HIH Insurance Group

HIH Insurance Company: Australia’s Biggest Corporate Collapse

HIH was Australia’s second largest and renowned insurance company which went into the provisional liquidation on 15th March 2001. This was the largest corporate collapse in Australia’s History, with total losses up to A$5.3 billion. The members of HIH management were charged as culprits, which led to their imprisonment.

According to the reports of an appointed provisional liquidator, HIH had lost more than $800 million over six months to 31st of December 2000. The company falls under various shortcomings including the failure to rapid expansion, extensive and complex reinsurance arrangements, an unsupervised delegation of authority, underpricing, false reports, reserve issues, self-dealing, fraud and irresponsible management. This caused the demise of HIH insurance company, which was considered as one of the biggest corporate Collapse in Australia.

Brief Story of HIH Group Collapse

On 1 March 2001, the Australian Prudential Regulation Authority (APRA) served the notice  ‘ show cause’ to appoint an inspector under s52 of the Insurance Act 1973. On 15th March 2001, HIH applied to the courts to be forced into provisional liquidation after the expiry of the show cause notice.

According to the thorough investigation, HIH has an estimated deficit of assets over liabilities on the order of around $5 billion in a total balance sheet of $7 billion. This was the shocking revelation and was considered as the largest corporate failure in Australian History. This caused a drastic impact on the Australian economy and aimed stress from the opposition and the media to act against it as soon as possible. To assist the affected policyholders of HIH, the Australian Government established a Royal Commission to find out the reasons of insolvency. It took around 18 months at the cost of over $50 million to summing up the major causes of the collapse. In April 2003, Justice Neville Owen, the Commissioner of the Royal Commission, submitted the report on the investigations of the HIH collapse.

The following are the main reasons behind the insolvency of HIH Insurance Group:

• Underprovisioning
• Wrong trading practices
• Corporate Governance Failure
• Mismanagement
• Ill-fated international ventures
• Abuses of reinsurance
• Improper asset valuations

It is also revealed that some senior personnel may have breached corporation laws. After the subsequent investigations, the HIH directors, associates and senior managers were sent to the custodial sentences because of their culprit activities.

Impact of the HIH Corporate Collapse

The demise of HIH Insurance Group sent affected the entire Australian business community. HIH was considered as the country’s second-largest insurance company that has now drastically collapsed. In 1997, the company purchased the major insurance operations in Argentina, Switzerland, the US and New Zealand –they were expanding their operations with each passing year. In fact, they had purchased one of its close competitors, FAI insurance in 1999.

The things were going smooth, but suddenly, the private internal reports had begun to reveal that the company’s debt and insurance liabilities were extremely high, and there was the risk of insolvency. Ultimately in early 2001, the company’s insecure financial condition became indefensible, which resulted in Australia’s largest corporate collapse. This failure impacted the entire business community, insurance industry community and the economy of the nation. If you want to know more about the adverse impacts of HIH collapse, then have a look at the following points:

Impact on the Community

The HIH’s collapse left the unfavourable crunch on the different communities of Australia and policyholders confidence across the insurance sector. Hundreds and thousands of people working at HIH Insurance Group lost their positions and jobs, over ten thousands of shareholders didn’t get anything, and policyholders of HIH lost their insurance coverage in their crucial time.

The consequences of HIH collapse were drastic- disabled or sick policyholders and insurers claiming on their policies stopped receiving payments (in the form of salary). Without insurance coverage, the Australian Rugby Union canceled their tournaments until the replacement of new insurance cover. In Queensland itself, car accident victims covered with the same insurance company didn’t get treatments worth $190 million on time.

Apart from this, HIH’s failure had left a major impact on doctors, charted accountant and other b professionals who provide their services. Most of the professional solutions were suspended by more than 100 legal centres after the sudden lockout of professional indemnity insurance.

Impact on Insurance Market Pricing

The collapse of the HIH Group caused a large premium increased in a few insurance covers, especially in public liability insurance and professional indemnity. For example, In South Australia, around six tourism and heritage rail and tram societies witnessed the hike of public liability insurance premium – from 55 to 900 per cent. This halted the operations of a rail society because they failed to afford the revised insurance.

The Australian Competition and Consumer Commission revealed that the failure of HIH Insurance Group had led to constant insurance premium hikes.  After this event, most of their competitors, as well as new insurance companies in Australia, provided insurance coverage at more reasonable rates. The impact of repricing sustained a decline in equity markets across the globe.

Impact on Medical Indemnity Insurance Sector

The Medical Indemnity Insurance sector experienced the problems soon after the collapse of HIH Group. It did irreparable damage to the United Medical Protection Limited and Australasian Medical Insurance Limited in financial markets. These companies were fallen into provisional liquidation after the collapse of HIH. In addition to this, doctors were threatened to cease work in hospitals due to the unavailability of medical indemnity insurance.

Key Points to Highlight

The collapse of HIH Insurance was the clear case of mismanagement, false accounting, breaches of corporate laws, lack of trading practices, poor corporate governance and zero knowledge of new markets. It is imperative for any organisation to analyse their processes twice or thrice while heading towards the expansion. They should take greater steps to ensure that their liabilities are covered.

HIH was making a big mistake while entering the new markets with little or no experience. They left no extra margins and that was one of the main reasons behind the Australia’s biggest corporate collapse.