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Interim Report - 18 of 24

26 Aug 2015 16:32

RNS Number : 2049X
HSBC Holdings PLC
26 August 2015
 



Risk management of insurance operations

The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as insurance risk and financial risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC). Financial risks include market risk, credit risk and liquidity risk.

There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2014.

A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 231 of the Annual Report and Accounts 2014.

Risk management of insurance operations in the first half of 2015

We measure the risk profile of our insurance manufacturing businesses using an economic capital approach. Under this approach, assets and liabilities are measured on a market value basis and capital is held to ensure that there is less than a 1 in 200 chance of insolvency during the coming year given the risks that the businesses are exposed to. This approach is aligned to the measurement approach for market, credit and insurance risks in the economic capitalmodel in the European Solvency II insurance capital regulations applicable from 2016.

The risk profile of our life insurance manufacturing businesses did not change materially during 1H15 despite the decrease in liabilities under insurance contracts to $69bn (31 December 2014: $74bn).

This reduction arose from the transfer of $5bn of these liabilities to 'Liabilities of disposal groups held for sale' during the period when we announced the plan to sell our operations in Brazil (including the entire insurance business there).

Asset and liability matching

A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching. In many markets in which we operate it is neither possible nor appropriate to follow a perfect asset and liability matching strategy. For long-dated non‑linked contracts, in particular, this results in a duration mismatch between assets and liabilities. We therefore structure portfolios that support liabilities under non-linked contracts with due consideration to the risk exposure to HSBC and the capital requirements.

The table below shows the composition of assets and liabilities by contract type and demonstrates that there were sufficient assets to cover the liabilities to policyholders, in each case at 30 June 2015.

 

Balance sheet of insurance manufacturing subsidiaries by type of contract

Insurance contracts

Investment contracts

Other

 

With

DPF

Unit-

linked

Annuities

Other

With

DPF

Unit-

linked

Other

assets and liabilities

Total

$m

$m

$m

$m

$m

$m

$m

$m

$m

Financial assets

30,199

7,351

1,272

6,359

22,570

2,587

4,027

5,862

80,227

- trading assets

-

-

3

-

-

-

-

-

3

- financial assets designated atfair value

4,563

7,157

343

699

6,778

2,174

1,924

1,136

24,774

- derivatives

42

1

-

2

100

-

11

63

219

- financial investments

22,784

-

830

5,478

13,902

-

1,425

4,663

49,082

- other financial assets

2,810

193

96

180

1,790

413

667

-

6,149

 

Reinsurance assets

199

239

-

754

-

-

-

-

1,192

PVIF

-

-

-

-

-

-

-

5,363

5,363

Other assets and investment properties

828

11

24

109

739

12

26

12,887

14,636

Total assets at 30 June 2015

31,226

7,601

1,296

7,222

23,309

2,599

4,053

24,112

101,418

Liabilities under investment contracts:

-

-

-

-

-

2,558

3,786

-

6,344

- designated at fair value

-

-

-

-

-

2,558

3,786

-

6,344

Liabilities under insurance contracts

30,914

7,541

1,237

6,493

23,309

-

-

-

69,494

Deferred tax

12

-

8

4

-

-

-

1,131

1,155

Other liabilities

-

-

-

-

-

-

-

13,837

13,837

Total liabilities

30,926

7,541

1,245

6,497

23,309

2,558

3,786

14,968

90,830

Total equity

-

-

-

-

-

-

-

10,588

10,588

Total equity and liabilitiesat 30 June 2015

30,926

7,541

1,245

6,497

23,309

2,558

3,786

25,556

101,418

 

 

Insurance contracts

Investment contracts

Other

 

With

DPF

Unit-

linked

Annuities

Other

With

DPF

Unit-

linked

Other

assets and liabilities

Total

$m

$m

$m

$m

$m

$m

$m

$m

$m

Financial assets

28,014

12,043

1,629

5,452

26,657

2,867

4,455

6,064

87,181

- trading assets

-

-

4

-

-

-

-

-

4

- financial assets designated atfair value

4,383

11,760

564

651

7,523

2,411

1,541

2,219

31,052

- derivatives

7

1

-

2

95

-

-

71

176

- financial investments

20,565

-

960

4,421

17,049

-

1,750

3,697

48,442

- other financial assets

3,059

282

101

378

1,990

456

1,164

77

7,507

 

Reinsurance assets

183

265

-

723

-

-

-

2

1,173

PVIF

-

-

-

-

-

-

-

5,438

5,438

Other assets and investment properties

794

330

19

101

728

11

27

7,813

9,823

Total assets at 30 June 2014

28,991

12,638

1,648

6,276

27,385

2,878

4,482

19,317

103,615

Liabilities under investment contracts:

-

-

-

-

-

2,878

4,276

-

7,154

- designated at fair value

-

-

-

-

-

2,878

3,800

-

6,678

- carried at amortised cost

-

-

-

-

-

-

476

-

476

Liabilities under insurance contracts

28,217

12,518

1,591

5,512

27,385

-

-

-

75,223

Deferred tax

12

-

11

10

-

-

-

1,223

1,256

Other liabilities

-

-

-

-

-

-

-

9,451

9,451

Total liabilities

28,229

12,518

1,602

5,522

27,385

2,878

4,276

10,674

93,084

Total equity

-

-

-

-

-

-

-

10,531

10,531

Total equity and liabilities at30 June 2014

28,229

12,518

1,602

5,522

 

27,385

2,878

4,276

21,205

103,615

Financial assets

29,040

11,278

1,517

6,253

24,238

2,561

4,322

5,732

84,941

- trading assets

-

-

3

-

-

-

-

-

3

- financial assets designated atfair value

4,304

11,111

533

782

6,346

2,223

1,684

1,713

28,696

- derivatives

12

1

-

1

101

1

10

73

199

- financial investments

21,152

-

886

5,167

15,677

-

1,807

3,812

48,501

- other financial assets

3,572

166

95

303

2,114

337

821

134

7,542

 

Reinsurance assets

190

262

-

617

-

-

-

2

1,071

PVIF

-

-

-

-

-

-

-

5,307

5,307

Other assets and investment properties

698

328

23

107

831

7

26

7,383

9,403

Total assets at 31 December 2014

29,928

11,868

1,540

6,977

25,069

2,568

4,348

18,424

100,722

Liabilities under investment contracts:

-

-

-

-

-

2,542

4,155

-

6,697

- designated at fair value

-

-

-

-

-

2,542

3,770

-

6,312

- carried at amortised cost

-

-

-

-

-

-

385

-

385

Liabilities under insurance contracts

29,479

11,820

1,473

6,021

25,068

-

-

-

73,861

Deferred tax

12

-

11

18

-

-

-

1,180

1,221

Other liabilities

-

-

-

-

-

-

-

8,577

8,577

Total liabilities

29,491

11,820

1,484

6,039

25,068

2,542

4,155

9,757

90,356

Total equity

-

-

-

-

-

-

-

10,366

10,366

Total equity and liabilities at31 December 2014

29,491

11,820

1,484

6,039

25,068

2,542

4,155

20,123

100,722

 

The Brazilian insurance operations and the UK pensions business are reported as disposal groups held for sale at 30 June 2015. The assets and liabilities of these disposal groups are included in the 'Other assets and liabilities' column of the table above.

These disposal groups contained a total of $12bn of total liabilities (mainly liabilities under insurance and investment contracts) and $12bn of total assets (mainly financial and reinsurance assets backing these liabilities and the PVIF associated with the insurance contracts) at 30 June 2015. The disposal of the UK pensions business is expected to be completed in the second half of 2015.

Insurance risk

Insurance risk is principally measured in terms of liabilities under the contracts in force.

A principal risk we face 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 and, if the policy has a savings element, the performance of the assets held to support the liabilities.

The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2014.

 

Footnotes to Risk

Credit risk

1 The amount of loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $70bn (30 June 2014: $60bn; 31 December 2014: $71bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at modest levels.

2 'Other commercial loans and advances' includes advances in respect of agriculture, transport, energy utilities and ABSs reclassified to 'Loans and advances'.

3 'Loans and advances to customers' includes asset-backed securities that have been externally rated as strong (30 June 2015: $812m; 30 June 2014: $1.8bn; 31 December 2014: $1.2bn), good (30 June 2015: $100m; 30 June 2014: $88m; 31 December 2014: $256m), satisfactory (30 June 2015: $125m; 30 June 2014: $54m; 31 December 2014: $332m), sub-standard (30 June 2015: $102m; 30 June 2014: $220m; 31 December 2014: $94m) and impaired (30 June 2015: $101m; 30 June 2014: $321m; 31 December 2014: $128m).

4 Corporate and commercial includes commercial real estate renegotiated loans of $2,547m (30 June 2014: $3,527; 31 December 2014: $2,724m) of which $656m (30 June 2014: $475m; 31 December 2014: $608m) were neither past due nor impaired, $1m (30 June 2014: $97m; 31 December 2014: $1m) were past due but not impaired and $1,890m (30 June 2014: $2,955m; 31 December 2014: $2,115m) were impaired.

5 'Financial' includes loans and advances to banks.

6 'Currency translation adjustment' is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.

7 Negative numbers are favourable: positive numbers are unfavourable.

Liquidity and funding

8 The most favourable metrics are a smaller advances to core funding and a larger stressed one month coverage ratio.

Market risk

9 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. For presentation purposes, portfolio diversification within the trading portfolio includes VaR-based RNIV.

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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