Annual Financial Report - 25 of 44

RNS Number : 1488A

HSBC Holdings PLC

27 March 2012

 



Risk management of insurance operations

(Audited)

HSBC's bancassurance model ..................................	171
Insurance risk in 2011 ............................................	171
Balance sheet of insurance manufacturing subsidiaries ..........................................................	173
Financial risks .........................................................	175
Present value of in-force long-term insurance business ............................................................................	181
Economic assumptions ...........................................	182
Non-economic assumptions ....................................	182

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 were no material changes to our policies and practices for the management of insurance risk, including the risks relating to different life and non-life products in 2011.

A summary of our policies and practices regarding insurance risk, and the main contracts we manufacture, is provided in the Appendix to Risk on page 188.

HSBC's bancassurance model

We operate a bancassurance model which provides insurance products for customers with whom we have a banking relationship. Insurance products are sold through all global businesses, mainly utilising retail branches, the internet and phone centres. RBWM customers attract the majority of sales and comprise the majority of policyholders.

Many of these insurance products are manufactured by our subsidiaries. Where we have scale, this allows us to retain the risks, within our appetite, and associated rewards with writing insurance contracts as both the underwriting profit and the commission paid by the manufacturer to the bank distribution channel are kept within the Group.

Where we do not have the risk appetite or operational scale to be effective, third parties are engaged to manufacture insurance products for sale through our banking network. We work with a limited number of market-leading partners to provide

the products. These arrangements earn us a commission.

Our bancassurance business operates in all six of our geographical regions with over 30 legal entities, the majority of which are subsidiaries of banking legal entities, manufacturing insurance products.

The insurance contracts we sell primarily relate to core underlying banking activities, such as savings and investment products, and credit life products.

Our manufacturing business concentrates on personal lines, e.g. contracts written for individuals. This focus on the higher volume, lower individual value personal lines contributes to diversifying risk.

Insurance risk in 2011

The 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.

In respect of financial risks, subsidiaries manufacturing products with guarantees are usually exposed to falls in market interest rates and equity prices to the extent that the market exposure cannot be managed by utilising any discretionary participation (or bonus) features ('DPF') within the policy.

This section provides disclosures on the management of financial risks specific to insurance operations, including credit risk, liquidity risk and market risk. The assets of the insurance manufacturing subsidiaries are included within the consolidated Group credit risk disclosures. The consolidated Group liquidity and market risk management disclosures exclude insurance operations as these risks are managed within the insurance entities using methodologies and processes appropriate to these insurance activities, but remain subject to oversight at Group level. Risk management disclosures specific to the insurance manufacturing subsidiaries are provided below.

The following tables analyse our insurance risk exposures by geographical region and by type of business.

Analysis of life insurance risk - liabilities to policyholders⁶⁶

(Audited)

	Europe		Hong          Kong		Rest of          Asia-       Pacific		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Life (non-linked) .........................................	1,163		21,460		1,227		982		2,094		26,926
Insurance contracts with DPF67 ...............	335		20,109		338		-		-		20,782
Credit life ................................................	219		-		58		34		-		311
Annuities .................................................	517		-		78		741		1,546		2,882
Term assurance and other long-term contracts .............................................	92		1,351		753		207		548		2,951
Life (linked) ................................................	2,508		3,393		476		-		4,833		11,210
Investment contracts with DPF67,68 .............	21,477		-		11		-		-		21,488
Insurance liabilities to policyholders ............	25,148		24,853		1,714		982		6,927		59,624
At 31 December 2010
Life (non-linked) .........................................	1,679		17,989		789		1,004		2,122		23,583
Insurance contracts with DPF67 ................	327		17,203		278		-		-		17,808
Credit life ................................................	565		-		72		36		2		675
Annuities .................................................	471		-		31		760		1,622		2,884
Term assurance and other long-term contracts .............................................	316		786		408		208		498		2,216
Life (linked) ................................................	2,274		3,235		485		-		4,502		10,496
Investment contracts with DPF67,68 .............	22,052		-		22		-		-		22,074
Insurance liabilities to policyholders ............	26,005		21,224		1,296		1,004		6,624		56,153

For footnotes, see page 185.

Our most significant life insurance products are investment contracts with DPF issued in France, insurance contracts with DPF issued in Hong Kong and unit-linked contracts issued in Latin America, Hong Kong and the UK.

 

Analysis of non-life insurance risk - net written insurance premiums^66,69

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	Europe		Hong          Kong		Rest of          Asia-       Pacific		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
2011
Accident and health .....................................	23		186		8		-		39		256
Motor .........................................................	-		17		25		-		328		370
Fire and other damage .................................	5		29		13		30		29		106
Liability ......................................................	1		16		5		-		1		23
Credit (non-life) ..........................................	6		-		-		48		1		55
Marine, aviation and transport ....................	-		10		3		-		25		38
Other non-life insurance contracts ..............	7		39		1		7		91		145
Total net written insurance premiums .........	42		297		55		85		514		993
Net insurance claims incurred and movement in liabilities to policyholders ....................	56		(127)		(26)		(22)		(231)		(350)
2010
Accident and health .....................................	78		174		8		3		37		300
Motor .........................................................	-		15		28		-		267		310
Fire and other damage .................................	38		29		11		16		22		116
Liability ......................................................	-		20		4		-		2		26
Credit (non-life) ..........................................	25		-		-		53		2		80
Marine, aviation and transport ....................	3		10		4		-		18		35
Other non-life insurance contracts ..............	20		39		1		9		84		153
Total net written insurance premiums .........	164		287		56		81		432		1,020
Net insurance claims incurred and movement in liabilities to policyholders ....................	(169)		(117)		(25)		(13)		(201)		(525)
	Europe		Hong           Kong		Rest of           Asia-        Pacific		North      America		Latin      America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
2009
Accident and health .....................................	94		160		7		3		23		287
Motor .........................................................	123		14		20		-		234		391
Fire and other damage .................................	72		22		8		16		22		140
Liability ......................................................	-		15		4		-		2		21
Credit (non-life) ..........................................	35		-		-		86		-		121
Marine, aviation and transport ....................	7		9		4		-		17		37
Other non-life insurance contracts ..............	24		32		1		12		58		127
Total net written insurance premiums .........	355		252		44		117		356		1,124
Net insurance claims incurred and movement in liabilities to policyholders ....................	(748)		(107)		(17)		(96)		(155)		(1,123)

For footnotes, see page 185.

(Audited)

Our motor business is written predominantly in Argentina. The UK motor book continued to run off and the business was sold in September 2011.

Our accident and health and fire and other damage to property contracts are written in all regions but mainly in Hong Kong.

Credit non-life insurance, which was historically originated in conjunction with the provision of loans, is concentrated in the US.

Balance sheet of insurance manufacturing subsidiaries

(Audited)

A principal tool we use to manage our exposure to insurance risk, in particular for life insurance contracts, is asset and liability matching.

The tables below show the composition of assets and liabilities by contract and by geographical region and demonstrate that there were sufficient assets to cover the liabilities to policyholders in each case at the end of 2011.

Balance sheet of insurance manufacturing subsidiaries by type of contract

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	Insurance contracts										Investment contracts
	With       DPF		Unit- linked		Annu-     ities		Term assur-    ance70		Non-life	With	With     DPF68		Unit- linked		Other		Other assets71		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Financial assets .......	20,520		10,355		2,531		3,398		1,656		20,745		7,843		4,103		7,219		78,370
- trading assets .....	-		-		3		-		24		-		-		-		-		27
- financial assets designated at fair value...................	1,730		10,101		426		594		206		5,491		7,191		1,515		1,616		28,870
- derivatives ........	23		1		-		-		-		231		7		89		7		358
- financial investments .......	15,523		1		1,778		2,540		791		13,732		-		1,913		4,008		40,286
- other financial assets .................	3,244		252		324		264		635		1,291		645		586		1,588		8,829
Reinsurance assets ...	12		903		441		196		250		-		-		-		42		1,844
PVIF72 ....................	-		-		-		-		-		-		-		-		4,092		4,092
Other assets and investment properties .............	384		6		14		188		169		744		28		34		753		2,320
Total assets .............	20,916		11,264		2,986		3,782		2,075		21,489		7,871		4,137		12,106		86,626
Liabilities under investment contracts:
- designated at fair value ..................	-		-		-		-		-		-		7,813		3,586		-		11,399
- carried at amortised cost	-		-		-		-		-		-		-		435		-		435
Liabilities under insurance contracts .............................	20,782		11,210		2,882		3,262		1,635		21,488		-		-		-		61,259
Deferred tax ............	15		-		21		6		1		-		-		-		931		974
Other liabilities .......	-		-		-		-		-		-		-		-		1,930		1,930
Total liabilities ........	20,797		11,210		2,903		3,268		1,636		21,488		7,813		4,021		2,861		75,997
Total equity ............	-		-		-		-		-		-		-		-		10,629		10,629
Total equity and liabilities73 ...........	20,797		11,210		2,903		3,268		1,636		21,488		7,813		4,021		13,490		86,626

Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)

	Insurance contracts										Investment contracts
	With       DPF		Unit-    linked		Annu-      ities		Term    assur-     ance70		Non-life	With	With     DPF68		Unit-    linked		Other		Other   assets71		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Financial assets .......	17,665		9,763		2,615		2,671		2,231		21,511		8,338		3,927		7,157		75,878
- trading assets .....	-		-		-		-		11		-		-		-		-		11
- financial assets designated at fair value	1,206		9,499		413		523		180		5,961		7,624		1,486		1,452		28,344
- derivatives ........	53		-		1		6		-		229		7		1		4		301
- financial investments .......	14,068		-		1,847		1,661		692		14,465		-		1,804		4,495		39,032
- other financial assets .................	2,338		264		354		481		1,348		856		707		636		1,206		8,190
Reinsurance assets ...	10		760		400		263		432		-		-		-		79		1,944
PVIF72 ....................	-		-		-		-		-		-		-		-		3,440		3,440
Other assets and investment properties ............	189		6		21		398		213		565		14		56		712		2,174
Total assets .............	17,864		10,529		3,036		3,332		2,876		22,076		8,352		3,983		11,388		83,436
Liabilities under investment contracts:
- designated at fair value...................	-		-		-		-		-		-		8,321		3,379		-		11,700
- carried at amortised cost	-		-		-		-		-		-		-		439		-		439
Liabilities under insurance contracts .............................	17,808		10,496		2,884		2,891		2,456		22,074		-		-		-		58,609
Deferred tax ...........	11		-		20		4		6		-		-		1		793		835
Other liabilities .......	-		-		-		-		-		-		-		-		2,075		2,075
Total liabilities ........	17,819		10,496		2,904		2,895		2,462		22,074		8,321		3,819		2,868		73,658
Total equity ............	-		-		-		-		-		-		-		-		9,778		9,778
Total equity and liabilities73 ...........	17,819		10,496		2,904		2,895		2,462		22,074		8,321		3,819		12,646		83,436

For footnotes, see page 185.

Balance sheet of insurance manufacturing subsidiaries by geographical region⁶⁶

(Audited)

	Europe		Hong          Kong		Rest of          Asia-       Pacific		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Financial assets ............................................	34,163		30,126		2,093		2,414		9,574		78,370
- trading assets ........................................	-		-		-		-		27		27
- financial assets designated at fair value ..	15,583		5,875		1,155		-		6,257		28,870
- derivatives ............................................	244		114		-		-		-		358
- financial investments ............................	15,531		19,858		617		1,846		2,434		40,286
- other financial assets ............................	2,805		4,279		321		568		856		8,829
Reinsurance assets .......................................	746		912		39		19		128		1,844
PVIF72 .........................................................	1,097		2,322		282		65		326		4,092
Other assets and investment properties .......	909		946		31		24		410		2,320
Total assets .................................................	36,915		34,306		2,445		2,522		10,438		86,626
Liabilities under investment contracts:
- designated at fair value ..........................	6,961		4,405		33		-		-		11,399
- carried at amortised cost .......................	-		-		-		-		435		435
Liabilities under insurance contracts ............	25,795		25,160		1,802		1,079		7,423		61,259
Deferred tax ................................................	352		408		60		28		126		974
Other liabilities ............................................	1,200		269		69		13		379		1,930
Total liabilities ............................................	34,308		30,242		1,964		1,120		8,363		75,997
Total equity ................................................	2,607		4,064		481		1,402		2,075		10,629
Total equity and liabilities73 .........................	36,915		34,306		2,445		2,522		10,438		86,626

	Europe		Hong           Kong		Rest of           Asia-        Pacific		North      America		Latin      America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Financial assets ............................................	36,233		26,278		1,651		2,548		9,168		75,878
- trading assets ........................................	-		-		-		-		11		11
- financial assets designated at fair value ..	16,133		5,550		1,106		-		5,555		28,344
- derivatives ............................................	238		50		12		-		1		301
- financial investments ............................	16,758		17,299		247		2,006		2,722		39,032
- other financial assets ............................	3,104		3,379		286		542		879		8,190
Reinsurance assets .......................................	974		770		33		23		144		1,944
PVIF72 .........................................................	1,102		1,734		165		141		298		3,440
Other assets and investment properties .......	1,060		743		26		9		336		2,174
Total assets .................................................	39,369		29,525		1,875		2,721		9,946		83,436
Liabilities under investment contracts:
- designated at fair value ..........................	7,359		4,300		41		-		-		11,700
- carried at amortised cost .......................	-		-		-		-		439		439
Liabilities under insurance contracts ............	27,475		21,515		1,381		1,169		7,069		58,609
Deferred tax ................................................	375		298		39		-		123		835
Other liabilities ............................................	1,354		289		58		12		362		2,075
Total liabilities ............................................	36,563		26,402		1,519		1,181		7,993		73,658
Total equity ................................................	2,806		3,123		356		1,540		1,953		9,778
Total equity and liabilities73 .........................	39,369		29,525		1,875		2,721		9,946		83,436

For footnotes, see page 185.

Financial risks

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The following table analyses the assets held in our insurance manufacturing subsidiaries at 31 December 2011 by type of contract, and provides a view of the exposure to financial risk. For linked contracts, which pay benefits to policyholders which are determined by reference to the value of the investments supporting the policies, we typically designate assets at fair value; for non-linked contracts, the classification of the assets is driven by the nature of the underlying contract.

Financial assets held by insurance manufacturing subsidiaries (Audited)
	Life linked	Life non-linked			Non-life		Other
	contracts74		contracts75		insurance76		assets71		Total
	US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Trading assets
Debt securities ......................................	-		3		-		-		3
Equity securities ...................................	-		-		24		-		24
Financial assets designated at fair value ....	17,292		9,756		206		1,616		28,870
Treasury bills .......................................	4		107		-		-		111
Debt securities ......................................	6,823		3,198		206		795		11,022
Equity securities ...................................	10,465		6,451		-		821		17,737
Financial investments
Held-to-maturity: debt securities...............	-		17,506		175		1,300		18,981
Available-for-sale: ...................................	1		17,980		616		2,708		21,305
- Treasury bills ....................................	-		-		-		-		-
- other eligible bills ..............................	-		-		-		50		50
- debt securities ....................................	-		17,963		599		2,520		21,082
- equity securities .................................	1		17		17		138		173
Derivatives ..............................................	8		343		-		7		358
Other financial assets77 ............................	897		5,709		635		1,588		8,829
Total financial assets73 ............................	18,198		51,297		1,656		7,219		78,370

Financial assets held by insurance manufacturing subsidiaries (continued)

	Life linked	Life non-linked			Non-life		Other
	contracts74		contracts75		insurance76		assets71		Total
	US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Trading assets
Debt securities ......................................	-		-		11		-		11
Equity securities ...................................	-		-		-		-		-
Financial assets designated at fair value ....	17,123		9,589		180		1,452		28,344
Treasury bills .......................................	10		119		-		10		139
Debt securities ......................................	6,660		3,281		180		847		10,968
Equity securities ...................................	10,453		6,189		-		595		17,237
Financial investments
Held-to-maturity: debt securities ..............	-		16,015		152		908		17,075
Available-for-sale: ...................................	-		17,830		540		3,587		21,957
- Treasury bills ....................................	-		10		-		31		41
- other eligible bills ..............................	-		36		140		217		393
- debt securities ....................................	-		17,776		391		3,210		21,377
- equity securities .................................	-		8		9		129		146
Derivatives ..............................................	7		290		-		4		301
Other financial assets77 ............................	971		4,665		1,348		1,206		8,190
Total financial assets73 ............................	18,101		48,389		2,231		7,157		75,878

For footnotes, see page 185.

Approximately 65.2% of financial assets were invested in debt securities at 31 December 2011 (2010: 65.1%) with 22.9% (2010: 22.9%) invested in equity securities.

In life linked insurance, premium income less charges levied is invested in a portfolio of assets. We manage the financial risks of this product on behalf of the policyholders by holding appropriate assets in segregated funds or portfolios to which the liabilities are linked. These assets represented 23.2% (2010: 23.9%) of the total financial assets of our insurance manufacturing subsidiaries at the end of 2011.

Market risk

(Audited)

Market risk arises when mismatches occur between product liabilities and the investment assets which
back them. For example, mismatches between asset and liability yields and maturities give rise to interest rate risk.

Long-term insurance or investment products may incorporate benefits that are guaranteed. Where mismatches exist as a result of current yields falling below guaranteed levels for a prolonged period the risk that shareholder capital is required to meet liabilities to policyholders may increase. The table below shows, in respect of each category of guarantee, the total liabilities to policyholders established for guaranteed products manufactured by our insurance subsidiaries. The table also shows the range of investment returns (net of operating costs) on the assets supporting these products and the implied investment returns that would enable the business to meet the guarantees.

Liabilities to policyholders⁷⁸

(Audited)

	2011						2010
	Amount of       reserve		Investment        returns implied by   guarantee73		Current           yields		Amount of           reserve		Investment        returns   implied by   guarantee73		Current           yields
	US$m		%		%		US$m		%		%
Annuities in payment .......................	1,414		0.0 - 9.6		4.2 - 25.2		1,491		0.0 - 8.5		1.5 - 16.2
Deferred annuities ............................	175		0.0 - 6.0		3.2 - 22.7		642		0.0 - 6.0		2.1 - 16.8
Immediate annuities .........................	538		6.0 - 12.0		5.3 - 5.4		532		6.0 - 12.0		5.5 - 5.5
Annual return ...................................	20,465		0.0 - 2.5		0.0 - 6.9		17,525		0.0 - 2.5		0.0 - 5.0
Annual return ...................................	3,849		2.5 - 4.5		3.3 - 10.0		2,455		2.5 - 4.5		1.8 - 5.9
Annual return ...................................	163		4.5 - 6.0		6.4 - 6.5		841		4.5 - 6.0		6.1 - 8.5
Capital .............................................	17,400		-		2.3 - 7.8		15,445		-		2.0 - 4.0

For footnotes, see page 185.

The following table illustrates the effects of various interest rate, equity price, foreign exchange rate and credit spread scenarios on our profit for the year and total equity of our insurance manufacturing subsidiaries.

Where appropriate, we include the impact of the stress on the PVIF in the results of the sensitivity tests. The relationship between the values of certain assets and liabilities and the risk factors may be non-linear and, therefore, the results disclosed cannot be extrapolated to measure sensitivities to different levels of stress. The sensitivities are stated before allowance for management actions which may mitigate the effect of changes in market rates, and for any factors such as policyholder behaviour that may change in response to changes in market risk.

Sensitivity of HSBC's insurance manufacturing subsidiaries to risk factors (Audited)
	2011				2010
	Effect on         profit for          the year		Effect on                total             equity		Effect on          profit for            the year		Effect on                 total               equity
	US$m		US$m		US$m		US$m
+ 100 basis points parallel shift in yield curves ...................	108		(178)		72		(132)
- 100 basis points parallel shift in yield curves ...................	(115)		191		(86)		131
10% increase in equity prices .............................................	106		106		76		76
10% decrease in equity prices .............................................	(164)		(164)		(76)		(76)
10% increase in US dollar exchange rate compared to all currencies ..............................................	31		31		21		21
10% decrease in US dollar exchange rate compared to all currencies ..............................................	(31)		(31)		(21)		(21)
Sensitivity to credit spread increases ..................................	(30)		(75)		(31)		(74)

 

Credit risk

(Audited)

Our exposure to credit risk products is included in the tables showing exposures to life and non-life insurance risk on pages 172 and 173.

Credit risk can give rise to losses through default and can lead to volatility in our income statement and balance sheet figures through movements in credit spreads, principally on the US$44.4bn (2010: US$43.3bn) non‑linked bond portfolio.

As tabulated above, the sensitivity of the net profit after tax of our insurance subsidiaries to the effects of increases in credit spreads is similar to 2010. The balance and related movement are small because about 80% of the debt securities held by our insurance subsidiaries are classified as either held to maturity or available for sale, and consequently any changes in the fair value of these financial investments, absent impairment, would have no effect on the profit after tax. We calculate the sensitivity using simplified assumptions based on a one-day movement in credit spreads over a two-year period. A confidence level of 99%, consistent with our Group VAR, is applied. Credit spreads have generally widened from the levels observed at the end of 2010; however, the expected increase this would generally cause has been offset by a refinement made to the calculation to better reflect how the risk is shared with the policyholder. Consequently, the sensitivity reported is consistent with that seen in 2010.

Credit quality

(Audited)

The following table presents an analysis of treasury bills, other eligible bills and debt securities within our insurance business by measures of credit quality. The five credit quality classifications are defined in the Appendix to Risk on page 188. Only assets supporting liabilities under non-linked insurance and investment contracts and shareholders' funds are included in the table as financial risk on assets supporting linked liabilities is predominantly borne by the policyholder. 86.6% (2010: 90.5%) of the assets included in the table are invested in investments rated as strong.

Treasury bills, other eligible bills and debt securities in HSBC's insurance manufacturing subsidiaries

(Audited)

	Neither past due nor impaired
	Strong		Good		Satisfactory		Sub-standard		Total
	US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Supporting liabilities under non-linked insurance and investment contracts
Trading assets - debt securities ..............................	1		-		2		-		3
Financial assets designated at fair value ..................	2,851		168		349		143		3,511
- treasury and other eligible bills ........................	107		-		-		-		107
- debt securities .................................................	2,744		168		349		143		3,404
Financial investments ............................................	32,062		2,716		1,269		196		36,243
- treasury and other similar bills ........................	-		-		-		-		-
- other eligible bills ............................................	-		-		-		-		-
- debt securities .................................................	32,062		2,716		1,269		196		36,243
	34,914		2,884		1,620		339		39,757
Supporting shareholders' funds79
Financial assets designated at fair value ..................	341		348		61		45		795
- treasury and other eligible bills ........................	-		-		-		-		-
- debt securities .................................................	341		348		61		45		795
Financial investments ............................................	3,198		560		83		29		3,870
- treasury and other similar bills ........................	-		-		-		-		-
- other eligible bills ............................................	50		-		-		-		50
- debt securities .................................................	3,148		560		83		29		3,820
	3,539		908		144		74		4,665
Total73
Trading assets - debt securities ..............................	1		-		2		-		3
Financial assets designated at fair value ..................	3,192		516		410		188		4,306
- treasury and other eligible bills ........................	107		-		-		-		107
- debt securities .................................................	3,085		516		410		188		4,199
Financial investments ............................................	35,260		3,276		1,352		225		40,113
- treasury and other similar bills ........................	-		-		-		-		-
- other eligible bills ............................................	50		-		-		-		50
- debt securities .................................................	35,210		3,276		1,352		225		40,063
	38,453		3,792		1,764		413		44,422

	Neither past due nor impaired
	Strong		Good		Satisfactory		Sub-standard		Total
	US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Supporting liabilities under non-linked insurance and investment contracts
Trading assets - debt securities ..........................................	9		-		2		-		11
Financial assets designated at fair value .............................	3,126		88		330		36		3,580
- treasury and other eligible bills ...................................	118		-		1		-		119
- debt securities .............................................................	3,008		88		329		36		3,461
Financial investments .......................................................	32,164		1,948		250		158		34,520
- treasury and other similar bills ....................................	-		-		10		-		10
- other eligible bills .......................................................	176		-		-		-		176
- debt securities .............................................................	31,988		1,948		240		158		34,334
	35,299		2,036		582		194		38,111
Supporting shareholders' funds79
Financial assets designated at fair value .............................	492		286		75		4		857
- treasury and other eligible bills ...................................	10		-		-		-		10
- debt securities .............................................................	482		286		75		4		847
Financial investments .......................................................	3,443		740		101		82		4,366
- treasury and other similar bills ....................................	-		-		31		-		31
- other eligible bills .......................................................	217		-		-		-		217
- debt securities .............................................................	3,226		740		70		82		4,118
	3,935		1,026		176		86		5,223
Total73
Trading assets - debt securities ..........................................	9		-		2		-		11
Financial assets designated at fair value .............................	3,618		374		405		40		4,437
- treasury and other eligible bills ...................................	128		-		1		-		129
- debt securities .............................................................	3,490		374		404		40		4,308
Financial investments .......................................................	35,607		2,688		351		240		38,886
- treasury and other similar bills ....................................	-		-		41		-		41
- other eligible bills .......................................................	393		-		-		-		393
- debt securities .............................................................	35,214		2,688		310		240		38,452
	39,234		3,062		758		280		43,334

For footnotes, see page 185.

Credit risk also arises when part of the insurance risk we incur is assumed by reinsurers. The split of liabilities ceded to reinsurers and outstanding reinsurance recoveries, analysed by credit quality, is shown below. Our exposure to third parties under the reinsurance agreements described in the Appendix to Risk on page 188 is included in this table.

Reinsurers' share of liabilities under insurance contracts

(Audited)

	Neither past due nor impaired								Past due
	Strong		Good		Satisfactory		Sub-   standard		but not    impaired		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Linked insurance contracts ..........................	45		858		-		-		-		903
Non-linked insurance contracts ...................	782		10		104		3		-		899
Total73 ........................................................	827		868		104		3		-		1,802
Reinsurance debtors .....................................	18		2		9		1		12		42

Reinsurers' share of liabilities under insurance contracts (continued)

	Neither past due nor impaired								Past due
	Strong		Good		Satisfactory		Sub-      standard		but not      impaired		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2010
Linked insurance contracts ..........................	44		716		-		-		-		760
Non-linked insurance contracts ...................	997		11		76		12		9		1,105
Total73 ........................................................	1,041		727		76		12		9		1,865
Reinsurance debtors .....................................	30		8		30		1		10		79

For footnote, see page 185.

Liquidity risk

(Audited)

The following tables show the expected undiscounted cash flows for insurance contract liabilities and the remaining contractual maturity of investment contract liabilities at 31 December 2011. A significant proportion of our non-life insurance business is viewed as short-term, with the settlement of liabilities expected to occur within one year of the period of risk. There is a greater spread of expected maturities for the life business where, in a large proportion of cases, the liquidity risk is borne in conjunction with policyholders (wholly owned by the policyholder in the case of unit-linked business).

The profile of the expected maturity of the insurance contracts as at 31 December 2011 remained comparable with 2010.

Expected maturity of insurance contract liabilities

(Audited)

	Expected cash flows (undiscounted)
	Within 1 year		1-5 years		5-15 years		Over 15 years		Total
	US$m		US$m		US$m		US$m		US$m
At 31 December 2011
Non-life insurance ...................................	742		704		176		13		1,635
Life insurance (non-linked) ......................	2,006		12,243		21,332		25,990		61,571
Life insurance (linked) .............................	920		3,262		9,070		15,546		28,798
Total73 ....................................................	3,668		16,209		30,578		41,549		92,004
At 31 December 2010
Non-life insurance ...................................	1,140		1,157		83		76		2,456
Life insurance (non-linked) ......................	2,463		11,178		18,839		21,093		53,573
Life insurance (linked) .............................	485		2,557		6,366		10,724		20,132
Total73 ....................................................	4,088		14,892		25,288		31,893		76,161

For footnote, see page 185.

Remaining contractual maturity of investment contract liabilities

(Audited)

	Liabilities under investment contracts by insurance manufacturing subsidiaries
	Linked     investment         contracts		Other     investment         contracts		Investment         contracts         with DPF		Total
	US$m		US$m		US$m		US$m
At 31 December 2011
Remaining contractual maturity:73
- due within 1 year .........................................................	191		438		8		637
- due between 1 and 5 years ............................................	595		-		3		598
- due between 5 and 10 years ..........................................	548		-		-		548
- due after 10 years ........................................................	2,063		-		-		2,063
- undated80 .....................................................................	4,416		3,583		21,477		29,476
	7,813		4,021		21,488		33,322

	Liabilities under investment contracts by insurance manufacturing subsidiaries
	Linked       investment          contracts		Other       investment          contracts		Investment          contracts          with DPF		Total
	US$m		US$m		US$m		US$m
At 31 December 2010
Remaining contractual maturity:73
- due within 1 year .........................................................	391		446		11		848
- due between 1 and 5 years ............................................	940		-		11		951
- due between 5 and 10 years ..........................................	1,182		-		-		1,182
- due after 10 years ........................................................	2,133		-		-		2,133
- undated80 .....................................................................	3,675		3,372		22,052		29,099
	8,321		3,818		22,074		34,213

For footnotes, see page 185.

Present value of in-force long-term insurance business

(Audited)

Our life insurance business is accounted for using the embedded value approach which, inter alia, provides a comprehensive risk and valuation framework. The PVIF asset at 31 December 2011 was US$4.1bn (2010: US$3.4bn), representing the present value of the shareholders' interest in the profits expected to emerge from the book of in-force policies at that date.

The PVIF calculation projects expected cash flows, adjusted for a variety of assumptions made by each insurance operation to reflect local market conditions and management's judgement of future trends. The main assumptions made relate to economic and non-economic assumptions and policyholder behaviour. By definition, assumptions are subject to risk and uncertainty and can result in volatility in the results of the insurance business.

The key drivers of the movement in the value of the PVIF asset are the expected cash flows from new business adjusted for anticipated maturities and assumptions relating to policyholder behaviour ('Value of new business written during the year'), the unwind of the discount rate less the reversal of expected cash flows for the period ('Expected return'), changes in non-economic operating assumptions such as mortality or lapse rates ('Change in operating assumptions'), impacts arising from changes in projected future cash flows associated with operating assumption experience variances compared to those assumed at the start of the period ('Experience variances'), changes related to future investment returns ('Changes in investment assumptions') and the impact of actual investment experience on future cash flows compared to those assumed at the start of the period ('Investment return variances').

During 2011 the calculation of the PVIF asset was refined to allow greater comparability and consistency across the Group's insurance operations. This was achieved by incorporating explicit margins and allowances for certain risks and uncertainties, where implicit adjustments to the risk discount rate have been made in the past.

The valuation now includes explicit risk margins for non-economic risks in the projection assumptions and explicit allowances for financial options and guarantees using stochastic methods. Risk discount rates are now set on an active basis with reference to market risk free yields and have been reduced as a result of removing the implicit adjustments, as shown in the key assumptions table below. It should be noted that these refinements will introduce greater volatility within reported results in the future which is reflected in higher sensitivity impacts, including sensitivities to lapse, mortality and/or morbidity.

A one-off gain of US$243m is included in 'Other adjustments' in the table below which represents the impact of these refinements on the in‑force book.

The following table shows the movements recorded during the year in respect of total equity and PVIF of insurance operations.

Movements in total equity and PVIF of insurance operations

(Audited)

	2011				2010
	PVIF		Total             equity		PVIF		Total               equity
	US$m		US$m		US$m		US$m
At 1 January ......................................................................	3,440		9,778		2,780		8,580
Value of new business written during the year81 ...................	943				737
Movements arising from in-force business:
- expected return ...........................................................	(428)				(85)
- experience variances82 .................................................	1				20
- changes in operating assumptions ................................	(222)				58
Investment return variances ...............................................	(103)				19
Changes in investment assumptions ...................................	294				(38)
Other adjustments ..............................................................	241				(6)
Change in PVIF of long-term insurance business .................	726		726		705		705
Return on net assets ...........................................................	-		1,057		-		858
Capital transactions ...........................................................	-		(500)		-		(149)
Disposals of subsidiaries/portfolios .....................................	-		(96)		-		-
Exchange differences and other ..........................................	(74)		(336)		(45)		(216)
At 31 December .................................................................	4,092		10,629		3,440		9,778

For footnotes, see page 185.

Key assumptions used in the computation of PVIF for main life insurance operations

	2011						2010
	UK		Hong Kong		France		UK		Hong Kong		France
	%		%		%		%		%		%
Risk free rate ................................................	2.24		1.47		2.77		3.46		3.10		3.15
Risk discount rate .........................................	2.74		8.00		5.95		7.00		11.00		8.00
Expense inflation .........................................	3.45		3.00		2.00		3.76		3.00		2.00

Economic assumptions

(Audited)

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 may be non-linear and the results of the sensitivity testing should not be extrapolated to higher levels of stress. In calculating the scenario for 2010, the shift in the risk-free rate resulted in changes to investment returns and bonus rates. During 2011, the scenario was updated and the shift in risk-free rate also now includes changes to the risk discount rate as a consequence of the refinements to PVIF methodology as described above, which in turn results in a reduction to the overall stress impact. The sensitivities shown are before actions that could be taken by management to mitigate effects and before resultant changes in policyholder behaviour.

Sensitivity of PVIF to changes in economic assumptions

(Audited)

	PVIF at 31 December
	2011		2010
	US$m		US$m
+ 100 basis point shift in risk-free rate ............	128		231
- 100 basis point shift in risk-free rate ............	(91)		(190)

Non-economic assumptions

(Audited)

We determine the policyholder liabilities for non-life manufacturers by reference to non-economic assumptions including claims costs and expense rates.

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 for 2011 and total equity at 31 December 2011 to reasonably possible changes in these non-economic assumptions at that date across all our insurance manufacturing subsidiaries, with comparatives for 2010.

The cost of claims is a risk associated with non-life insurance business. An increase in claims costs would have a negative effect on profit. Our main exposures to this scenario are in Hong Kong, Latin America and Bermuda. Sensitivities have decreased since 2010 due to the non-renewal and transfer to third parties of certain contracts in our Irish business as well as the disposal of the motor business in the UK during 2011.

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, Hong Kong and the US.

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 premium income on the lapsed policies. France, Hong Kong and the UK are where we are most sensitive to a change in lapse rates.

Expense rate risk is the exposure to a change in expense rates. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative impact on our profits.

Sensitivity analysis

(Audited)

	Effect on profit for the year to 31 December						Effect on total equity at 31 December
	Life		Non-life		Total		Life		Non-life		Total
	US$m		US$m		US$m		US$m		US$m		US$m
2011
20% increase in claims costs ........................	-		(135)		(135)		-		(135)		(135)
20% decrease in claims costs .......................	-		135		135		-		135		135
10% increase in mortality and/or morbidity rates ........................................................	(100)		-		(100)		(100)		-		(100)
10% decrease in mortality and/or morbidity rates ........................................................	110		-		110		110		-		110
50% increase in lapse rates ..........................	(349)		-		(349)		(349)		-		(349)
50% decrease in lapse rates ..........................	609		-		609		609		-		609
10% increase in expense rates .....................	(89)		(12)		(101)		(89)		(12)		(101)
10% decrease in expense rates .....................	89		12		101		89		12		101
2010
20% increase in claims costs ........................	-		(211)		(211)		-		(211)		(211)
20% decrease in claims costs .......................	-		211		211		-		211		211
10% increase in mortality and/or morbidity rates ........................................................	(55)		-		(55)		(55)		-		(55)
10% decrease in mortality and/or morbidity rates ........................................................	66		-		66		66		-		66
50% increase in lapse rates ..........................	(203)		-		(203)		(203)		-		(203)
50% decrease in lapse rates ..........................	363		-		363		363		-		363
10% increase in expense rates .....................	(63)		(11)		(74)		(63)		(11)		(74)
10% decrease in expense rates .....................	63		11		74		63		11		74

Other material risks

Reputational risk

(Unaudited)

The safeguarding of our reputation is paramount. It is the responsibility of all members of staff who are supported by a global risk management structure underpinned by relevant policies and practices, readily available guidance, and regular training.

As discussed in the Group Chief Executive's Business Review, we are placing a fresh emphasis on values at HSBC, so that our employees are empowered to do the right thing and to act with courageous integrity. In 2011, we made HSBC Values more explicit to ensure we meet the expectations of society, customers, regulators and investors. Those values are that we are dependable; open to different ideas and cultures; and connected to customers, communities, regulators and investors.

The Group acknowledges that it has not always got this right in the past and that its conduct in relation to the NHFA Limited, leading to the imposition of a financial penalty, fell below the standards we set for ourselves and required by regulation. We recognise that our reputation was damaged by this incident and we have committed to a robust process of review of past sales which, in appropriate cases, will lead to full and proper customer compensation. We will take responsibility for all NHFA Limited customers, including those from before HSBC bought the company, which is beyond the requirements of the terms agreed with the FSA.

In addition, we have reviewed sales procedures applicable to potentially vulnerable categories of customers on a global basis and will apply a consistent approach to such services to a global minimum and a robust standard, which fully respects the letter and spirit of all relevant regulatory requirements.

We continue to work to resolve previously-disclosed regulatory issues in the US relating to anti-money laundering ('AML') and compliance controls and foreclosure procedures in full co-operation with our relevant regulators. We are committed to maintaining robust AML and compliance controls in all our businesses.

Pension risk

(Unaudited)

We operate a number of pension plans throughout the world. Some are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan').

There were no material changes to our policies and procedures for the management of pension risk in 2011.

During 2011, the net liability under the Group's defined benefit pension plans reduced from US$2.9bn to US$0.2bn. This was principally due to growth in the value of the principal plan's assets outstripping the comparable growth in liabilities.

The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from accrued benefits as they fall due to be paid. The trustee of the principal plan is required to produce a written Statement of Investment Principles which governs decision-making about how investments are made.

In 2006, HSBC and the trustee of the principal plan agreed to change the investment strategy in order to reduce the investment risk. The target asset allocations for this strategy at that time, at the last year-end and as revised in 2011, demonstrating the ongoing evolution of the strategy, are shown below. The strategy is to hold the majority of assets in bonds, with the remainder in a more diverse range of investments, and includes a commitment to undertake a programme of swap arrangements (see Note 45 on the Financial Statements) by which the principal plan makes LIBOR-related interest payments in exchange for the receipt of cash flows which are based on projected future benefit payments to be made from the principal plan.

The DBS principal plan - asset allocation

	2011		2010		2006
	%		%		%
Equities .......................	15.5		15.5		15.0
Bonds ..........................	60.5		56.5		50.0
Alternative assets83 .....	9.5		10.5		10.0
Property .....................	9.0		9.0		10.0
Cash ............................	5.5		8.5		15.0
	100.0		100.0		100.0

For footnote, see page 185.

Sustainability risk

(Unaudited)

Assessing the environmental and social impacts of providing finance to our customers is integral to our overall risk management processes.

There were no material changes to our policies and procedures for the management of sustainability risk in 2011.

A summary of our current policies and practices regarding reputational risk, pension risk and sustainability risk is provided in the Appendix to Risk on page 188.

Footnotes to Risk

Credit risk

  1 Includes loan impairment charges relating to assets reclassified as held for sale.

  2 2010 comparative data have not been separately presented as the amounts are insignificant.

  3 The amount of the 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 US$171bn (2010: US$220bn), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest levels.

  4 Residential mortgages include Hong Kong Government Home Ownership Scheme loans of US$3.3bn at 31 December 2011 (2010: US$3.5bn). Where disclosed, earlier comparatives were 2009: US$3.5bn; 2008: US$3.9bn; 2007: US$3.9bn.

  5 Other personal loans and advances include second lien mortgages and other property-related lending.

  6 These categories were formerly combined under a single heading, 'Commercial, industrial and international trade'.

  7 Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities.

  8 During 2011 the Group adopted a more stringent treatment for the presentation of impaired loans for geographical regions with significant levels of forbearance. As a result loans and advances have been classified as impaired that under the previous disclosure convention would otherwise have been classified as neither past due nor impaired or past due but not impaired. The comparative balances for 2010 were restated to comply with the revised segmentation, restatement of comparatives prior to 2010 is impracticable (see page 133, 'Impaired loans disclosure' for further details).

  9 The impairment allowances on loans and advances to banks in 2011 relate to the geographical regions, Europe and North America.

10 The impairment allowances on loans and advances to banks in 2010 relate to geographical regions, Europe, Middle East and North Africa, and North America.

11 Our available-for-sale holdings in sovereign and agency debt of Italy and Spain include debt held to support insurance contracts which provide discretionary profit participation to policyholders. For such contracts, unrealised movements in liabilities are recognised in other comprehensive income, following the treatment of the unrealised movements on related available-for-sale assets. To the extent that the movements are matched, no movement in the available-for-sale reserve is recognised. For those available-for-sale debt instruments described above that are not held to support insurance contracts which provide discretionary profit participation to policyholders, the available-for-sale reserves at 31 December 2011 were insignificant.

12 Derivative assets net of collateral and derivative liabilities for which a legally enforceable right of offset exists.

13 Includes residential mortgages of HSBC Bank USA and HSBC Finance.

14 Comprising Hong Kong, Rest of Asia-Pacific, Middle East and North Africa, and Latin America.

15 HSBC Finance lending is shown on a management basis and includes loans transferred to HSBC USA Inc. which are managed by HSBC Finance.

16 Property acquired through foreclosure is initially recognised at the lower of the carrying amount of the loan or its fair value less estimated costs to sell ('Initial Foreclosed Property Carrying Amount'). The average loss on sale of foreclosed properties is calculated as cash proceeds less the Initial Foreclosed Properties Carrying Amount divided by the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g. real estate tax advances) and were incurred prior to our taking title to the property. This ratio represents the portion of our total loss on foreclosed properties that occurred after we took title to the property. The comparative data are restated (previously divided by the Initial Foreclosed Property Carrying Amount).

17 The average total loss on foreclosed properties includes both the loss on sale of the foreclosed property as discussed in footnote 16 and the cumulative write-downs recognised on the loans up to the time we took title to the property. This calculation of the average total loss on foreclosed properties uses the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g. real estate tax advances) and were incurred prior to our taking title to the property.

18 Percentages are expressed as a function of the relevant loans and receivables balance.

19 Impairment allowances are not reported for financial instruments whereby the carrying amount is reduced directly for impairment and not through the use of an allowance account.

20 Impairment is not measured for assets held in trading portfolios or designated at fair value as assets in such portfolios are managed according to movements in fair value, and the fair value movement is taken directly to the income statement. Consequently, we report all such balances under 'Neither past due nor impaired'.

21 Loans and advances to customers includes asset-backed securities that have been externally rated as strong (2011: US$3.5bn; 2010: US$4.1bn), good (2011: US$476m; 2010: US$627m), satisfactory (2011: US$428m; 2010: US$452m), sub-standard (2011: US$556m; 2010: US$669m) and impaired (2011: US$229m; 2010: US$29m).

22 Included in this category are loans of US$2.9bn (2010: US$3.7bn) that have been re-aged once and were less than 60 days past due at the point of re-age. These loans are not classified as impaired following re-age due to the overall expectation that these customers will perform on the original contractual terms of their borrowing in the future.

23 Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10, retail loans 90 days or more past due, unless individually they have been assessed as not impaired (see page 128, 'Past due but not impaired gross financial instruments') and renegotiated loans and advances meeting the criteria to be disclosed as impaired (see page 133).

24 Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.

25 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8 but excluding retail loans 90 days past due and renegotiated loans and advances meeting the criteria to be disclosed as impaired.

26 Included within 'Exchange and other movements' is US$1.6bn of impairment allowances reclassified to held for sale.

27 Net of repo transactions, settlement accounts and stock borrowings.

28 As a percentage of loans and advances to banks and loans and advances to customers, as applicable.

29 Includes movement in impairment allowances against banks.

30 See table below 'Net loan impairment charge to the income statement by geographical region'.

31 Collectively assessed impairment allowances are allocated to geographical segments based on the location of the office booking the allowances or provisions. Consequently, the collectively assessed impairment allowances booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in Rest of Asia-Pacific, as well as those booked in Hong Kong.

32 The table presents the carrying amount of collateral and other credit enhancements obtained which are held at the reporting date. In previous years we presented the amount of collateral and other credit enhancements obtained during the year. This resulted from a change to the disclosure requirements under IFRSs.

33 Carrying amount of the net principal exposure.

34 Total includes holdings of ABSs issued by The Federal Home Loan Mortgage Corporation ('Freddie Mac') and The Federal National Mortgage Association ('Fannie Mae').

35 'Directly held' includes assets held by Solitaire where we provide first loss protection and assets held directly by the Group.

36 Impairment charges allocated to capital note holders represent impairments where losses would be borne by external third-party investors in the structures.

37 The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption amounts through the residual life of the security.

38 A credit default swap ('CDS') gross protection is the gross principal of the underlying instrument that is protected by CDSs.

39 Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from monoline protection, except where this protection is purchased with a CDS.

40 Net exposure after legal netting and any other relevant credit mitigation prior to deduction of the credit valuation adjustment.

41 Cumulative fair value adjustment recorded against exposures to OTC derivative counterparties to reflect their creditworthiness.

42 Funded exposures represent the loan amount advanced to the customer, less any fair value write-downs, net of fees held on deposit. Unfunded exposures represent the contractually committed loan facility amount not yet drawn down by the customer, less any fair value write-downs, net of fees held on deposit.

Liquidity and funding

43 As a result of the significant level of disposal groups held for sale at 31 December 2011, the financial liabilities of the disposal groups held for sale has been separately shown in the table. For further details of the disposal groups held for sale refer to Note 27.

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

45 Figures provided for HSBC Bank plc and The Hongkong and Shanghai Banking Corporation incorporate all overseas branches. Subsidiaries of these entities are not included unless there is unrestricted transferability of liquidity between them and the parent.

46 Part of the improvement in the advances to core funding ratio and stressed one month coverage ratio for HSBC Bank USA is due to a change in its inherent liquidity risk categorisation during 2011. The change in categorisation was due to an improvement in the overall liquidity risk in US banking sector and the strong liquidity profile of HSBC Bank USA. If this change had not been made, the advances to core funding ratio for 2011 would have been as follows: year end, 96.8%; maximum, 99.7%; minimum, 86.4%; average, 93.5%. The stressed one month coverage ratio would have been as follows: year end, 105.4%; maximum, 116.3%; minimum, 98.5%; average, 108.2%. For further details of our inherent liquidity risk categorisation refer to the Appendix to Risk on page 188.

47 This comprises our other main banking subsidiaries and, as such, includes businesses spread across a range of locations, in many of which we may require a higher ratio of net liquid assets to customer liabilities to reflect local market conditions.

48 Unused committed sources of secured funding for which eligible assets were held.

49 Client-originated asset exposures relate to consolidated multi-seller conduits, primarily Regency and Bryant Park. These vehicles provide funding to our customers by issuing debt secured by a diversified pool of customer-originated assets. The 2010 comparative for HSBC Bank plc has been restated to include a US$0.6bn committed facility provided to Bryant Park. In 2011 a committed line of US$3.3bn was provided to Bryant Park by HSBC Bank plc which has been reflected in these figures. The reduction in contingent risk exposure in HSBC Bank USA in 2011 is primarily due to the transfer of the majority of the committed lines provided for Bryant Park LLC to HSBC Bank plc.

50 HSBC-managed asset exposures relate to consolidated securities investment conduits, primarily Solitaire and Mazarin (see page 403). These vehicles issue debt secured by ABSs which are managed by HSBC. HSBC has a total contingent liquidity risk of US$22.1bn (2010: US$25.6bn) of which Solitaire represents US$9.3bn already funded on-balance sheet as at 31 December 2011 (2010: US$8.1bn) leaving a net contingent exposure of US$12.8bn (2010: US$17.5bn). As at 31 December 2011, US$6.2bn (2010: US$8.4bn) of the net contingent liability is on the Commercial Paper issued by Mazarin and entirely held by HSBC.

51 Other conduit exposures relate to third-party sponsored conduits (see page 405).

52 The undrawn balance for the five largest committed liquidity facilities provided to customers other than facilities to conduits.

53 The undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than facilities to conduits.

Market risk

54 The structural foreign exchange risk is monitored using sensitivity analysis (see page 166). The reporting of commodity risk is consolidated with foreign exchange risk and is not applicable to non-trading portfolios.

55 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group VAR. The management of this risk is described on page 168.

56 Credit spread sensitivity is reported separately for insurance operations (see page 177).

57 2010 VAR comparatives have been adjusted to include credit spread risk to allow for a like for like comparison. In the Annual Report and Accounts 2010, we reported the following measures for Group VAR for 2010: at 31 December US$267m, average US$200m, minimum US$140m, and maximum US$286m.

58 The standard deviation measures the variation of daily revenues about the mean value of those revenues.

59 Revenues within the daily distribution graph include all revenues booked in Global Markets (gross of brokerage fees), Balance Sheet Management, and the trading element of revenues booked in the GPB and RBWM businesses. The effect of any month-end adjustments, not attributable to a specific daily market move, is spread evenly over the days in the month in question.

60 Trading intent portfolios include positions arising from market-making and position taking.

61 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.

62 The total VAR is non-additive across risk types due to diversification effects.

63 Investments in private equity are primarily made through managed funds that are subject to limits on the amount of investment. Potential new commitments are subject to risk appraisal to ensure that industry and geographical concentrations remain within acceptable levels for the portfolio as a whole. Regular reviews are performed to substantiate the valuation of the investments within the portfolio.

64 Investments held to facilitate ongoing business include holdings in government-sponsored enterprises and local stock exchanges.

65 Instead of assuming that all interest rates move together, we group our interest rate exposures into currency blocs whose rates are considered likely to move together.

Risk management of insurance operations

66 HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa.

67 Insurance contracts and investment contracts with discretionary participation features ('DPF') can give policyholders the contractual right to receive, as a supplement to their guaranteed benefits, additional benefits that may be a significant portion of the total contractual benefits, but whose amount and timing are determined by HSBC. These additional benefits are contractually based on the performance of a specified pool of contracts or assets, or the profit of the company issuing the contracts.

68 Although investment contracts with DPF are financial investments, HSBC continues to account for them as insurance contracts as permitted by IFRS 4.

69 Net written insurance premiums represent gross written premiums less gross written premiums ceded to reinsurers.

70 Term assurance includes credit life insurance.

71 Other assets comprise shareholder assets and assets and liabilities classified as 'held for sale'.

72 Present value of in-force long-term insurance contracts and investment contracts with DPF.

73 Does not include associated insurance companies, Ping An, SABB Takaful Company and Bao Viet, or joint venture insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.

74 Comprise life linked insurance contracts and linked long-term investment contracts.

75 Comprise life non-linked insurance contracts and non-linked long-term investment contracts.

76 Comprises non-life insurance contracts.

77 Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.

78 The table excludes contracts where the risk is 100% reinsured.

79 Shareholders' funds comprise solvency and unencumbered assets.

80 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies. These may be significantly lower than the amounts shown.

81 Value of net new business during the year is the present value of the projected stream of profits from the business.

82 Experience variances include the effect of the difference between demographic, expense and persistency assumptions used in the previous PVIF calculation and actual experience observed during the year to the extent this impacts profits on future business.

Pension risk

83 In 2010 and 2011, alternative assets included ABSs, MBSs and infrastructure assets. In 2006, alternative assets included loans and infrastructure assets.

 

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