HSBC 2014 Annual Report Download - page 83

HSBC BANK PLC
Report of the Directors: Risk (continued)
81
Remaining contractual maturity of investment contract liabilities
(Audited)
Liabilities under investment contracts by insurance underwriting subsidiaries
Within 1 year
1-5 years
5-10 years
Over 10 years
Undated1
Total
£m
£m
£m
£m
£m
£m
Unit-linked investment contracts
84
85
124
492
231
1,016
Investment contracts with discretionary
participation features (‘DPFs’)
–
–
–
–
16,083
16,083
At 31 December 2014
84
85
124
492
16,314
17,099
Unit-linked investment contracts
130
471
515
1,364
2,819
5,299
Investment contracts with DPFs
–
–
–
–
15,987
15,987
At 31 December 2013
130
471
515
1,364
18,806
21,286
1 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies.
The insurance risk profile of the group’s life insurance
manufacturing businesses has not changed materially
during 2014 despite the decrease in liabilities to
policyholders on these contracts to £17.5 billion (2013:
£19.2 billion). This decrease is largely due to the changes
in the UK pension business as described on pages 78 and
79.
A principal risk faced by the group 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, expense rates and, if the policy has a
savings element, the performance of the assets held to
support the liabilities.
The following tables analyse the group’s insurance risk
exposures by type of business.
Analysis of life insurance risk – liabilities to policy holders
(Audited)
2014
2013
£m
£m
Non-linked insurance1
– Insurance contracts with DPF 2
235
230
– Credit life
36
79
– Annuities
45
376
– Term assurance and other long-
term contracts
215
151
Total non-linked insurance
531
836
Unit-linked insurance
908
2,405
Investment contracts with DPF 2, 3
16,083
15,987
Liabilities under insurance contracts
17,522
19,228
1 Non-linked insurance includes remaining non-life business.
2 Insurance contracts and investment contracts with DPFs give
policyholders the contractual right to receive, as a supplement to
their guaranteed benefits, additional benefits that are likely to be
a significant portion of the total contractual benefits, but whose
amount or timing is contractually at the discretion of the group.
These additional benefits are contractually based on the
performance of a specified pool of contracts or assets, or the
profit of the company issuing the contracts.
3 Although investment contracts with DPFs are financial
investments, the group continues to account for them as
insurance contracts as required by IFRS 4.
Sensitivities to non-economic assumptions
The group’s life insurance business is accounted for using
the embedded value approach which, inter alia, provides
a risk and valuation framework. The sensitivity of the
present value of in-force long term insurance business
(‘PVIF’) asset to changes in economic and non-economic
assumptions is described in Note 21.
Other material risks
(Unaudited)
Reputational risk
Reputational risk is the failure to meet stakeholder
expectations as a result of any event, behaviour, action
or inaction, either by HSBC itself, our employees or those
with whom we are associated, that might cause
stakeholders to form a negative view of HSBC.
Reputational risk relates to perceptions, whether based
on fact or otherwise. Stakeholders’ expectations are
constantly changing and thus reputational risk is dynamic
and varies between geographies, groups and individuals.
As a global bank HSBC shows unwavering commitment
to operate, and be seen to be operating, to the high
standards we have set for ourselves in every jurisdiction.
Reputational risk might result in financial or non-financial
impacts, loss of confidence, adverse effects on our ability
to keep and attract customers, or other consequences.
Any lapse in standards of integrity, compliance, customer
service or operating efficiency represents a potential
reputational risk.
A number of measures to address the requirements of
the DPAs and otherwise to enhance our AML and
sanctions compliance framework have been taken
and/or are ongoing. These measures, which should also
serve over time to enhance our reputational risk
management, include the following:
• simplifying our business through the ongoing
implementation of our Group strategy, including the
adoption of a global financial crime risk filter, which
should help to standardise our approach to doing
business in higher risk countries;
• a substantial increase in resources and investment
allocated to the two Compliance sub-functions (see
‘Compliance risk’ on page 76);
• an increase in dedicated reputational risk resources in
each region in which we operate and the introduction
of a central case management and tracking process
for reputational risk and client relationship matters;
• the creation of combined Reputational Risk and Client
Selection committees within the global businesses