Annual Financial Report - 32 of 54

RNS Number : 0469I

HSBC Holdings PLC

20 March 2015

 



Risk management of insurance operations

(Audited)

	Page		App1		Tables	Page
HSBC's bancassurance model	190
Overview of insurance products			231
Nature and extent of risks			232
Risk management of insurance operations in 2014	191
Asset and liability matching	191				Balance sheet of insurance manufacturing subsidiaries:
					-  by type of contract	191
					-  by geographical region	193
					Movement in total equity of insurance operations	193
Financial risks	194		232		Financial assets held by insurance manufacturing subsidiaries	194
Market risk	194		232		Financial return guarantees	195
					Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors	195
Credit risk	196		234		Treasury bills, other eligible bills and debt securities in HSBC's insurance manufacturing subsidiaries	1196
					Reinsurers' share of liabilities under insurance contracts	197
Liquidity risk	197		234		Expected maturity of insurance contract liabilities	197
					Remaining contractual maturity of investment contract liabilities	197
Insurance risk	198		235		Analysis of insurance risk - liabilities under insurance contracts	198
Sensitivities to non-economic assumptions	198				Sensitivity analysis	198
1. Appendix to Risk - policies and practices.

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 risks arising in the insurance operations in 2014.

A summary of HSBC's policies and practice regarding the risk management of insurance operations and the main contracts we manufacture is provided in the Appendix to Risk on page 231.

HSBC's bancassurance model

(Unaudited)

We operate an integrated bancassurance model which provides insurance products principally for customers with whom we have a banking relationship. Insurance products are sold through all global businesses, but predominantly by RBWM and CMB through our branches and direct channels worldwide.

The insurance contracts we sell relate to the underlying needs of our banking customers, which we can identify from our point-of-sale contacts and customer knowledge. The majority of sales are of savings and investment products and term and credit life contracts.
By focusing largely on personal and SME lines of business we are able to optimise volumes and diversify individual insurance risks.

Where we have operational scale and risk appetite, mostly in life insurance, these insurance products are manufactured by HSBC subsidiaries. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts by keeping part of the underwriting profit, investment income and distribution commission within the Group.

Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage with a handful of leading external insurance companies in order to provide insurance products to our customers through our banking network and direct channels. These arrangements are generally structured with our exclusive strategic partners and earn the Group a combination of commissions, fees and a share of profits.

We distribute insurance products in all of our geographical regions. We have core life insurance manufacturing entities, the majority of which are direct subsidiaries of legal banking entities, in seven countries (Argentina, Brazil, Mexico, France, the UK, Hong Kong and Singapore). There are also life insurance manufacturing subsidiaries in mainland China, Malaysia and Malta.

Risk management of insurance operations in 2014

We measure the risk profile of our insurance manufacturing businesses using an economic capital approach, where assets and liabilities are measured on a market value basis and a capital requirement is held to ensure that there is less than a 1 in 200 chance of insolvency over the next year, given the risks that the businesses are exposed to. In 2014 we aligned the measurement approach for market, credit and insurance risks in the economic capital model to the new pan‑European Solvency II insurance capital regulations, which are applicable from 2016.

The risk profile of our life insurance manufacturing businesses did not change materially during 2014 and liabilities to policyholders on these contracts remained constant at US$74bn (2013: US$74bn). However, a notable change arose in the UK where HSBC Life (UK) Ltd entered into an agreement to sell its pensions business. The full effect will only be recognised once regulatory approval is received and the portfolio is transferred to the purchaser.

Asset and liability matching

(Audited)

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 to support projected liabilities from non-linked contracts.

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 2014.

Balance sheet of insurance manufacturing subsidiaries by type of contract

(Audited)

		Insurance contracts								Investment contracts
		With DPF		Unit- linked		Annuities		Other40		With DPF41		Unit- linked		Other		Other assets42		Total
		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
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 at fair 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
PVIF43		-		-		-		-		-		-		-		5,307		5,307
Other assets and investment properties		698		328		23		107		831		7		26		7,383		9,403
Total assets		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 tax44		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 liabilities and equity at 31 December 201445		29,491		11,820		1,484		6,039		25,068		2,542		4,155		20,123		100,722

		Insurance contracts								Investment contracts
		With DPF		Unit- linked		Annuities		Other40		With DPF41		Unit- linked		Other		Other assets42		Total
		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Financial assets		26,382		13,348		1,651		4,728		25,676		9,720		4,375		5,846		91,726
- trading assets		-		-		3		-		-		-		-		-		3
- financial assets designated at fair value		3,850		13,131		532		761		6,867		9,293		1,706		1,757		37,897
- derivatives		1		3		-		-		215		5		-		55		279
- financial investments		19,491		-		959		3,780		16,556		-		1,853		3,745		46,384
- other financial assets		3,040		214		157		187		2,038		422		816		289		7,163
Reinsurance assets		182		291		522		439		-		-		-		2		1,436
PVIF43		-		-		-		-		-		-		-		5,335		5,335
Other assets and investment properties		757		284		23		113		791		19		31		546		2,564
Total assets		27,321		13,923		2,196		5,280		26,467		9,739		4,406		11,729		101,061
Liabilities under investment contracts		-		-		-		-		-		9,730		4,209		-		13,939
- designated at fair value		-		-		-		-		-		9,730		3,761		-		13,491
- carried at amortised cost		-		-		-		-		-		-		448		-		448
Liabilities under insurance contracts		26,920		13,804		2,158		4,872		26,427		-		-		-		74,181
Deferred tax44		12		-		17		1		-		-		-		1,163		1,193
Other liabilities		-		-		-		-		-		-		-		2,048		2,048
Total liabilities		26,932		13,804		2,175		4,873		26,427		9,730		4,209		3,211		91,361
Total equity		-		-		-		-		-		-		-		9,700		9,700
Total liabilities and equity at 31 December 201345		26,932		13,804		2,175		4,873		26,427		9,730		4,209		12,911		101,061

For footnotes, see page 202.

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.

Our exposure to financial risks arising in the above balance sheet varies depending on the type of contract issued. For unit-linked contracts, the policyholder bears the majority of the exposure to financial risks whereas, for non-linked contracts, the majority of financial risks are borne by the shareholder (HSBC). For contracts with DPF, the shareholder is exposed to financial risks to the extent that the exposure cannot be managed by utilising any discretionary participation (or bonus) features within the policy contracts issued.

As noted above, during the year HSBC entered into an agreement to sell its UK pensions business, and the related balances are reported as a disposal group held for sale under IFRS 5 (and are therefore included within the 'Other assets' column in the table above). The disposal group comprises US$6.8bn of total liabilities, being liabilities under unit-linked investment contracts, unit-linked insurance contracts and annuity contracts. It also comprises US$6.8bn of total assets, being financial and reinsurance assets backing the liabilities, and the associated PVIF on these contracts. The transfer is subject to regulatory approvals and is expected to complete in the second half of 2015. As part of the transaction we also entered into a reinsurance agreement transferring certain risks and rewards of the business to the purchaser from 1 January 2014 until completion of the transaction. A gain of US$42m was recognised on entering into this reinsurance agreement.

Balance sheet of insurance manufacturing subsidiaries by geographical region⁴⁶

(Audited)

		Europe		Asia4		Latin                   America		Total
		US$m		US$m		US$m		US$m
Financial assets		30,178		47,443		7,320		84,941
- trading assets		-		-		3		3
- financial assets designated at fair value		10,610		12,497		5,589		28,696
- derivatives		172		27		-		199
- financial investments		16,947		30,010		1,544		48,501
- other financial assets		2,449		4,909		184		7,542
Reinsurance assets		308		748		15		1,071
PVIF43		711		4,175		421		5,307
Other assets and investment properties		7,650		1,145		608		9,403
Total assets		38,847		53,511		8,364		100,722
Liabilities under investment contracts:
- designated at fair value		1,585		4,727		-		6,312
- carried at amortised cost		-		-		385		385
Liabilities under insurance contracts		27,312		39,990		6,559		73,861
Deferred tax44		273		806		142		1,221
Other liabilities		7,932		460		185		8,577
Total liabilities		37,102		45,983		7,271		90,356
Total equity		1,745		7,528		1,093		10,366
Total liabilities and equity at 31 December 201445		38,847		53,511		8,364		100,722
Financial assets		41,557		42,352		7,817		91,726
- trading assets		-		-		3		3
- financial assets designated at fair value		20,742		11,420		5,735		37,897
- derivatives		272		7		-		279
- financial investments		18,080		26,505		1,799		46,384
- other financial assets		2,463		4,420		280		7,163
Reinsurance assets		823		596		17		1,436
PVIF43		1,156		3,730		449		5,335
Other assets and investment properties		868		1,101		595		2,564
Total assets		44,404		47,779		8,878		101,061
Liabilities under investment contracts:
- designated at fair value		8,760		4,731		-		13,491
- carried at amortised cost		-		-		448		448
Liabilities under insurance contracts		31,786		35,619		6,776		74,181
Deferred tax44		407		645		141		1,193
Other liabilities		1,474		371		203		2,048
Total liabilities		42,427		41,366		7,568		91,361
Total equity		1,977		6,413		1,310		9,700
Total liabilities and equity at 31 December 201345		44,404		47,779		8,878		101,061

For footnotes, see page 202.

Movement in total equity of insurance operations

(Audited)

		Total equity
		2014		2013
		US$m		US$m
At 1 January		9,700		9,989
Change in PVIF of long-term insurance business43		261		525
Return on net assets		1,835		848
Capital transactions		(673)		(590)
Disposals of subsidiaries/portfolios		1		(675)
Exchange differences and other		(758)		(397)
At 31 December		10,366		9,700

For footnote, see page 202.

Financial risks

(Audited)

Details on the nature of financial risks and how they are managed are provided in the Appendix to Risk on page 232.

Financial risks can be categorised into:

·   market risk - risk arising from changes in the fair values of financial assets or their future cash flows from fluctuations in variables such as interest rates, credit spreads, foreign exchange rates and equity prices;

·   credit risk - the risk of financial loss following the failure of third parties to meet their obligations; and

·   liquidity risk - the risk of not being able to make payments to policyholders as they fall due as there are insufficient assets that can be realised as cash.

The following table analyses the assets held in our insurance manufacturing subsidiaries at 31 December 2014 by type of contract, and provides a view of the exposure to financial risk. For unit‑linked contracts, which pay benefits to policyholders 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)

		Unit-linked		Non-linked		Other
		contracts47		contracts48		assets49		Total
		US$m		US$m		US$m		US$m
Trading assets
Debt securities		-		3		-		3
Financial assets designated at fair value		13,334		13,649		1,713		28,696
Treasury bills		-		40		16		56
Debt securities		4,589		3,507		618		8,714
Equity securities		8,745		10,102		1,079		19,926
Financial investments
Held-to-maturity: debt securities		-		21,789		2,494		24,283
Available-for-sale:		-		22,899		1,319		24,218
- debt securities		-		22,899		1,290		24,189
- equity securities		-		-		29		29
Derivatives		2		124		73		199
Other financial assets49		503		6,905		134		7,542
Total financial assets at 31 December 201445		13,839		65,369		5,733		84,941
Trading assets
Debt securities		-		3		-		3
Financial assets designated at fair value		22,424		13,716		1,757		37,897
Treasury bills		-		-		50		50
Debt securities		7,809		3,910		546		12,265
Equity securities		14,615		9,806		1,161		25,582
Financial investments
Held-to-maturity: debt securities		-		21,784		2,142		23,926
Available-for-sale:		-		20,855		1,603		22,458
- debt securities		-		20,855		1,594		22,449
- equity securities		-		-		9		9
Derivatives		8		216		55		279
Other financial assets49		636		6,238		289		7,163
Total financial assets at 31 December 201345		23,068		62,812		5,846		91,726

For footnotes, see page 202.

Approximately 67% of financial assets were invested in debt securities at 31 December 2014 (2013: 64%) with 24% (2013: 28%) invested in equity securities.

Under unit-linked contracts, 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 16% (2013: 25%) of the total financial assets of our insurance manufacturing subsidiaries at the end of 2014. The reduction of US$9.3bn in the value of assets backing unit-linked contracts is largely due to the classification of US$6.3bn of assets relating to the UK pensions business as held for sale (see page 192) and the transfer of US$2.9bn assets backing other unit-linked investment contracts to a third party during the year.

The remaining financial risks are managed either solely on behalf of the shareholder, or jointly on behalf of the shareholder and policyholders where DPF exist.

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.

Our current portfolio of assets includes debt securities issued at a time when yields were higher than those observed in the current market. As a result, yields on extant holdings of debt securities exceed those available on current issues.

Long-term insurance or investment products may incorporate benefits that are guaranteed. Fixed guaranteed benefits, for example for annuities in payment, are reserved for as part of the calculation of liabilities under insurance contracts.

The risk of shareholder capital being required to meet liabilities to policyholders increases in products that offer guaranteed financial returns where current yields fall below guaranteed levels for a prolonged period. Reserves are held against the cost of guarantees, calculated by stochastic modelling. Where local rules require, these reserves are held through policyholder liabilities. Any remainder is accounted for as a deduction to PVIF on the relevant product. The table below shows the total reserve held for the cost of guarantees, the range of investment returns on assets supporting these products and the implied investment return that would enable the business to meet the guarantees.

The financial guarantees offered on some portfolios exceeded the current yield on the assets that back them. The cost of guarantees increased to US$777m (2013: US$575m) primarily because of falling yields in France throughout 2014. As these yields fell, the cost of guarantees on closed portfolios reported in the 2.1%-4.0% and 4.1%-5.0% categories increased, driven by reduced reinvestment yield assumptions. In addition, there was a closed portfolio in Hong Kong with a guaranteed rate of 5.0% compared with the current yield of 4.1%. We reduced short-term bonus rates paid to policyholders on certain DPF contracts to manage the immediate strain on the business.

Financial return guarantees^45,50

(Audited)

		2014						2013
		Investment                 returns            implied by           guarantee		Current                     yields		Cost of         guarantees		Investment                  returns            implied by            guarantee		Current                     yields		Cost of          guarantees
		%		%		US$m		%		%		US$m
Capital		0.0		0.0 - 3.5		81		0.0		0.0 - 4.4		57
Nominal annual return		0.1 - 2.0		3.6 - 3.6		6		0.1 - 2.0		4.1 - 4.1		9
Nominal annual return51		2.1 - 4.0		3.5 - 4.1		646		2.1 - 4.0		4.2 - 4.4		471
Nominal annual return		4.1 - 5.0		3.5 - 4.1		30		4.1 - 5.0		4.1 - 4.4		25
Real annual return52		0.0 - 6.0		4.7 - 7.5		14		0.0 - 6.0		6.4 - 6.4		13
At 31 December						777						575

For footnotes, see page 202.

In addition to the above, a deduction from PVIF of US$53m (2013: US$134m) is made in respect of the modelled cost of guaranteed annuity options attached to certain unit-linked pension products in Brazil.

The following table illustrates the effects of selected interest rate, equity price and foreign exchange rate scenarios on our profit for the year and the 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 profit and total equity and the risk factors is non-linear and, therefore, the results disclosed should not 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. The sensitivities presented allow for adverse changes in policyholder behaviour that may arise in response to changes in market rates.

The effects of +/-100 basis points parallel shifts in yield curves have increased from 2013 to 2014, driven mainly by falling yields and a flattening of the yield curve in France during 2014. In the low yield environment the projected cost of options and guarantees described above is particularly sensitive to yield curve movements. The market value of available-for-sale bonds is also sensitive to yield curve movements hence the larger opposite stresses on equity.

Sensitivity of HSBC's insurance manufacturing subsidiaries to market risk factors

(Audited)

		2014				2013
		Effect on                     profit               after tax		Effect on                       total                    equity		Effect on                      profit                after tax		Effect on                       total                    equity
		US$m		US$m		US$m		US$m
+ 100 basis points parallel shift in yield curves		290		(345)		151		(199)
- 100 basis points parallel shift in yield curves53		(549)		214		(230)		139
10% increase in equity prices		180		180		149		149
10% decrease in equity prices		(153)		(153)		(129)		(129)
10% increase in US dollar exchange rate compared to all currencies		54		54		21		21
10% decrease in US dollar exchange rate compared to all currencies		(54)		(54)		(21)		(21)

Credit risk

(Audited)

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$53bn (2013: US$51bn) bond portfolio supporting non-linked contracts and shareholders' funds.

The sensitivity of the profit after tax of our insurance subsidiaries to the effects on asset values of increases in credit spreads was a reduction of US$7m (2013: US$21m). The sensitivity of total equity was a reduction of US$9m (2013: US$46m). The sensitivities are relatively small because the vast majority 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 (or to total equity in the case of the held-to-maturity securities). We calculate the sensitivity 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 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.

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 unit-linked liabilities is predominantly borne by the policyholder. 84.8% (2013: 83.4%) of the assets included in the table are invested in investments rated as 'strong'.

For a definition of the five credit quality classifications, see page 207.

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
Supporting liabilities under non-linked insurance and investment contracts
Trading assets - debt securities		3		-		-		-		3
Financial assets designated at fair value		2,550		530		214		255		3,549
- treasury and other eligible bills		5		-		-		35		40
- debt securities		2,545		530		214		220		3,509
Financial investments - debt securities		38,515		4,312		1,662		200		44,689
		41,068		4,842		1,876		455		48,241
Supporting shareholders' funds54
Financial assets designated at fair value		214		322		30		69		635
- treasury and other eligible bills		-		-		-		16		16
- debt securities		214		322		30		53		619
Financial investments - debt securities		3,378		196		154		54		3,782
		3,592		518		184		123		4,417
Total45
Trading assets - debt securities		3		-		-		-		3
Financial assets designated at fair value		2,764		852		244		324		4,184
- treasury and other eligible bills		5		-		-		51		56
- debt securities		2,759		852		244		273		4,128
Financial investments - debt securities		41,893		4,508		1,816		254		48,471
At 31 December 2014		44,660		5,360		2,060		578		52,658
Supporting liabilities under non-linked insurance and investment contracts
Trading assets - debt securities		3		-		-		-		3
Financial assets designated at fair value		2,780		691		224		215		3,910
- debt securities		2,780		691		224		215		3,910
Financial investments - debt securities		36,113		4,596		1,699		231		42,639
		38,896		5,287		1,923		446		46,552
Supporting shareholders' funds54
Financial assets designated at fair value		191		298		73		34		596
- treasury and other eligible bills		50		-		-		-		50
- debt securities		141		298		73		34		546
Financial investments - debt securities		3,356		176		139		65		3,736
		3,547		474		212		99		4,332
Total45
Trading assets - debt securities		3		-		-		-		3
Financial assets designated at fair value		2,971		989		297		249		4,506
- treasury and other eligible bills		50		-		-		-		50
- debt securities		2,921		989		297		249		4,456
Financial investments - debt securities		39,469		4,772		1,838		296		46,375
At 31 December 2013		42,443		5,761		2,135		545		50,884

For footnotes, see page 202.

Credit risk also arises when assumed insurance risk is ceded to 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 235 is included in this table.

Reinsurers' share of liabilities under insurance contracts⁴⁵

(Audited)

		Neither past due nor impaired								Past due but
		Strong		Good		Satisfactory		Sub-standard		not impaired		Total
		US$m		US$m		US$m		US$m		US$m		US$m
Unit-linked insurance		75		185		-		-		-		260
Non-linked insurance55		751		11		10		-		-		772
At 31 December 2014		826		196		10		-		-		1,032
Reinsurance debtors		11		6		-		-		21		38
Unit-linked insurance		72		218		-		-		-		290
Non-linked insurance55		1,103		8		7		-		-		1,118
At 31 December 2013		1,175		226		7		-		-		1,408
Reinsurance debtors		17		1		-		-		10		28

For footnotes, see page 202.

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 2014. The liquidity risk exposure is borne in conjunction with policyholders for the majority of our business, and wholly borne by the policyholder in the case of unit-linked business.

The profile of the expected maturity of the insurance contracts at 31 December 2014 remained comparable with 2013.

Expected maturity of insurance contract liabilities⁴⁵

(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
Unit-linked insurance		709		3,280		9,243		14,544		27,776
Non-linked insurance55		3,504		12,718		29,905		33,108		79,235
At 31 December 2014		4,213		15,998		39,148		47,652		107,011
Unit-linked insurance		1,106		3,609		9,757		13,725		28,197
Non-linked insurance55		3,977		11,731		26,848		31,306		73,862
At 31 December 2013		5,083		15,340		36,605		45,031		102,059

For footnotes, see page 202.

Remaining contractual maturity of investment contract liabilities

(Audited)

		Liabilities under investment contracts issued by insurance manufacturing subsidiaries46
		Unit-linked              investment                  contracts		Investment                  contracts                   with DPF		Other              investment                  contracts		Total
		US$m		US$m		US$m		US$m
Remaining contractual maturity:
- due within 1 year		151		-		389		540
- due over 1 year to 5 years		133		-		-		133
- due over 5 years to 10 years		194		-		-		194
- due after 10 years		766		-		-		766
- undated56		1,298		25,068		3,765		30,131
At 31 December 2014		2,542		25,068		4,154		31,764
Remaining contractual maturity:
- due within 1 year		232		-		454		686
- due over 1 year to 5 years		778		-		-		778
- due over 5 years to 10 years		852		-		-		852
- due after 10 years		2,254		-		-		2,254
- undated56		5,614		26,427		3,755		35,796
At 31 December 2013		9,730		26,427		4,209		40,366

For footnotes, see page 202.

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 following table analyses our life insurance risk exposures by geographical region and by type of business. The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2013. 

Analysis of insurance risk - liabilities under insurance contracts⁴⁶

(Audited)

		Europe		Asia		Latin America		Total
		US$m		US$m		US$m		US$m
Non-linked insurance55		829		34,261		1,883		36,973
Insurance contracts with DPF57		367		29,112		-		29,479
Credit life		56		87		-		143
Annuities		71		127		1,275		1,473
Other		335		4,935		608		5,878
Unit-linked insurance		1,415		5,729		4,676		11,820
Investment contracts with DPF41,57		25,068		-		-		25,068
Liabilities under insurance contracts at 31 December 2014		27,312		39,990		6,559		73,861
Non-linked insurance55		1,383		30,554		2,013		33,950
Insurance contracts with DPF57		380		26,540		-		26,920
Credit life		130		74		-		204
Annuities		622		129		1,407		2,158
Other		251		3,811		606		4,668
Unit-linked insurance		3,976		5,065		4,763		13,804
Investment contracts with DPF41,57		26,427		-		-		26,427
Liabilities under insurance contracts at 31 December 2013		31,786		35,619		6,776		74,181

For footnotes, see page 202.

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

Sensitivities to non-economic assumptions

(Audited)

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 and total equity to reasonably possible changes in these non-economic assumptions at that date across all our insurance manufacturing subsidiaries.

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 Brazil, France and Hong Kong.

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. However, some contract lapses have a positive effect on profit due to the existence of policy surrender charges. Brazil, 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 the cost of administering insurance contracts. To the extent that increased expenses cannot be passed on to policyholders, an increase in expense rates will have a negative effect on our profits.

Sensitivity analysis

(Audited)

		2014		2013
		US$m		US$m
Effect on profit after tax and total equity at 31 December
10% increase in mortality and/or morbidity rates		(65)		(76)
10% decrease in mortality and/or morbidity rates		72		79
10% increase in lapse rates57		(108)		(119)
10% decrease in lapse rates57		122		133
10% increase in expense rates		(106)		(101)
10% decrease in expense rates		106		100

For footnote, see page 202.

Other material risks

Reputational risk	199		235
Fiduciary risk	200
Pension risk	200		236
The principal plan	200				The principal plan - target asset allocation	200
					Benefit payments (US$m)	201
Future developments	201
Defined contribution plans	201
Sustainability risk	201		237
1. Appendix to Risk - risk policies and practices.

Reputational risk

(Unaudited)

Reputational risk is the failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC itself, our employees or those with whom we are associated, that might cause stakeholders to form a negative view of HSBC.

Reputational risk relates to perceptions, whether based on fact or otherwise. Stakeholders' expectations are constantly changing and thus reputational risk is dynamic and varies between geographies, groups and individuals. As a global bank, HSBC shows unwavering commitment to operating, and to be seen to be operating, to the high standards we have set for ourselves in every jurisdiction. Reputational risk might result in financial or non-financial impacts, loss of confidence, adverse effects on our ability to keep and attract customers, or other consequences. Any lapse in standards of integrity, compliance, customer service or operating efficiency represents a potential reputational risk.

A number of measures to address the requirements of the US DPA and otherwise to enhance our AML, sanctions and other regulatory compliance frameworks have been taken and/or are ongoing. These measures, which should also serve over time to enhance our reputational risk management, include the following:

·   simplifying our business through the progressive implementation of our Group strategy, including the adoption of a global financial crime risk filter, which should help to standardise our approach to doing business in higher risk countries;

·   an increase in reputational risk resources in each region in which we operate and the introduction of a central case management and tracking process for reputational risk and client relationship matters;

·   the creation of combined reputational risk and client selection committees within the global businesses with a clear process to escalate and address matters at the appropriate level;

·   the continued roll-out of training and communication about the HSBC Values Programme that defines the way everyone in the Group should act and seeks to ensure that the Values are embedded into our operations; and

·   the continuous development and implementation of the Global Standards around financial crime compliance, which underpin our businesses. This includes ensuring globally consistent application of policies that govern AML and sanctions compliance programmes.

In July 2014, the new reputational risk and customer selection policies were issued which define a consistent and structured approach to managing these risks:

·   Reputational risk (new policy): defines reputational risk and sets out HSBC's approach to managing it;

·   Customer selection and business acceptance (new policy): outlines the risk factors to be considered when a new customer relationship is identified;

·   Customer selection and exit management: establishes the globally sustainable approach to customer selection and exit management for all accounts and relationships in all business lines. This details the criteria under which escalation or approval is required; and

·   Sixth filter: customers operating in high risk jurisdictions carry particular financial crime risks and may require specific approvals, or be considered for an exit, if the relationship exceeds HSBC's global risk appetite.

HSBC has zero tolerance for knowingly engaging in any business, activity or association where foreseeable reputational damage has not been considered and mitigated. There must be no barriers to open discussion and the escalation of issues that could affect the Group negatively. While there is a level of risk in every aspect of business activity, appropriate consideration of potential harm to HSBC's good name must be a part of all business decisions.

Detecting and preventing illicit actors' access to the global financial system calls for constant vigilance and we will continue to cooperate closely with all governments to achieve success. This is integral to the execution of our strategy, to HSBC Values and to preserving and enhancing our reputation.

Fiduciary risk

(Unaudited)

Fiduciary risk is the risk to the Group of breaching our fiduciary duties when we act in a fiduciary capacity as trustee or investment manager or as mandated by law or regulation.

A fiduciary duty is one where HSBC holds, manages, oversees or has responsibility for assets for a third party that involves a legal and/or regulatory duty to act with a high standard of care and with good faith. A fiduciary must make decisions and act in the interests of the third party and must place the wants and needs of the client first, above the needs of the Group.

We may be held liable for damages or other penalties caused by failure to act in accordance with these duties. Fiduciary duties may also arise in other circumstances, such as when we act as an agent for a principal, unless the fiduciary duties are specifically excluded (e.g. under the agency appointment contract).

Our principal fiduciary businesses (the 'designated businesses') have developed fiduciary risk appetite statements for their various fiduciary roles and have put in place key indicators to monitor their related risks.

Pension risk

(Audited)

We operate a number of defined benefit and defined contribution pension plans throughout the world. The majority of pension risk arises from the Group's defined benefit plans of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan').

During 2014, a new global pension risk framework was established, with accompanying new global policies on the management of risks related to defined benefit and defined contribution plans. In addition, a new Global Pensions Oversight Committee was established to oversee the running of all pension plans sponsored by HSBC around the world.

At 31 December 2014, the Group's aggregate defined benefit pension plan obligation was US$42bn and the net asset was US$2.7bn (2013: US$40bn and US$0.1bn, respectively). The increase in the net asset was mainly due to the increase in the principal plan's assets exceeding the increase in its benefit obligation. Of the Group total amounts, the principal plan contributed US$30bn to the defined benefit obligation and US$4.8bn to the net asset. The principal plan is the largest contributor to pension risk in the Group.

The principal plan

(Audited)

The principal plan is overseen by a corporate trustee who has fiduciary responsibility for the operation of the pension scheme. The principal plan comprises a defined benefit section and a defined contribution section. Unless stated otherwise, this narrative relates to the defined benefit section.

The investment strategy of the principal plan is to hold the majority of assets in bonds, with the remainder in a more diverse range of investments, and includes a portfolio of interest rate and inflation swaps in order to reduce interest rate risk and inflation risk (see Note 41 in the Financial Statements). The target asset allocation of the principal plan at the year-end is shown below. HSBC and the trustee have developed a general framework which, over time, will see the plan's asset strategy evolve to be less risky: this is described in further detail below.

The principal plan - target asset allocation

		2014		2013
		%		%
Equities58		19.4		19.4
Bonds		64.5		64.5
Alternative assets59		10.6		10.6
Property		5.5		5.5
Cash60		-		-
At 31 December		100.0		100.0

For footnotes, see page 202.

The latest actuarial valuation of the principal plan was made as at 31 December 2011 by C G Singer, Fellow of the Institute and Faculty of Actuaries, of Towers Watson Limited. At that date, the market value of the plan's assets was £18bn (US$28bn) (including assets relating to both the defined benefit and defined contribution plans, and additional voluntary contributions). The market value of the plan assets represented 100% of the amount expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after allowing for expected future increases in earnings under the projected unit method. There was therefore no resulting surplus/deficit and hence no recovery plan was required.

The expected cash flows from the principal plan were projected by reference to the Retail Price Index ('RPI') swap break-even curve at 31 December 2011. Salary increases were assumed to be 0.5% per annum above RPI and inflationary pension increases, subject to a minimum of 0% and a maximum of 5% (maximum of 3% per annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash flows were discounted at the Libor swap curve at 31 December 2011 plus a margin for the expected return on the investment strategy of 160bps per annum. The mortality experience of the principal plan's pensioners over the six-year period (2006-2011) was analysed and, on the basis of this analysis, the mortality assumptions were set, based on the SAPS S1 series of tables adjusted to reflect the pensioner experience. Allowance was made for future improvements to mortality rates in line with the Continuous Mortality Investigation core projections with a long-run improvement rate set at 2% for males and 1.5% for females. The benefits expected to be payable from the defined benefit plan from 2015 are shown in the chart below.

Future benefit payments (US$m)

As part of the 31 December 2011 valuation, calculations were also made of the amount of assets that might be needed to meet the liabilities if the principal plan was discontinued and the members' benefits bought out with an insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to run the plan without the support of HSBC. The amount required under this approach was estimated to be £26bn (US$41bn) as at 31 December 2011. In arriving at this estimation, a more prudent assumption about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter the investment strategy to be an appropriately matched portfolio of UK government bonds. An explicit allowance for expenses was also included.

HSBC and the trustee have developed a general framework which, over time, will see the principal plan's asset strategy evolve to be less risky and further aligned to the expected future cash-flows, referred to as the Target Matching Portfolio ('TMP'). The TMP would therefore contain sufficient assets, the majority of which will be bond-like in nature, which are more closely aligned to the liability profile. Progress towards the TMP can be achieved by asset returns in excess of that assumed and/or additional funding. In 2013, HSBC agreed to make general framework contributions of £64m (US$100m) in each of the calendar years 2013, 2014 and 2015 as well as £128m (US$200m) in 2016. Further contributions have been agreed to be made in future years, which are linked to the continued implementation of the general framework.

HSBC Bank is also making contributions to the principal plan in respect of the accrual of benefits of defined
benefit section members. Since April 2013, HSBC has paid contributions at the rate of 43% of pensionable salaries (less member contributions).Contribution levels will be reviewed as part of the next actuarial valuation, which has an effective date of 31 December 2014. The results of this valuation are expected to be included in the Annual Report and Accounts 2015.

Future developments

(Unaudited)

Future service accrual for active members of the defined benefit section will cease with effect from 30 June 2015. All active members of the defined benefit section will become members of the defined contribution section from 1 July 2015, and their accrued defined benefit pensions based on service to 30 June 2015 will continue to be linked to final salary on retirement (underpinned by increases in CPI). The defined benefit service cost will therefore reduce to zero from 1 July 2015 and the defined contribution service cost will increase.

Defined contribution plans

Our global strategy is to move from defined benefit pension provisions to defined contribution, dependent on local legislative requirements and emerging practice. In defined contribution pension plans, the sponsor contributions are known, while the ultimate benefit will vary, typically with investment returns achieved by employee investment choices. While the market risk of defined contribution plans is significantly less than that of defined benefit plans, the Bank is still exposed to operational and reputational risk.

Sustainability risk

(Unaudited)

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

In 2014, we issued new policies on forestry, agricultural commodities, World Heritage Sites and Ramsar Wetlands, following an extensive internal and external review of our previous forestry policy. The results of two independent reviews into the content and implementation of our previous policy were published on www.hsbc.com.

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 235.

Footnotes to Risk

Credit risk

  1   From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse repos were included within 'Loans and advances to banks' and 'Loans and advances to customers' and non-trading repos were included within 'Deposits by banks' and 'Customer accounts'. Comparative data have been re-presented accordingly.

  2   At 31 December 2014, the credit quality of financial guarantees and similar contracts was: US$17bn strong, US$16bn good, US$12bn satisfactory, and US$2bn sub-standard.

  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$71bn (2013: US$34bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at modest levels. At 31 December 2014, the credit quality of loan and other credit-related commitments was: US$322bn strong, US$191bn good, US$127bn satisfactory, US$10bn sub-standard and US$0.8bn impaired.

  4   From 1 January 2014, the geographical region 'Asia' replaced the geographical regions previously reported as 'Hong Kong' and 'Rest of Asia-Pacific' (see Note 23 on the Financial Statements for further details). Comparative data have been re-presented to reflect this change.

  5   'Financial' includes loans and advances to banks.

  6   'First lien residential mortgages' include Hong Kong Government Home Ownership Scheme loans of US$3.4bn at 31 December 2014 (2013: US$3.2bn). Where disclosed, earlier comparatives were 2012: US$3.2bn; 2011: US$3.3bn; 2010: US$3.5bn.

  7   'Other personal lending' includes second lien mortgages and other property-related lending.

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

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

10  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'.

11  'Loans and advances to customers' includes asset-backed securities that have been externally rated as strong (2014: US$1.2bn; 2013: US$1.7bn), good (2014: US$256m; 2013: US$255m), satisfactory (2014: US$332m; 2013: US$200m), sub-standard (2014: US$94m; 2013: US$283m) and impaired (2014: US$128m; 2013: US$252m).

12  'Collectively assessed impairment allowances' are allocated to geographical segments based on the location of the office booking the allowances or provisions.

13  Included within 'Exchange and other movements' is US$0.4bn of impairment allowances reclassified to held for sale (2013: US$0.2bn).

14  Of the US$2,724m (2013: US$3,580m) of renegotiated loans, US$608m (2013: US$716m) were neither past due nor impaired, US$1m (2013: US$52m) was past due but not impaired and US$2,115m (2013: US$2,812m) were impaired.

15  French Banking Federation Master Agreement Relating to Transactions on Forward Financial Instruments plus CSA equivalent.

16  The German Master Agreement for Financial Derivative Transactions.

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

18  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 gain/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.

19  The average total gain/loss on foreclosed properties includes both the gain/loss on sale of the foreclosed property as discussed in footnote 18 and the cumulative write-downs recognised on the loans up to the time we took title to the property.

20  Included in this category are loans of US$1.5bn (2013: US$1.9bn) 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.

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

22  Negative numbers are favourable: positive numbers are unfavourable.

23  Carrying amount of the net principal exposure.

24  Total includes holdings of ABSs issued by Freddie Mac and Fannie Mae.

Liquidity and funding

25  The most favourable metrics are smaller advances to core funding and larger stressed one-month and three-month coverage ratios.

26  The HSBC UK entity shown comprises four legal entities; HSBC Bank plc (including all overseas branches, and SPEs consolidated by HSBC Bank plc for Financial Statement purposes), Marks and Spencer Financial Services Limited, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed with the UK PRA.

27  The Hongkong and Shanghai Banking Corporation represents the Group in Hong Kong, including its overseas branches. Each branch is monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.

28  The HSBC USA principal entity shown represents the HSBC USA Inc consolidated group; predominantly HSBC USA Inc and HSBC Bank USA, NA. The HSBC USA Inc consolidated group is managed as a single operating entity.

29  The total shown for other principal HSBC operating entities represents the combined position of all the other operating entities overseen directly by the Risk Management Meeting of the GMB.

30  Estimated liquidity value represents the expected realisable value of assets prior to management assumed haircuts.

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

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

33  The residual contractual maturity profile of the balance sheet is set out on in Note 31 on the Financial Statements.

Market risk

34  Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.

35  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 occurs 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.

36  The total VaR is non-additive across risk types due to diversification effects.

37  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.

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

39  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. See 'Cautionary statement regarding forward-looking statements'.

Risk management of insurance operations

40  Other includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance.

41  Although investment contracts with discretionary participation features ('DPF') are financial investments, HSBC continues to account for them as insurance contracts as permitted by IFRS 4.

42  The Other assets column shows shareholder assets as well as assets and liabilities classified as held for sale. The majority of the assets for insurance businesses classified as held for sale are reported as 'Other assets and investment properties' and totalled US$6.8bn at 31 December 2014 (31 December 2013: nil). The majority of these assets were debt and equity securities. All liabilities for insurance businesses classified as held for sale are reported in 'Other liabilities' and totalled US$6.8bn at 31 December 2014 (31 December 2013: nil). The majority of these liabilities were liabilities under insurance contracts and liabilities under investment contracts.

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

44  Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.

45  Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.

46  HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa or North America.

47  Comprise unit-linked life insurance contracts and linked long-term investment contracts.

48  Comprise non-linked insurance contracts and non-linked long-term investment contracts.

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

50  The cost of guarantees figure presented comprises the modelled cost of guarantees under products manufactured by our insurance subsidiaries, including both the cost of guarantees reserved for through policyholder liabilities and the amount accounted for as a deduction to PVIF. This is considered to provide more relevant information than the total liabilities to policyholders established for guaranteed products manufactured by our insurance subsidiaries as disclosed in prior periods.

51  A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% are reported entirely in the 2.1%-4.0% category in line with the average guaranteed return of 2.7% offered to policyholders by these contracts.

52  Real annual return guarantees provide the policyholder a guaranteed return in excess of the rate of inflation, and are supported by inflation-linked debt securities with yields that are also expressed in real terms.

53  Where a -100 basis point parallel shift in the yield curve would result in a negative interest rate, the effects on profit after tax and total equity have been calculated using a minimum rate of 0%.

54  Shareholders' funds comprise solvency and unencumbered assets.

55  Non-linked insurance includes remaining non-life business.

56  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.

57  Insurance contracts and investment contracts with 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.

Pension risk

58  In 2014, option overlay strategies which are expected to improve the risk/return profile of the equity allocation were implemented.

59  Alternative assets includes ABSs, MBSs and infrastructure assets.

60  Whilst there is no target cash allocation, the amount of cash is expected to vary between 0-5% depending upon the liquidity requirements of the scheme, which will affect the actual allocation of bonds correspondingly.

 

END

 

 

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