HSBC 2012 Annual Report Download - page 247

245
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
Non-economic assumptions
(Audited)
We determine the policyholder liabilities for non-life
manufacturers by reference to non-economic
assumptions including claims costs and expense
rates.
Policyholder liabilities and PVIF for life
manufacturers are determined by reference to non-
economic assumptions including mortality and/or
morbidity, lapse rates and expense rates. The table
below shows the sensitivity of profit for 2012 and
total equity at 31 December 2012 to reasonably
possible changes in these non-economic assumptions
at that date across all our insurance manufacturing
subsidiaries, with comparatives for 2011.
The cost of claims is a risk associated with non-
life insurance business. An increase in claims costs
would have a negative effect on profit. Sensitivities
have significantly decreased since 2011 due to the
disposal of the non-life entities or portfolios in
Argentina, Hong Kong, Ireland and Singapore
during 2012.
Mortality and morbidity risk is typically
associated with life insurance contracts. The effect
on profit of an increase in mortality or morbidity
depends on the type of business being written. Our
largest exposures to mortality and morbidity risk
exist in Brazil, France, Hong Kong and the US.
Sensitivity to lapse rates depends on the type
of contracts being written. For insurance contracts,
claims are funded by premiums received and income
earned on the investment portfolio supporting the
liabilities. For a portfolio of term assurance, an
increase in lapse rates typically has a negative effect
on profit due to the loss of future premium income
on the lapsed policies. However, some contract
lapses have a positive effect on profit due to the
existence of policy surrender charges. Brazil, France,
Hong Kong and the UK are where we are most
sensitive to a change in lapse rates.
Expense rate risk is the exposure to a change in
expense rates. To the extent that increased expenses
cannot be passed on to policyholders, an increase in
expense rates will have a negative impact on our
profits.
Sensitivity analysis
(Audited)
Effect on profit and total
equity at 31 December
Life Non-life Total
US$m US$m US$m
2012
20% increase in claims costs ................................................................. – (12) (12)
20% decrease in claims costs ................................................................ – 12 12
10% increase in mortality and/or morbidity rates ................................. (88) – (88)
10% decrease in mortality and/or morbidity rates ................................ 92 – 92
50% increase in lapse rates .................................................................... (491) – (491)
50% decrease in lapse rates ................................................................... 842 – 842
10% increase in expense rates ............................................................... (105) (1) (106)
10% decrease in expense rates .............................................................. 106 1 107
2011
20% increase in claims costs ................................................................. – (135) (135)
20% decrease in claims costs ................................................................ – 135 135
10% increase in mortality and/or morbidity rates ................................. (100) – (100)
10% decrease in mortality and/or morbidity rates ................................ 110 – 110
50% increase in lapse rates .................................................................... (349) – (349)
50% decrease in lapse rates ................................................................... 609 – 609
10% increase in expense rates ............................................................... (89) (12) (101)
10% decrease in expense rates .............................................................. 89 12 101