HSBC 2015 Annual Report Download - page 414

Notes on the Financial Statements (continued)
20 – Goodwill and intangible assets
HSBC HOLDINGS PLC
412
Key assumptions used in the computation of PVIF for main life insurance operations
Economic assumptions are either set in a way that is consistent with observable market values or, in certain markets (including
those where the risk free curve is not observable at tenors matching the duration of our insurance contract liabilities) use is
made of long-term economic assumptions. Setting such assumptions involves the projection of long-term interest rates and
the time horizon over which observable rates tend towards these long-term assumptions. The assumptions are informed by
relevant historical data and by research and analysis performed by the Group’s Economic Research team and external experts,
including regulatory bodies. The valuation of PVIF will be sensitive to any changes in these long-term assumptions in the same
way that it is sensitive to observed market movements, and the impact of such changes is included in the sensitivities
presented below.
2015 2014
UK Hong Kong France1UK Hong Kong France1
% % % % % %
Weighted average risk free rate 1.75 1.82 1.57 1.65 1.86 1.21
Weighted average risk discount rate 2.25 6.81 2.55 2.15 7.42 1.73
Expense inflation 4.56 3.00 1.70 4.67 3.00 2.00
1 For 2015, the calculation of France’s PVIF assumes a risk discount rate of 2.55% (2014: 1.73%) plus a risk margin of $51m (2014: $63m).
Sensitivity to changes in economic assumptions
The Group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding explicit
allowances for risks not reflected in the best estimate cash flow modelling. Where shareholders provide options and
guarantees to policyholders the cost of these options and guarantees is an explicit reduction to PVIF, unless it is already
allowed for as an explicit addition to the technical provisions required by regulators. See page 184 for further details of these
guarantees.
The following table shows the effect on the PVIF of reasonably possible changes in the main economic assumption, risk-free
rates, across all insurance manufacturing subsidiaries. Due to certain characteristics of the contracts, the relationships are non-
linear and the results of the sensitivity testing should not be extrapolated to higher levels of stress. For the same reason, the
impact of the stress is not symmetrical on the upside and downside. The sensitivities shown are before actions that could be
taken by management to mitigate effects and allow for adverse changes in policyholder behaviour. The sensitivities have
decreased from 2014 to 2015, driven mainly by rising yields and updates to interest rate parameters in France during 2015.
In a low yield environment the PVIF asset is particularly sensitive to yield curve movements driven by the projected cost of
options and guarantees described on page 184.
2015 2014
$m $m
Effect on PVIF at 31 December of:
+100 basis point shift in risk-free rate (3) 320
–
100 basis point shift in risk-free rate1(139) (589)
1 Where a –100 basis point parallel shift in the risk-free rate would result in a negative rate, the effect on PVIF has been calculated using a minimum
rate of 0%.
Sensitivity to changes in non-economic assumptions
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 PVIF to reasonably possible
changes in these non-economic assumptions at 31 December across all our insurance manufacturing subsidiaries.
2015 2014
$m $m
Effect on PVIF at 31 December of:
10% increase in mortality and/or morbidity rates (73) (66)
10% decrease in mortality and/or morbidity rates 77 70
10% increase in lapse rates (127) (146)
10% decrease in lapse rates 144 165
10% increase in expense rates (83) (93)
10% decrease in expense rates 83 94