The Collapse of HIH Insurance

Corporate Governance

Q.1

HIH Insurance was the second largest Australian insurance company before it got liquidated in March 2001. It was a publicly listed company, before its collapse in 2001. ON 15th March 2001, the company along with its subsidiaries was placed into provisional liquidation, and in August of the same year, it was put into liquidation. The downfall of HIH Insurance is considered as one of the leading examples of the collapse of a corporate in Australia’s history. HIH’s total losses were calculated to be A$5.3 billion (Mirshekary, Yaftian and Cross, 2005).

The HIH Insurance, before being placed into liquidation, had a very complicated organisational structure. The group consisted of more than 200 companies. Some of the companies under the HIH Insurance Group were HIH Casualty & General Insurance Limited (HIH C&G), HIH Underwriting & Insurances Pty Limited, World Marine & General Insurance Pty Limited, CIC Insurance Limited (CIC), and many more. Of all these companies, HIH C&G and CIC were the most important companies for the group because of their size and scale of activity (Phelan, 2011).

Q.2

Before the collapse, HIH Insurance had assets worth well over $8 billion, due to which it was considered as one of the largest insurance companies in Australia. However, after offsetting its assets with debts and potential claims of insurance against the company, HIH was left with assets amounting to only $133 million (McCarthy, 2001). Even with a small movement in the value of assets could have had a significant impact on firms’ balance sheet and could have resulted in a deficiency of net assets. This was supported by Du Plessis (2003) who stated that the HIH’s solvency was only ‘marginal’. According to Vaughan (2004), one of the main reasons for the company’s collapse was because its debt leverage and insurance liabilities were extremely high. Mak, Cooper and Funnell (2005) supported this finding and stated that this lead to insolvency of the company. Anderson (2006) argued that HIH’s downfall could be associated with its rapid and over-aggressive expansion business strategies. There were more than 200 subsidiaries of the insurance group. Jackling, Leung and Dellaportas (2007) stated that the HIH Insurance was operating in one of the most competitive marketplaces in the country, due to which it was unable to cope with the constant pressure and competition. In addition, the company had acquired some very troubled insurance firms such as FAI from Rodney Adler in $300 million, but FAI was later revealed to be valued at only $100 million. According to Du Plessis (2003), this was the biggest risk HIH Insurance had ever taken. Under-pricing and reserve problem were also some of the major issues faced by the company. It provided insurance at very low prices but then failed to provide enough capital that could have covered its future liabilities. Mirshekary, Yaftian and Cross (2005) argued that reasons for company’s collapse could not only be attributed to aggressive business strategies but also false reports, irresponsible management, fraud, stock market manipulation and disseminating false information.

Q.3

There are several reasons that lead to the failure and collapse of HIH Insurance. In the scenario, the board of directors were primarily responsible for the downfall of the company. The corporate governance aspect of the company was very weak. It can be supported through the fact that there was a lack of independence for the non-executive director from the management. This meant that the non-executive directors could not oversee functions and decisions taken by the management (Murat, Tonkin and Jüttner, 2002). Due to this reason, the company failed to recognise true value of FAI. Further, over dominance from Ray Williams, the CEO also had a major role to play in the downfall of the company. In addition to this, inadequate risk management systems also lead to the downfall of the firm.

Q.4

Herein it can be observed that the negligence from the board of directors, executive and non-executive directors had a major role to play in the downfall of the company. The actuarial advisor had warned the management about the impending risk of collapse almost a year before such events (Phelan, 2011). According to the actuarial adviser, the company was engrossed in some very dubious accounting practices, which could have disastrous consequences for the firm. Instead of taking this advice seriously, the management decided to reduce the company’s risk by buying reinsurance from other insurance providers.

Q.5

The Australian insurance industry is governed, monitored and controlled by the Federal, State and Territory legislation. The Federal regulatory system consists of three main authorities – Treasury, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC). The treasury is responsible for developing and implementing the regulatory policies, while APRA is associated with the task of setting up prudential regulation in the insurance industry; and the market is controlled by the ASIC (Mak, Cooper and Funnell, 2005). APRA was among the first authority that became aware of HIH’s over aggressive accounting and business expansion.

Q.6

While filing for statutory returns, companies have to pay attention to certain specific requirements. They have to comply with the regulatory requirements of RG58, RG85, INFO 31, INFO 183, and INFO 191 (Regulatory Index – Financial Reporting, 2018).

Q.7

Corporate Governance includes a wide variety of aspects. It is imperative for the management to use a number of systems to effectively perform this function. One of the management processes that a firm can use internal audits. This is considered as a highly effective way of handling and performing various corporate governance related activities (Phelan, 2011). Through the use of internal audit the management can identify areas of possible issues, and on the basis of such information, they can take decisions for rectification. Other than this corporate planning can also be extremely useful and effective in this regard (Jackling, Leung and Dellaportas, 2007). Various committees can also be created that oversee various functions of the company. It includes the likes of audit and risk committees, business continuity and emergency planning committees, and human resource management committees.

Q.8

Currently, the operations of insurance companies and firms in other industries are governed by the Australian Prudential Regulation Authority (APRA). It uses a supervisory approach for monitoring operations of insurance companies in the country. The supervision is primarily based on a review and analysis of statutory returns. It includes the likes of quarterly returns, an annual application by the insurance company for approval of reinsurance arrangements, and an application for approval of related party assets that have to be included in the solvency calculations (Phelan, 2011).

REFERENCES

Books and Journals

• Anderson, B. A. (2006). Crisis management in the Australian tourism industry: Preparedness, personnel and postscript. Tourism Management, 27(6), 1290-1297.
• Du Plessis, J. J. (2003). Reverberations after the HIH and other recent Australian corporate collapses: the role of ASIC. Australian Journal of Corporate Law, 15, 225-245.
• Jackling, B., Leung, P., and Dellaportas, S. (2007). Professional accounting bodies' perceptions of ethical issues, causes of ethical failure and ethics education. Managerial auditing journal, 22(9), 928-944.
• Mak, T., Cooper, K. and Funnell, W. (2005). Audit, accountability and an auditor's ethical dilemma: A case study of HIH Insurance. Asian Review of Accounting, 13(2), 18-35.
• McCarthy, G. (2001). The HIH Royal Commission and the tangled web of truth. Australian Journal of Public Administration, 60(3), 110-112.
• Mirshekary, S., Yaftian, A. M., and Cross, D. (2005). Australian corporate collapse: The case of HIH Insurance. Journal of Financial Services Marketing, 9(3), 249-258.
• Murat, G., Tonkin, R. S., and Jüttner, D. J. (2002). Competition in the general insurance industry. Zeitschrift für die gesamte Versicherungswissenschaft, 91(3), 453-481.
• Phelan, L. (2011). Managing climate risk: extreme weather events and the future of insurance in a climate-changed world. Australasian Journal of Environmental Management, 18(4), 223-232.
• Vaughan, T. M. (2004). Financial stability and insurance supervision: the future of prudential supervision. The Geneva Papers on Risk and Insurance. Issues and Practice, 29(2), 258-272.

Online

• Regulatory Index – Financial Reporting., (2018). [Online]. Available through: < https://asic.gov.au/regulatory-resources/regulatory-index/financial-reporting/ >. [Accessed on 26th March 2019].