HSBC 2012 Annual Report Download - page 276

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Risk management of insurance operations
274
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
Management 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. The Group Insurance Risk Management 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 Management Committee would be reported to the RBWM Risk
Management Committee.
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 prior to introduction. Approval by Group Insurance Head Office may be required 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
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.
Life and non-life business insurance risks are controlled by high-level policies and procedures set both centrally and
locally, taking into account where appropriate local market conditions and regulatory requirements. Formal
underwriting, reinsurance and claims-handling procedures designed to ensure compliance with regulations are
applied, supplemented with stress testing.
As well as exercising underwriting controls, we use reinsurance as a means of mitigating exposure to insurance risk.
Where we manage our exposure to insurance risk through the use of third-party reinsurers, the associated revenue
and manufacturing profit is ceded to the reinsurers. Although reinsurance provides a means of managing insurance
risk, such contracts expose us to credit risk, the risk of default by the reinsurer.
The principal drivers of our insurance risk are described below. The liabilities for long-term contracts are set by
reference to a range of assumptions around these drivers. These typically reflect the issuers’ own experiences. The
type and quantum of insurance risk arising from life insurance depends on the type of business, and varies
considerably.
• mortality and morbidity: the main contracts which generate exposure to these risks are term assurance, whole life
products, critical illness and income protection contracts and annuities. The risks are monitored on a regular
basis, and are primarily mitigated by underwriting controls and reinsurance and by retaining the ability in certain
cases to amend premiums in the light of experience;
• lapses and surrenders: the risks associated with this are generally mitigated by product design, the application
of surrender charges and management actions, for example, managing the level of bonus payments to
policyholders. A detailed persistency analysis at a product level is carried out at least on an annual basis; and
• expense risk is mitigated by pricing, for example, retaining the ability in certain cases to amend premiums
and/or policyholder charges based on experience, and cost management discipline.
Liabilities are affected by changes in assumptions (see ‘Sensitivity analysis’ on page 245).
The main risks associated with non-life business are:
• underwriting: the risk that premiums are not appropriate for the cover provided; and
• claims experience: the risk that claims exceed expectations.