HSBC 2011 Annual Report Download - page 183

181
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Liabilities under investment contracts by
insurance manufacturing subsidiaries
Linked
investment
contracts
Other
investment
contracts
Investment
contracts
with DPF Total
US$m US$m US$m US$m
At 31 December 2010
Remaining contractual maturity:73
– due within 1 year ................................................................... 391 446 11 848
– due between 1 and 5 years .................................................... 940 – 11 951
– due between 5 and 10 years .................................................. 1,182 – – 1,182
– due after 10 years .................................................................. 2,133 – – 2,133
– undated80 ................................................................................ 3,675 3,372 22,052 29,099
8,321 3,818 22,074 34,213
For footnotes, see page 185.
Present value of in-force long-term
insurance business
(Audited)
Our life insurance business is accounted for using
the embedded value approach which, inter alia,
provides a comprehensive risk and valuation
framework. The PVIF asset at 31 December 2011
was US$4.1bn (2010: US$3.4bn), representing the
present value of the shareholders’ interest in the
profits expected to emerge from the book of in-force
policies at that date.
The PVIF calculation projects expected cash
flows, adjusted for a variety of assumptions made
by each insurance operation to reflect local market
conditions and management’s judgement of future
trends. The main assumptions made relate to
economic and non-economic assumptions and
policyholder behaviour. By definition, assumptions
are subject to risk and uncertainty and can result in
volatility in the results of the insurance business.
The key drivers of the movement in the value
of the PVIF asset are the expected cash flows from
new business adjusted for anticipated maturities
and assumptions relating to policyholder behaviour
(‘Value of new business written during the year’),
the unwind of the discount rate less the reversal
of expected cash flows for the period (‘Expected
return’), changes in non-economic operating
assumptions such as mortality or lapse rates
(‘Change in operating assumptions’), impacts
arising from changes in projected future cash flows
associated with operating assumption experience
variances compared to those assumed at the start of
the period (‘Experience variances’), changes related
to future investment returns (‘Changes in investment
assumptions’) and the impact of actual investment
experience on future cash flows compared to those
assumed at the start of the period (‘Investment return
variances’).
During 2011 the calculation of the PVIF asset
was refined to allow greater comparability and
consistency across the Group’s insurance operations.
This was achieved by incorporating explicit margins
and allowances for certain risks and uncertainties,
where implicit adjustments to the risk discount rate
have been made in the past.
The valuation now includes explicit risk
margins for non-economic risks in the projection
assumptions and explicit allowances for financial
options and guarantees using stochastic methods.
Risk discount rates are now set on an active basis
with reference to market risk free yields and have
been reduced as a result of removing the implicit
adjustments, as shown in the key assumptions table
below. It should be noted that these refinements will
introduce greater volatility within reported results in
the future which is reflected in higher sensitivity
impacts, including sensitivities to lapse, mortality
and/or morbidity.
A one-off gain of US$243m is included in
‘Other adjustments’ in the table below which
represents the impact of these refinements on the
in-force book.
The following table shows the movements
recorded during the year in respect of total equity
and PVIF of insurance operations.