HSBC 2015 Annual Report Download - page 186

Report of the Directors: Risk (continued)
Risk management of insurance operations
HSBC HOLDINGS PLC
184
Financial assets held by insurance manufacturing subsidiaries
(Audited)
Unit-linked Non-linked Other
contracts44 contracts45 assets39 Total
$m $m $m $m
Trading assets
Debt securities
–
2
–
2
Financial assets designated at fair value 8,435 13,837 1,015 23,287
Treasury bills
–
146 56 202
Debt securities 448 3,547 228 4,223
Equity securities 7,987 10,144 731 18,862
Financial investments
Held-to-maturity: debt securities
–
27,029 3,050 30,079
Available-for-sale:
–
19,097 1,233 20,330
–
debt securities
–
19,097 1,177 20,274
–
equity securities
–
–
56 56
Derivatives 1 193 62 256
Other financial assets39 404 5,054 171 5,629
Total financial assets at 31 December 201542 8,840 65,212 5,531 79,583
Trading assets
Debt securities
–
3
–
3
Financial assets designated at fair value 13,334 13,649 1,713 28,696
Treasury bills
–
40 16 56
Debt securities 4,589 3,507 618 8,714
Equity securities 8,745 10,102 1,079 19,926
Financial investments
Held-to-maturity: debt securities
–
21,789 2,494 24,283
Available-for-sale:
–
22,899 1,319 24,218
–
debt securities
–
22,899 1,290 24,189
–
equity securities
–
–
29 29
Derivatives 2 124 73 199
Other financial assets39 503 6,905 134 7,542
Total financial assets at 31 December 201442 13,839 65,369 5,733 84,941
For footnotes, see page 191.
Approximately 69% of financial assets were invested in
debt securities at 31 December 2015 (2014: 67%) with 24%
(2014: 24%) invested in equity securities.
Under unit-linked contracts, premium income less charges
levied is invested in a portfolio of assets. We manage the
financial risks of this product on behalf of the policyholders
by holding appropriate assets in segregated funds or
portfolios to which the liabilities are linked. These assets
represented 11% (2014: 16%) of the total financial assets of
our insurance manufacturing subsidiaries at the end of
2015.
The remaining assets of $71bn (2014: $71bn) are where
financial risks are managed either solely on behalf of the
shareholder, or jointly on behalf of the shareholder and
policyholders where DPF exist. These assets relate primarily
to operations in Asia and France.
Market risk
(Audited)
Market risk arises when mismatches occur between
product liabilities and the investment assets which back
them. For example, mismatches between asset and liability
yields and maturities give rise to interest rate risk.
The proceeds from insurance and investment products are
primarily invested in bonds. A proportion is also allocated
to other asset classes, such as equities, property, private
equity and hedge funds to provide customers with the
potential for enhanced returns. Portfolios of such assets
are exposed to the risk of changes in market prices and
where not fully reflected in bonuses paid to policyholders,
will affect shareholder funds.
Long-term insurance or investment products may
incorporate benefits that are guaranteed. Fixed guaranteed
benefits, for example for annuities in payment, are
reserved for as part of the calculation of liabilities under
insurance contracts.
The risk of shareholder capital being required to meet
liabilities to policyholders increases in products that
offer guaranteed financial returns where current yields fall
below guaranteed levels for a prolonged period. Reserves
are held against the cost of guarantees, calculated by
stochastic modelling. Where local rules require, these
reserves are held as part of liabilities under insurance
contracts. Any remainder is accounted for as a deduction
to PVIF on the relevant product. The table below shows the
total reserve held for the cost of guarantees, the range of
investment returns on assets supporting these products
and the implied investment return that would enable the
business to meet the guarantees.
The financial guarantees offered on some portfolios
exceeded the current yield on the assets that back them.
The cost of guarantees decreased to $748m (2014: $777m)
primarily because of rising yields and updates to interest
rate parameters in France during 2015. Following these