Interim Report - 20 of 28

RNS Number : 9073L

HSBC Holdings PLC

16 August 2013

 



Risk management of insurance operations

	Page
HSBC's bancassurance model ........................	175
Insurance risk in the first half of 2013 ..........	175
Analysis of life insurance risk - liabilities to policyholders ....................................................	176
Balance sheet of insurance manufacturing subsidiaries by type of contract ...................	176
-  by type of contract ........................................	177

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 our policies and practices for the management of insurance risk, including the risks relating to different life and non-life products.

A summary of HSBC's policies and practices regarding insurance risk and the main contracts we manufacture is provided in the Appendix to Risk on page 273 of the Annual Report and Accounts 2012.

HSBC's bancassurance model

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

The insurance contracts we sell largely 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, these insurance products are manufactured by HSBC subsidiaries. Manufacturing insurance allows us to retain the risks and rewards associated with writing insurance contracts as part of the underwriting profit, investment income and distribution commission are kept within the Group.

Where we do not have the risk appetite or operational scale to be an effective insurance manufacturer, we engage through a handful of leading external insurance companies 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 profit-share.

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, UK, Hong Kong and Singapore). Our life insurance manufacturing entities in the US previously reported as 'held for sale' were sold in the first half of 2013.

Insurance risk in the first half of 2013

Risks in these operations are managed within the insurance entities using methodologies and processes appropriate to the insurance activities, but remain subject to oversight at Group level.

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 discretionary participation (or bonus) features ('DPF') within the policy.

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 2012.

Analysis of life insurance risk - liabilities to policyholders^55,56

	Europe		Hong          Kong		Rest of          Asia-        Pacific		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m
At 30 June 2013
Life (non-linked) ..............................................................	1,293		27,575		1,705		2,142		32,715
-  insurance contracts with DPF57 .................................	354		25,366		502		-		26,222
-  credit life ..................................................................	131		-		68		-		199
-  annuities ...................................................................	585		-		127		1,501		2,213
-  term assurance and other long-term contracts ...........	223		2,209		1,008		641		4,081
Life (linked) .....................................................................	3,402		3,676		627		4,995		12,700
Investment contracts with DPF57,58 ..................................	24,330		-		-		-		24,330
Insurance liabilities to policyholders .................................	29,025		31,251		2,332		7,137		69,745
At 30 June 2012
Life (non-linked)	1,185		23,645		1,432		2,079		28,341
-  insurance contracts with DPF57 .................................	329		22,028		395		-		22,752
-  credit life ..................................................................	167		-		59		-		226
-  annuities ...................................................................	547		-		110		1,512		2,169
-  term assurance and other long-term contracts ...........	142		1,617		868		567		3,194
Life (linked) .....................................................................	2,774		3,713		532		4,905		11,924
Investment contracts with DPF57,58 ..................................	21,898		-		8		-		21,906
Insurance liabilities to policyholders .................................	25,857		27,358		1,972		6,984		62,171
At 31 December 2012
Life (non-linked) ..............................................................	1,319		25,615		1,587		2,163		30,684
-  insurance contracts with DPF57 .................................	353		23,685		439		-		24,477
-  credit life ..................................................................	160		-		61		-		221
-  annuities ...................................................................	586		-		122		1,579		2,287
-  term assurance and other long-term contracts ...........	220		1,930		965		584		3,699
Life (linked) .....................................................................	3,249		3,786		594		5,427		13,056
Investment contracts with DPF57,58 ..................................	24,370		-		4		-		24,374
Insurance liabilities to policyholders .................................	28,938		29,401		2,185		7,590		68,114

For footnotes, see page 178.

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.

Balance sheet of insurance manufacturing subsidiaries by type of contract

A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching.

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 2013.

Balance sheet of insurance manufacturing subsidiaries by type of contract

	Insurance contracts												Investment contracts
	With       DPF		Unit- linked		Annu-     ities		Term assur- ance59										Unit- linked				Other				Other assets60				Total
									Non-life		With       DPF58
	US$m		US$m		US$m		US$m		US$m			US$m				US$m				US$m				US$m				US$m
At 30 June 2013
Financial assets ...............	25,918		12,451		1,733		4,365		45			23,636				8,782				4,303				5,511				86,744
- trading assets ............	-		-		4		-		-			-				-				-				-				4
- financial assets designated at fair value.................................	3,628		12,258		524		670		14			6,389				8,349				1,550				1,425				34,807
- derivatives ...............	13		3		-		1		-			191				6				1				59				274
- financial investments .................................	19,053		-		955		3,402		5			15,518				-				1,906				3,193				44,032
- other financial assets	3,224		190		250		292		26			1,538				427				846				834				7,627
Reinsurance assets ..........	174		327		493		339		7			-				-				-				3				1,343
PVIF61 ............................	-		-		-		-		-			-				-				-				4,874				4,874
Other assets and investment properties ..	730		10		28		105		-			694				28				26				452				2,073
Total assets ....................	26,822		12,788		2,254		4,809		52			24,330				8,810				4,329				10,840				95,034
Liabilities under investment contracts:
- designated at fair value	-		-		-		-		-			-				8,601				3,740				-				12,341
- carried at amortised cost	-		-		-		-		-			-				-				452				-				452
Liabilities under insurance contracts ......	26,222		12,700		2,213		4,280		26			24,330				-				-				-				69,771
Deferred tax ...................	13		-		11		-		-			-				-				-				1,099				1,123
Other liabilities ...............	-		-		-		-		-			-				-				-				1,890				1,890
Total liabilities ...............	26,235		12,700		2,224		4,280		26			24,330				8,601				4,192				2,989				85,577
Total equity ...................	-		-		-		-		-			-				-				-				9,457				9,457
Total equity and liabilities62....................................	26,235		12,700		2,224		4,280		26			24,330				8,601				4,192				12,446				95,034
At 30 June 2012
Financial assets ...............	22,712		11,129		1,798		3,758		1,123			21,242				8,138				4,212				6,347				80,459
- trading assets ............	-		-		4		-		-			-				-				-				-				4
- financial assets designated at fair value.................................	1,989		10,905		376		571		212			5,895				7,432				1,472				2,623				31,475
- derivatives ...............	20		1		-		-		-			216				5				91				5				338
- financial investments .................................	16,971		-		1,083		2,929		676			13,728				-				1,847				3,122				40,356
- other financial assets	3,732		223		335		258		235			1,403				701				802				597				8,286
Reinsurance assets ..........	13		826		464		166		102			-				-				-				73				1,644
PVIF61 ............................	-		-		-		-		-			-				-				-				4,426				4,426
Other assets and investment properties ..	422		8		19		175		145			664				30				28				2,924				4,415
Total assets ....................	23,147		11,963		2,281		4,099		1,370			21,906				8,168				4,240				13,770				90,944
Liabilities under investment contracts:
- designated at fair value	-		-		-		-		-			-				8,057				3,679				-				11,736
- carried at amortised cost	-		-		-		-		-			-				-				430				-				430
Liabilities under insurance contracts ......	22,752		11,924		2,169		3,420		690			21,906				-				-				-				62,861
Deferred tax ...................	17		-		14		10		1			-				-				-				1,011				1,053
Other liabilities ...............	-		-		-		-		-			-				-				-				4,587				4,587
Total liabilities ...............	22,769		11,924		2,183		3,430		691			21,906				8,057				4,109				5,598				80,667
Total equity ...................	-		-		-		-		-			-				-				-				10,277				10,277
Total equity and liabilities62....................................	22,769		11,924		2,183		3,430		691			21,906				8,057				4,109				15,875				90,944

	Insurance contracts												Investment contracts
	With       DPF		Unit-    linked		Annu-      ities		Term assur- ance59										Unit-    linked				Other				Other assets60				Total
									Non-life		With       DPF58
	US$m		US$m		US$m		US$m		US$m			US$m				US$m				US$m				US$m				US$m
At 31 December 2012
Financial assets ...............	24,288		12,619		1,785		4,350		356			23,620				8,780				4,315				4,692				84,805
- trading assets ............	-		-		4		-		-			-				-				-				-				4
- financial assets designated at fair value	2,333		12,440		571		756		196			6,043				8,206				1,486				987				33,018
- derivatives ................	40		4		-		6		-			117				13				86				69				335
- financial investments	18,283		-		932		3,315		73			16,022				-				1,853				2,928				43,406
- other financial assets	3,632		175		278		273		87			1,438				561				890				708				8,042
Reinsurance assets ..........	124		593		494		320		14			-				-				-				22				1,567
PVIF61 ............................	-		-		-		-		-			-				-				-				4,847				4,847
Other assets and investment properties ..	448		7		34		110		11			754				24				28				2,420				3,836
Total assets ....................	24,860		13,219		2,313		4,780		381			24,374				8,804				4,343				11,981				95,055
Liabilities under investment contracts:
- designated at fair value ..................................	-		-		-		-		-			-				8,691				3,765				-				12,456
- carried at amortised cost	-		-		-		-		-			-				-				455				-				455
Liabilities under insurance contracts ......	24,477		13,056		2,287		3,920		81			24,374				-				-				-				68,195
Deferred tax ...................	13		-		13		12		1			-				-				-				1,161				1,200
Other liabilities ...............	-		-		-		-		-			-				-				-				2,760				2,760
Total liabilities ...............	24,490		13,056		2,300		3,932		82			24,374				8,691				4,220				3,921				85,066
Total equity ...................	-		-		-		-		-			-				-				-				9,989				9,989
Total equity and liabilities62	24,490		13,056		2,300		3,932		82			24,374				8,691				4,220				13,910				95,055

For footnotes, see below.

Footnotes to Risk

Credit risk

  1 The table presents our maximum exposure to credit risk from balance sheet and off‑balance sheet financial instruments before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). For financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount; for financial guarantees and similar contracts granted, it is the maximum amount that we would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, it is generally the full amount of the committed facilities.

  2 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$48bn (30 June 2012: US$27.9bn; 31 December 2012: US$28bn), reflecting the full take-up of such irrevocable loan commitments. The take-up of such offers is generally at modest levels.

  3 The US includes residential mortgages of HSBC Bank USA and HSBC Finance. Other regions comprise Rest of Asia-Pacific, Middle East and North Africa, and Latin America.

  4 First lien residential mortgages include Hong Kong Government Home Ownership Scheme loans of US$3.1bn at 30 June 2013 (30 June 2012: US$3.2bn; 31 December 2012: US$3.2bn).

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

  6 Property acquired through foreclosure is initially recognised at the lower of the carrying amount of the loan or its fair value less estimated costs to sell ('Initial Foreclosed Property Carrying Amount'). The average loss on sale of foreclosed properties is calculated as the Initial Foreclosed Properties Carrying Amount less cash proceeds divided by the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g. real estate tax advances) and were incurred prior to our taking title to the property. This ratio represents the portion of our total loss on foreclosed properties that occurred after we took title to the property. The comparative data for 30 June and 31 December 2012 are restated (previously divided by the Initial Foreclosure Property Carrying Amount).

  7 The average total loss on foreclosed properties includes both the loss on sale of the foreclosed property as discussed in footnote 6 and the cumulative write-downs recognised on the loans up to the time we took title to the property. This calculation of the average total loss on foreclosed properties uses the unpaid loan principal balance prior to write-down (excluding any accrued finance income) plus certain other ancillary disbursements that, by law, are reimbursable from the cash proceeds (e.g. real estate tax advances) and were incurred prior to our taking title to the property.

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

  9 For the purpose of this disclosure, retail loans which are past due up to 89 days and are not otherwise classified as impaired in accordance with our disclosure convention (see page 162 in the Annual Report and Accounts 2012), are not disclosed within the expected loss ('EL') grade to which they relate, but are separately classified as past due but not impaired.

10 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.

11 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'.

12 Loans and advances to customers include asset-backed securities that have been externally rated as strong (30 June 2013: US$2.0bn; 30 June 2012: US$3.5bn; 31 December 2012: US$2.3bn), good (30 June 2013: US$348m; 30 June 2012: US$564m; 31 December 2012: US$457m), satisfactory (30 June 2013: US$338m; 30 June 2012: US$205m; 31 December 2012: US$390m), sub-standard (30 June 2013: US$493m; 30 June 2012: US$649m; 31 December 2012: US$422m) and impaired (30 June 2013: US$246m; 30 June 2012: US$227m; 31 December 2012: US$259m).

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

14 Included in this category are loans of US$2.1bn (30 June 2012: US$2.5bn; 31 December 2012: US$2.3bn) 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.

15 Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10, retail loans 90 days or more past due, unless individually they have been assessed as not impaired (see page 127, 'Past due but not impaired gross financial instruments') and renegotiated loans and advances meeting the criteria to be disclosed as impaired (see page 129).

16 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.

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

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

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

20 Included within 'Exchange and other movements' is US$0.8bn of impairment allowances reclassified to held for sale.

21 'Currency translation' 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.

22 Negative numbers are favourable: positive numbers are unfavourable.

23 Equity securities not included.

24 Included within 'Total gross loans and advances to customers' is credit card lending of US$28.9bn (30 June 2012: US$29.1bn; 31 December 2012: US$31.2bn).

25 The impairment allowances on loans and advances to banks at 30 June 2013 relate to the geographical regions, Europe and Middle East and North Africa (30 June 2012: Europe and Middle East and North Africa; 31 December 2012: Europe, Middle East and North Africa and North America).

26 Carrying amount of the net principal exposure.

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

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

29 'Effect of impairments' represents the reduction or increase in the reserve on initial impairment and subsequent reversal of impairment of the asset.

30 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.

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

32 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.

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

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

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

36 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.

37 In-country liabilities in Italy include liabilities issued under local law but booked outside the country.

Liquidity and funding

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

39 HSBC UK comprises five legal entities; HSBC Bank plc (including all overseas branches), Marks and Spencer Financial Services Limited, HSBC Private Bank (UK) Ltd, HFC Bank 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.

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

41 HSBC USA 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.

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

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

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

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

Market risk

46 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.

47 Revenues within the daily distribution graph include all revenues booked in Global Markets (gross of brokerage fees). The 2012 daily distribution of trading revenues excludes the effect of the one-off credit valuation adjustment on derivative assets of US$899m.

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

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

50 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.

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

52 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.

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

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

Risk management of insurance operations

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

56 The life insurance business in North America previously reported as held for sale was disposed of in the first half of 2013.

57 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.

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

59 Term assurance includes credit life insurance.

60 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$0.1bn at 30 June 2013 (30 June 2012: US$2.4bn; 31 December 2012: US$2.0bn). Assets classified as held for sale consist primarily of debt securities. All liabilities for insurance businesses classified as held for sale are reported in 'Other liabilities' and totalled US$0.1bn at 30 June 2013 (30 June 2012: US$1.6bn; 31 December 2012: US$1.2bn). The majority of these liabilities were life and non-life policyholder liabilities.

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

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

 

END

 

 

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