Interim Report - 18 of 26

RNS Number : 1255M

HSBC Holdings PLC

12 August 2011

 



Risk management of insurance operations

HSBC's bancassurance model ....................................	142
Insurance risk in the first half of 2011 .....................	142
Balance sheet of insurance manufacturing subsidiaries by type of contract .............................	144

Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC).

There have been 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, as described in the Annual Report and Accounts 2010.

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 157.

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 to all customer groups, 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. This allows us to retain the risks and rewards associated 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 consider it operationally more 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 the first half of 2011

The principal insurance 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 a discretionary bonus feature within the policy.

In January 2009, the Competition Commission ('CC') published its report into the PPI market in which it stipulated that short-term income protection ('STIP') products will also be subject to their remedies when sold in conjunction with or as a result of a referral following the sale of a loan or similar credit product. We have undertaken an analysis of the required changes to our STIP product and its sales processes resulting from the CC's remedies. On 14 October 2010, the CC confirmed that it intended to proceed with a point of sale ban and this will come into effect on 6 April 2012.

The following tables analyse our insurance risk exposures by geographical region and by type of business. The exposures remain consistent with those observed at 31 December 2010.

Analysis of life insurance risk - liabilities to policyholders⁶⁴

	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 30 June 2011
Life (non-linked) ................................	1,621		19,957		997		992		2,282		25,849
Insurance contracts with DPF65 ...........	364		18,875		316		–		–		19,555
Credit life .....................................	482		–		51		34		2		569
Annuities .....................................	473		–		72		749		1,699		2,993
Term assurance and other long-term contracts ..................................	302		1,082		558		209		581		2,732
Life (linked) .....................................	2,563		3,460		525		–		5,184		11,732
Investment contracts with DPF65,66 ..........	24,652		–		16		–		–		24,668
Insurance liabilities to policyholders .........	28,836		23,417		1,538		992		7,466		62,249
At 30 June 2010
Life (non-linked)	1,789		16,261		617		1,017		2,002		21,686
Insurance contracts with DPF65 ...........	286		15,663		240		–		–		16,189
Credit life .....................................	664		–		41		40		1		746
Annuities .....................................	409		–		27		771		1,559		2,766
Term assurance and other long-term contracts ..................................	430		598		309		206		442		1,985
Life (linked) .....................................	1,785		2,875		422		–		3,702		8,784
Investment contracts with DPF65,66 ..........	19,636		–		35		–		–		19,671
Insurance liabilities to policyholders .........	23,210		19,136		1,074		1,017		5,704		50,141
At 31 December 2010
Life (non-linked) ................................	1,679		17,989		789		1,004		2,122		23,583
Insurance contracts with DPF65 ...........	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 DPF65,66 ..........	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 146.

Analysis of non-life insurance risk - net written insurance premiums^64,67

	Europe		Hong         Kong		Rest of         Asia-     Pacific		North   America		Latin   America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
Half-year to 30 June 2011
Accident and health ...........................................	19		91		5		1		20		136
Motor ................................................................	-		8		15		-		160		183
Fire and other damage ........................................	9		14		5		12		13		53
Liability .............................................................	-		10		3		-		1		14
Credit (non-life) ................................................	7		-		-		27		1		35
Marine, aviation and transport ..........................	-		5		2		-		12		19
Other non-life insurance contracts .....................	6		18		-		4		46		74
Total net written insurance premiums ................	41		146		30		44		253		514
Net insurance claims incurred and movement in liabilities to policyholders ..............................	25		(67)		(14)		(7)		(115)		(178)
Half-year to 30 June 2010
Accident and health ...........................................	45		85		4		1		19		154
Motor ................................................................	-		7		15		-		130		152
Fire and other damage ........................................	22		17		4		8		10		61
Liability .............................................................	-		12		2		-		-		14
Credit (non-life) ................................................	11		-		-		28		1		40
Marine, aviation and transport ..........................	1		5		3		-		8		17
Other non-life insurance contracts .....................	13		18		-		5		40		76
Total net written insurance premiums ................	92		144		28		42		208		514
Net insurance claims incurred and movement in liabilities to policyholders ..............................	(85)		(61)		(13)		(3)		(85)		(247)

	Europe		Hong          Kong		Rest of          Asia-      Pacific		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
Half-year to 31 December 2010
Accident and health ...........................................	33		89		4		2		18		146
Motor ................................................................	-		8		13		-		137		158
Fire and other damage ........................................	16		12		7		8		12		55
Liability .............................................................	-		8		2		-		2		12
Credit (non-life) ................................................	14		-		-		25		1		40
Marine, aviation and transport ..........................	2		5		1		-		10		18
Other non-life insurance contracts .....................	7		21		1		4		44		77
Total net written insurance premiums ................	72		143		28		39		224		506
Net insurance claims incurred and movement in liabilities to policyholders ..............................	(84)		(56)		(12)		(10)		(116)		(278)

For footnotes, see page 146.

Credit non-life insurance is concentrated in North America and Europe, and is originated in conjunction with the provision of loans. Following a decision taken to close the Consumer Lending network in the US, insurance products written in conjunction with this business are being run off.

Balance sheet of insurance manufacturing subsidiaries by type of contract

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

The table below shows the composition of assets and liabilities and demonstrates that there were sufficient assets to cover the liabilities to policyholders at 30 June 2011.

Balance sheet of insurance manufacturing subsidiaries by type of contract

	Insurance contracts												Investment contracts
	With       DPF		Unit- linked		Annu-     ities		Term assur- ance68										Unit- linked				Other				Other assets69				Total
									Non-life		With       DPF66
	US$m		US$m		US$m		US$m		US$m			US$m				US$m				US$m				US$m				US$m
At 30 June 2011
Financial assets ............	19,436		10,962		2,734		3,233		2,434			24,112				8,771				4,038				7,371				83,091
- trading assets .........	-		-		-		-		34			-				-				-				-				34
- financial assets designated at fair value......................	1,683		10,664		474		646		221			6,426				8,050				1,529				1,641				31,334
- derivatives ............	54		1		1		10		1			279				11				1				2				360
- financial investments ..........	14,650		-		1,929		2,061		1,169			16,178				-				1,789				4,274				42,050
- other financial assets ....................	3,049		297		330		516		1,009			1,229				710				719				1,454				9,313
Reinsurance assets ........	13		802		395		243		424			-				-				-				59				1,936
PVIF70 .........................	-		-		-		-		-			-				-				-				4,186				4,186
Other assets and investment properties ..................................	216		10		26		363		208			557				23				51				697				2,151
	-
Total assets .................	19,665		11,774		3,155		3,839		3,066			24,669				8,794				4,089				12,313				91,364
Liabilities under investment contracts:
- designated at fair value	-		-		-		-		-			-				8,762				3,429				-				12,191
- carried at amortised cost	-		-		-		-		-			-				-				485				-				485
Liabilities under insurance contracts ...	19,555		11,732		2,993		3,301		2,202			24,668				-				-				-				64,451
Deferred tax ................	13		-		22		6		6			-				-				1				970				1,018
Other liabilities ............	-		-		-		-		-			-				-				-				2,213				2,213
Total liabilities ............	19,568		11,732		3,015		3,307		2,208			24,668				8,762				3,915				3,183				80,358
Total equity .................	-		-		-		-		-			-				-				-				11,006				11,006
Total equity and liabilities71 ................	19,568		11,732		3,015		3,307		2,208			24,668				8,762				3,915				14,189				91,364

	Insurance contracts										Investment contracts
	With       DPF		Unit-    linked		Annu-      ities		Term assur- ance68						Unit-    linked		Other		Other assets69		Total
									Non-life	With       DPF66
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2010
Financial assets ............	16,070		7,947		2,686		2,379		2,025		19,273		6,944		3,988		6,825		68,137
- trading assets .........	-		-		-		-		10		-		-		-		-		10
- financial assets designated at fair value......................	876		7,643		549		609		56		5,018		5,838		1,450		1,207		23,246
- derivatives .............	25		-		-		1		-		131		362		1		9		529
- financial investments ...........	13,371		-		1,743		1,196		645		13,478		-		1,757		4,293		36,483
- other financial assets .....................	1,798		304		394		573		1,314		646		744		780		1,316		7,869
Reinsurance assets ........	7		872		343		273		422		-		-		-		65		1,982
PVIF70 .........................	-		-		-		-		-		-		-		-		2,966		2,966
Other assets and investment properties ..................................	192		6		18		436		215		398		17		45		648		1,975
Total assets .................	16,269		8,825		3,047		3,088		2,662		19,671		6,961		4,033		10,504		75,060
Liabilities under investment contracts:
- designated at fair value	-		-		-		-		-		-		6,934		3,450		-		10,384
- carried at amortised cost	-		-		-		-		-		-		-		413		-		413
Liabilities under insurance contracts ...	16,189		8,784		2,766		2,731		2,375		19,671		-		-		-		52,516
Deferred tax ................	7		-		19		3		5		1		-		2		626		663
Other liabilities ............	-		-		-		-		-		-		-		-		1,974		1,974
Total liabilities ............	16,196		8,784		2,785		2,734		2,380		19,672		6,934		3,865		2,600		65,950
Total equity .................	-		-		-		-		-		-		-		-		9,110		9,110
Total equity and liabilities71 ................	16,196		8,784		2,785		2,734		2,380		19,672		6,934		3,865		11,710		75,060
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
PVIF70 .........................	-		-		-		-		-		-		-		-		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 liabilities71 ................	17,819		10,496		2,904		2,895		2,462		22,074		8,321		3,819		12,646		83,436

For footnotes, see page 146.

Footnotes to Risk

Credit risk

  1 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$159.5bn (30 June 2010: US$158.6bn; 31 December 2010: US$220.2bn), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest levels.

  2 Residential mortgages include Hong Kong Government Home Ownership Scheme loans of US$3.4bn at 30 June 2011 (30 June 2010: US$3.4bn; 31 December 2010: US$3.5bn).

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

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

  5 Included within 'Total gross loans and advances to customers' ('TGLAC') is credit card lending of US$59bn (30 June 2010: US$61bn; 31 December 2010: US$62bn).

  6 The numbers in North America include a reclassification within the corporate and commercial lending category to reflect a more accurate presentation of lending in the region.

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

  8 We have not reclassified any assets from the available-for-sale category as permitted by the 2008 amendment to IAS 39, 'Financial instruments: Recognition and measurement'. The majority of our available-for-sale holdings in sovereign and agency debt of Italy of US$1.5bn is 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 offset, no movement in the available-for-sale reserve is recognised.

  9 Trading assets net of short positions.

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

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

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

13 Negative equity arises when the value of the property used to secure a loan is below the balance outstanding on the loan, generally based on values at the balance sheet date.

14 Loan-to-value ratios are generally based on values at the balance sheet date.

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 Interest-only (affordability mortgages) are loans which are classified as 'interest only' for an initial period before reverting to repayment. As a consequence, in the table 'Mortgage lending products' on page 105 these balances are included in the category 'Affordability mortgages, including ARMs'.

17 Stated income lending forms a subset of total Mortgage Services lending across all categories.

18 By states which individually account for 5% or more of HSBC Finance's US customer loan portfolio.

19 The average loss on sale of foreclosed properties is calculated as cash proceeds after deducting selling costs, commissions and other ancillary costs, minus the book value of the property when it was moved to assets held for sale divided by the book value of the property when it was moved to assets held for sale.

20 The average total loss on foreclosed properties sold during each quarter includes both the loss on sale and the cumulative write-downs recognised on the loans up to and upon classification as assets held for sale. This average total loss on foreclosed properties is expressed as a percentage of the book value of the property prior to its transfer to assets held for sale.

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

22 At 30 June 2011, 31 December 2010 and 30 June 2010, real estate secured delinquency included US$4.2bn, US$4.2bn and US$3.8bn, respectively, of loans that we carried at the lower of cost or net realisable value.

23 We observe the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that are delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 114, 'Past due but not impaired gross financial instruments').

24 The EL percentage is derived through a combination of PD and LGD, and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries.

25 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.

26 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, all such balances are reported under 'Neither past due nor impaired'.

27 Loans and advances to customers include asset-backed securities that have been externally rated as strong (30 June 2011: US$4.1bn; 30 June 2010: US$4.2bn; 31 December 2010: US$4.1bn), good (30 June 2011: US$748m; 30 June 2010: US$1,039m; 31 December 2010: US$627m), satisfactory (30 June 2011: US$227m; 30 June 2010: US$223m; 31 December 2010: US$452m), sub-standard (30 June 2011: US$480m; 30 June 2010: US$511m; 31 December 2010: US$669m) and impaired (30 June 2011: US$49m; 30 June 2010: US$243m; 31 December 2010: US$29m).

28 Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due, unless individually they have been assessed as not impaired.

29 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.

30 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.

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

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

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

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

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

36 Mortgage-backed securities ('MBS's), asset-backed securities ('ABS's) and collateralised debt obligations ('CDO's).

37 High grade assets rated AA or AAA.

38 Gains or losses on the net principal exposure (footnote 44) recognised in the income statement as a result of changes in the fair value of the asset.

39 Fair value gains and losses on the net principal exposure (footnote 44) recognised in other comprehensive income as a result of the changes in the fair value of available-for-sale assets.

40 Realised fair value gains and losses on the net principal exposure (footnote 44) recognised in the income statement as a result of the disposal of assets or the receipt of cash flows from assets.

41 Reclassified from equity on impairment, disposal or payment. This includes impairment losses recognised in the income statement in respect of the net principal exposure (footnote 44) of available-for-sale assets. Payments are the contractual cash flows received on the assets.

42 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.

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

44 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.

45 Carrying amount of the net principal exposure.

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

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

48 Funded exposures represent the loan amount advanced to the customer, less any fair value write-downs, net of fees held on deposit.

49 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

50 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 the subsidiaries and the parent. The comparatives for the stressed one month coverage ratio during the half-year to 30 June 2010 have been revised upwards to better reflect intra-Group netting.

51 This comprises our 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 advances to core funding to reflect local market conditions.

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

53 HSBC-managed asset exposures relate to consolidated securities investment conduits, primarily Solitaire and Mazarin (see page 209). These vehicles issue debt secured by ABSs which are managed by HSBC. Of the total contingent liquidity risk under this category, US$8.9bn was already funded on-balance sheet at 30 June 2011 (30 June 2010: US$ 8.5bn; 31 December 2010: US$7.6bn) leaving a net contingent exposure of US$14.3bn (30 June 2010: US$18.4bn; 31 December 2010: US$18.0bn).

Market risk

54 The structural foreign exchange risk is monitored using sensitivity analysis (see page 138). 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 140.

56 Credit spread sensitivity is reported separately for insurance operations (see page 142).

57 We completed the introduction of credit spread within our VaR models globally during the first half of 2010. For the six months ended 30 June 2010, the average maximum and minimum included credit spread risk for the majority of our regions.

58 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.

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

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

61 Trading credit spread VAR was previously reported in the Group trading credit VAR. See page 137.

62 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.

63 The total VAR is non-additive across risk types due to diversification effects. It incorporates credit spread VAR.

Risk management of insurance operations

64 HSBC has no insurance manufacturing subsidiaries in the Middle East.

65 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.

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

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

68 Term assurance includes credit life insurance.

69 Other assets comprise shareholder assets.

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

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

 

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