HSBC 2008 Annual Report Download - page 266

HSBC HOLDINGS PLC
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Market risk
264
• annuities in payment;
• deferred annuities: these consist of two phases
– the savings and investing phase and the
retirement income phase;
• annual return: the annual return is guaranteed to
be no lower than a specified rate. This may be
the return credited to the policyholder every
year, or the average annual return credited to the
policyholder over the life of the policy, which
may occur on the maturity date or the surrender
date of the contract;
• capital: policyholders are guaranteed to receive
no less than the premiums paid plus declared
bonuses less expenses; and
• market performance: policyholders receive an
investment return which is guaranteed to be
within a prescribed range of average investment
returns earned by predetermined market
participants on the specified product.
Subsidiaries manufacturing products with
guarantees are usually exposed to falls in market
interest rates as they result in lower yields on the
assets supporting guaranteed investment returns
payable to policyholders. In the current market
environment, in which interest rates are falling,
managing this risk is of increasing importance.
The table below shows, in respect of each
category of guarantee, the total liabilities to
policyholders established for guaranteed products,
the range of investment returns (net of operating
costs) implied by the guarantees, and the range of
current yields of the investment portfolios supporting
the guarantees.
Liabilities to policyholders1
(Audited)
2008 2007
Amount of
reserve
Investment
returns
implied by
guarantee2
Current
yields
Amount of
reserve
Investment
returns
implied by
guarantee3
Current
yields
US$m % % US$m % %
Annuities in payment .......................................... 744 0.0 – 11.5 6.5 – 28.0 716 0.0 – 8.5 5.1 – 18.1
Deferred annuities ............................................... 120 0.0 – 6.0 3.9 – 7.4 116 0.0 – 6.0 3.8 – 8.6
Deferred annuities ............................................... 576 6.0 – 9.0 5.4 – 5.4 609 6.0 – 9.0 5.7
Annual return ...................................................... 13,717 0.0 – 4.5 2.2 – 4.9 12,875 0.0 – 4.5 3.2 – 8.7
Annual return ...................................................... 302 4.5 – 6.0 3.4 – 7.3 352 4.5 – 6.0 3.2 – 8.5
Capital ................................................................. 13,346 0.0 2.0 – 4.3 11,311 0.0 3.8 – 4.8
Market performance4 .......................................... n/a n/a n/a 3,605 n/a n/a
1 The table excludes contracts where the market risk is 100 per cent reinsured.
2 Excluding guarantees from associated insurance company, Ping An Insurance, or joint venture insurance companies, Hana Life and
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited
3 Excluding guarantees from associate insurance company, Ping An Insurance.
4 There is no specific investment return implied by market performance guarantees because the guarantees are expressed as lying within
prescribed ranges of average market returns.
A certain number of these products have been
discontinued, including the US$576 million deferred
annuity portfolio in HSBC Finance where, as
highlighted in the above table, the current portfolio
yield is less than the guarantee. On acquisition of
this block of business by HSBC Finance, a provision
was established to mitigate the shortfall in yields.
There has been no further deterioration in the
shortfall since acquisition. There are a limited
number of additional contracts where the current
portfolio yield is less than the guarantee implied by
the contract.
The proceeds from insurance and investment
products with DPF are primarily invested in bonds
with a proportion allocated to equity securities in
order to provide customers with the potential for
enhanced returns. Subsidiaries with portfolios of
such products are exposed to the risk of falls in the
market price of equity securities when they cannot
be fully reflected in the discretionary bonuses. An
increase in market volatility could also result in an
increase in the value of the guarantee to the
policyholder.
Long-term insurance and investment products
typically permit the policyholder to surrender the
policy or let it lapse at any time. When the surrender
value is not linked to the value realised from the sale
of the associated supporting assets, the subsidiary is
exposed to market risk. In particular, when
customers seek to surrender their policies when asset
values are falling, assets may have to be sold at a
loss to fund redemptions.
A subsidiary holding a portfolio of long-term
insurance and investment products, especially with