HSBC 2011 Annual Report Download - page 173

171
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Risk management of insurance
operations
(Audited)
HSBC’s bancassurance model ......................................... 171
Insurance risk in 2011 ..................................................... 171
Balance sheet of insurance manufacturing
subsidiaries .................................................................. 173
Financial risks .................................................................. 175
Present value of in-force long-term insurance business . 181
Economic assumptions .................................................... 182
Non-economic assumptions ............................................ 182
The majority of the risk in our insurance
business derives from manufacturing
activities and can be categorised as
insurance risk and financial risk. Insurance
risk is the risk, other than financial risk, of
loss transferred from the holder of the
insurance contract to the issuer (HSBC).
Financial risks include market risk, credit
risk and liquidity risk.
There were no material changes to our policies and
practices for the management of insurance risk,
including the risks relating to different life and non-
life products in 2011.
A summary of our policies and practices
regarding insurance risk, and the main
contracts we manufacture, is provided in
the Appendix to Risk on page 188.
HSBC’s bancassurance model
We operate a bancassurance model which provides
insurance products for customers with whom we
have a banking relationship. Insurance products are
sold through all global businesses, mainly utilising
retail branches, the internet and phone centres.
RBWM customers attract the majority of sales
and comprise the majority of policyholders.
Many of these insurance products are
manufactured by our subsidiaries. Where we have
scale, this allows us to retain the risks, within our
appetite, and associated rewards with writing
insurance contracts as both the underwriting profit
and the commission paid by the manufacturer to the
bank distribution channel are kept within the Group.
Where we do not have the risk appetite or
operational scale to be effective, third parties are
engaged to manufacture insurance products for sale
through our banking network. We work with a
limited number of market-leading partners to provide
the products. These arrangements earn us a
commission.
Our bancassurance business operates in all six
of our geographical regions with over 30 legal
entities, the majority of which are subsidiaries of
banking legal entities, manufacturing insurance
products.
The insurance contracts we sell primarily relate
to core underlying banking activities, such as savings
and investment products, and credit life products.
Our manufacturing business concentrates on
personal lines, e.g. contracts written for individuals.
This focus on the higher volume, lower individual
value personal lines contributes to diversifying risk.
Insurance risk in 2011
The principal risk we face is that, over time, the cost
of acquiring and administering a contract, claims
and benefits may exceed the aggregate amount of
premiums received and investment income. The
cost of claims and benefits can be influenced by
many factors, including mortality and morbidity
experience, lapse and surrender rates and, if the
policy has a savings element, the performance of the
assets held to support the liabilities.
In respect of financial risks, subsidiaries
manufacturing products with guarantees are usually
exposed to falls in market interest rates and equity
prices to the extent that the market exposure cannot
be managed by utilising any discretionary
participation (or bonus) features (‘DPF’) within
the policy.
This section provides disclosures on the
management of financial risks specific to insurance
operations, including credit risk, liquidity risk
and market risk. The assets of the insurance
manufacturing subsidiaries are included within the
consolidated Group credit risk disclosures. The
consolidated Group liquidity and market risk
management disclosures exclude insurance
operations as these risks are managed within
the insurance entities using methodologies and
processes appropriate to these insurance activities,
but remain subject to oversight at Group level. Risk
management disclosures specific to the insurance
manufacturing subsidiaries are provided below.
The following tables analyse our insurance risk
exposures by geographical region and by type of
business.