HSBC 2015 Annual Report Download - page 190

Report of the Directors: Risk (continued)
Risk management of insurance operations / Other material risks
HSBC HOLDINGS PLC
188
Insurance risk
Insurance risk is the risk, other than financial risk, of loss
transferred from the holder of the insurance contract to
the issuer (i.e. HSBC). It is principally measured in terms of
liabilities under the contracts in force.
The principal risk we face is that, over time, the cost of
the contract, including claims and benefits may exceed the
total amount of premiums and investment income received.
The cost of claims and benefits can be influenced by many
factors, including mortality and morbidity experience, lapse
and surrender rates. The following table analyses our life
insurance risk exposures by geographical region and by
type of business. The insurance risk profile and related
exposures remain largely consistent with those observed
at 31 December 2014.
Analysis of insurance risk – liabilities under insurance contracts43
(Audited)
Europe Asia
Latin
America Total
$m $m $m $m
Non-linked insurance50 749 38,525 1,264 40,538
–
insurance contracts with DPF52 343 32,071
–
32,414
–
credit life 49 80
–
129
–
annuities 69 108 905 1,082
–
other53 288 6,266 359 6,913
Unit-linked insurance 1,341 5,450
–
6,791
Investment contracts with DPF36,52 22,609
–
–
22,609
Liabilities under insurance contracts at 31 December 2015 24,699 43,975 1,264 69,938
Non-linked insurance50 829 34,261 1,883 36,973
–
insurance contracts with DPF52 367 29,112
–
29,479
–
credit life 56 87
–
143
–
annuities 71 127 1,275 1,473
–
other53 335 4,935 608 5,878
Unit-linked insurance 1,415 5,729 4,676 11,820
Investment contracts with DPF36,52 25,068
–
–
25,068
Liabilities under insurance contracts at 31 December 2014 27,312 39,990 6,559 73,861
For footnotes, see page 191.
Our most significant life insurance products are
insurance contracts with DPF issued in Hong Kong,
investment contracts with DPF issued in France and unit-
linked contracts issued in Latin America, Hong Kong and
the UK.
Sensitivities to non-economic assumptions
(Audited)
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 and total equity to reasonably possible changes in
these non-economic assumptions at that date across all
our insurance manufacturing subsidiaries.
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 France and Hong Kong.
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 income on the lapsed policies. However, some
contract lapses have a positive effect on profit due to the
existence of policy surrender charges. France, Hong Kong
and Singapore are where we are most sensitive to a change
in lapse rates.
Expense rate risk is the exposure to a change in the cost
of administering insurance contracts. To the extent that
increased expenses cannot be passed on to policyholders,
an increase in expense rates will have a negative effect on
our profits.
Sensitivity analysis
(Audited)
2015 2014
$m $m
Effect on profit after tax and
total equity at 31 December
10% increase in mortality and/or
morbidity rates
(70) (65)
10% decrease in mortality and/or
morbidity rates
75 72
10% increase in lapse rates (90) (108)
10% decrease in lapse rates 102 122
10% increase in expense rates (85) (106)
10% decrease in expense rates 83 106
For footnote, see page 191.