HSBC 2012 Annual Report Download - page 405

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
While investment contracts with discretionary participation features are financial instruments, they continue to
be treated as insurance contracts as permitted by IFRS 4.
Insurance premiums
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance
contracts where premiums are accounted for when liabilities are established.
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contracts based on the proportion of risks borne during the accounting period. The unearned premium (the
proportion of the business underwritten in the accounting year relating to the period of risk after the balance
sheet date) is calculated on a daily or monthly pro rata basis.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
contracts to which they relate.
Insurance claims and reinsurance recoveries
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Claims arising during the year include maturities, surrenders and death claims.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date
on which, following notification, the policy ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims liabilities.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on
local actuarial principles. Liabilities under unit-linked life insurance contracts are at least equivalent to the
surrender or transfer value which is calculated by reference to the value of the relevant underlying funds or
indices.
Outstanding claims liabilities for non-life insurance contracts are based on the estimated ultimate cost of all
claims incurred but not settled at the balance sheet date, whether reported or not, together with related claim-
handling costs and a reduction for the expected value of salvage and other recoveries. Liabilities for claims
incurred but not reported are made on an estimated basis, using appropriate statistical techniques.
A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities
is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all
contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is
identified it is charged immediately to the income statement.
Future profit participation on insurance contracts with discretionary participation features
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts
include provisions for the future discretionary benefits to policyholders. These provisions reflect actual
performance of the investment portfolio to date and management expectation on the future performance in
connection with the assets backing the contracts, as well as other experience factors such as mortality, lapses
and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or
past distribution policy.
Investment contracts
Unit-linked and non-linked
Customer liabilities under linked and certain non-linked investment contracts and the corresponding financial
assets are designated at fair value. Movements in fair value are recognised in ‘Net income from financial