Last checked at 26 Aug 2015 16:32
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.