Interim Report - 18 of 24

RNS Number : 2049X

HSBC Holdings PLC

26 August 2015

 



Risk management of insurance operations

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

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

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

Risk management of insurance operations in the first half of 2015

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

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

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

Asset and liability matching

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

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

Balance sheet of insurance manufacturing subsidiaries by type of contract

		Insurance contracts								Investment contracts						Other
		With              DPF		Unit-          linked		Annuities		Other		With              DPF		Unit-          linked		Other		assets and     liabilities		Total
		$m		$m		$m		$m		$m		$m		$m		$m		$m
Financial assets		30,199		7,351		1,272		6,359		22,570		2,587		4,027		5,862		80,227
- trading assets		-		-		3		-		-		-		-		-		3
- financial assets designated at fair value		4,563		7,157		343		699		6,778		2,174		1,924		1,136		24,774
- derivatives		42		1		-		2		100		-		11		63		219
- financial investments		22,784		-		830		5,478		13,902		-		1,425		4,663		49,082
- other financial assets		2,810		193		96		180		1,790		413		667		-		6,149
Reinsurance assets		199		239		-		754		-		-		-		-		1,192
PVIF		-		-		-		-		-		-		-		5,363		5,363
Other assets and investment properties		828		11		24		109		739		12		26		12,887		14,636
Total assets at 30 June 2015		31,226		7,601		1,296		7,222		23,309		2,599		4,053		24,112		101,418
Liabilities under investment contracts:		-		-		-		-		-		2,558		3,786		-		6,344
- designated at fair value		-		-		-		-		-		2,558		3,786		-		6,344
Liabilities under insurance contracts		30,914		7,541		1,237		6,493		23,309		-		-		-		69,494
Deferred tax		12		-		8		4		-		-		-		1,131		1,155
Other liabilities		-		-		-		-		-		-		-		13,837		13,837
Total liabilities		30,926		7,541		1,245		6,497		23,309		2,558		3,786		14,968		90,830
Total equity		-		-		-		-		-		-		-		10,588		10,588
Total equity and liabilities at 30 June 2015		30,926		7,541		1,245		6,497		23,309		2,558		3,786		25,556		101,418

		Insurance contracts								Investment contracts						Other
		With              DPF		Unit-          linked		Annuities		Other		With              DPF		Unit-          linked		Other		assets and     liabilities		Total
		$m		$m		$m		$m		$m		$m		$m		$m		$m
Financial assets		28,014		12,043		1,629		5,452		26,657		2,867		4,455		6,064		87,181
- trading assets		-		-		4		-		-		-		-		-		4
- financial assets designated at fair value		4,383		11,760		564		651		7,523		2,411		1,541		2,219		31,052
- derivatives		7		1		-		2		95		-		-		71		176
- financial investments		20,565		-		960		4,421		17,049		-		1,750		3,697		48,442
- other financial assets		3,059		282		101		378		1,990		456		1,164		77		7,507
Reinsurance assets		183		265		-		723		-		-		-		2		1,173
PVIF		-		-		-		-		-		-		-		5,438		5,438
Other assets and investment properties		794		330		19		101		728		11		27		7,813		9,823
Total assets at 30 June 2014		28,991		12,638		1,648		6,276		27,385		2,878		4,482		19,317		103,615
Liabilities under investment contracts:		-		-		-		-		-		2,878		4,276		-		7,154
- designated at fair value		-		-		-		-		-		2,878		3,800		-		6,678
- carried at amortised cost		-		-		-		-		-		-		476		-		476
Liabilities under insurance contracts		28,217		12,518		1,591		5,512		27,385		-		-		-		75,223
Deferred tax		12		-		11		10		-		-		-		1,223		1,256
Other liabilities		-		-		-		-		-		-		-		9,451		9,451
Total liabilities		28,229		12,518		1,602		5,522		27,385		2,878		4,276		10,674		93,084
Total equity		-		-		-		-		-		-		-		10,531		10,531
Total equity and liabilities at 30 June 2014		28,229		12,518		1,602		5,522		27,385		2,878		4,276		21,205		103,615
Financial assets		29,040		11,278		1,517		6,253		24,238		2,561		4,322		5,732		84,941
- trading assets		-		-		3		-		-		-		-		-		3
- financial assets designated 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
PVIF		-		-		-		-		-		-		-		5,307		5,307
Other assets and investment properties		698		328		23		107		831		7		26		7,383		9,403
Total assets at 31 December 2014		29,928		11,868		1,540		6,977		25,069		2,568		4,348		18,424		100,722
Liabilities under investment contracts:		-		-		-		-		-		2,542		4,155		-		6,697
- designated at fair value		-		-		-		-		-		2,542		3,770		-		6,312
- carried at amortised cost		-		-		-		-		-		-		385		-		385
Liabilities under insurance contracts		29,479		11,820		1,473		6,021		25,068		-		-		-		73,861
Deferred tax		12		-		11		18		-		-		-		1,180		1,221
Other liabilities		-		-		-		-		-		-		-		8,577		8,577
Total liabilities		29,491		11,820		1,484		6,039		25,068		2,542		4,155		9,757		90,356
Total equity		-		-		-		-		-		-		-		10,366		10,366
Total equity and liabilities at 31 December 2014		29,491		11,820		1,484		6,039		25,068		2,542		4,155		20,123		100,722

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

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

Insurance risk

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

A principal risk we face is that, over time, the cost of acquiring and administering a contract, claims and benefits may exceed the aggregate amount of premiums received and investment income. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, lapse and surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities.

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

Footnotes to Risk

Credit risk

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

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

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

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

  5   'Financial' includes loans and advances to banks.

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

  7   Negative numbers are favourable: positive numbers are unfavourable.

Liquidity and funding

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

Market risk

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

 

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