HSBC 2011 Annual Report Download - page 206

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Insurance risk
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mitigate the permutations of these and other non-financial risks to its business lines across the jurisdictions in which
we operate.
Insurance risk
Overview of insurance products
(Audited)
The main contracts we manufacture are listed below:
Life insurance business
• life insurance contracts with discretionary participation features (‘DPF’);
• credit life insurance business;
• annuities;
• term assurance and critical illness policies;
• linked life insurance;
• investment contracts with DPF;
• unit-linked investment contracts; and
• other investment contracts (including pension contracts written in Hong Kong).
Non-life insurance business
Non-life insurance contracts include motor, fire and other damage to property, accident and health, repayment
protection and commercial insurance.
Nature and extent of risks
(Audited)
The majority of the risks in our insurance business derive from manufacturing activities and can be categorised as
insurance risk and financial risks. The following sections describe how these risks are managed. Financial risks
include market risk, credit risk and liquidity risk. The assets of insurance manufacturing subsidiaries are included
within the consolidated risk disclosures on pages 98 to 187, although separate disclosures in respect of insurance
manufacturing subsidiaries are provided in the ‘Risk management of insurance operations’ section. The consolidated
liquidity risk and market risk disclosures focus on banking entities and exclude insurance operations. Disclosures
specific to the insurance manufacturing subsidiaries are provided in the ‘Risk management of insurance operations’
section on pages 171 to 183. Operational risk is covered by the Group’s overall operational risk management process.
Insurance manufacturers set their own control procedures in addition to complying with guidelines issued by
the Group Insurance Head Office. The control framework for monitoring risk includes the Group Insurance Risk
Committee, which oversees the status of the significant risk categories in the insurance operations. Five sub-
committees of this Committee focus on products and pricing, market and liquidity risk, credit risk, operational risk
and insurance risk, respectively. Similar risk committees exist at regional or entity levels. The Group Insurance Risk
Committee monitors the risk profile of the insurance operations against a risk appetite for insurance business agreed
by the GMB. Any issues requiring escalation from the Group Insurance Risk Committee would be reported to the
GMB via the Risk Management Meeting.
In addition, local ALCOs and Risk Management Committees monitor certain risk exposures, mainly for life business
where the duration and cash flow matching of insurance assets and liabilities are reviewed.
All insurance products, whether manufactured internally or by a third party, are subjected to a product approval
process. Approval is provided by the Regional Insurance Head Office or Group Insurance Head Office depending
on the type of product and its risk profile. The approval process is formalised through the Product and Pricing
Committee, which comprises the heads of the relevant risk functions within insurance.
Insurance risk
(Audited)
Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to
the issuer (HSBC). The principal risk we face in manufacturing insurance contracts is that, over time, the cost of
acquiring and administering a contract, claims and benefits may exceed the aggregate amount of premiums received