debt issues or issuers; and
• establishing committed contingency borrowing
facilities.
Each of these techniques contributes to
mitigating the three types of liquidity risk described
above.
Every quarter, our insurance manufacturing
subsidiaries are required to complete and submit
liquidity risk reports to Group Insurance Head Office
for collation and review by the Group Insurance
Market and Liquidity Risk Meeting. Liquidity risk
is assessed in these reports by measuring changes
in expected cumulative net cash flows under a
series of stress scenarios designed to determine the
effect of reducing expected available liquidity and
accelerating cash outflows. This is achieved, for
example, by assuming new business or renewals are