HIH Lecture 5

Question 1

Run through the timeline of HIH

10 points

Answer 1

1. formed in 1968 to underwrite workers compensation, expaned into Victoria
2. Acquired by Ce heath and know as CE heath PLC during 1971
3. Changes to workers compensation during 1985 and 1986 legislation reduced profits. It diversified its underwriting into other insurance classes and also expanded offshore.
4. it became listed in may 1992
5. It acquired CIC insurance group, major acquistion
6. May 1997 the company acquired general insurance operations of colonial mutual general Insurance company
7. In 1996 the major share holder of HIH Winterur existed and offered shares in public offering
8. In 1999 hih acquired FAI insurance, FAL was on the apra watch list
9. In 2000 HIH sold its major cash cow to Allianz Australia insurance limited
10. Formal winding up orders were made on 27 August 2001

Question 2

Why was the Royal Commission established

Answer 2

Following the failure of HIH the royal commission was set up to inquire into company’s collapse. The report outlined what could of happened and what could be improved

Question 3

What were the Key comments of the Royal commission.

5 points

point 2 has 4 bouns points

Answer 3

1. APRAs performance in supervising HIH was not good. It did not cause or contribute to the collapse APRA was Mislead on the disclosure by HIH. APRA was in varying degrees of transition and this was the mitigating factor
2. Missed warning signs, was slow to act, made misjudgments about some vital matters

For example:

• Received report from whistle blower which was ignored
• APRA had knowledge that HIH was overstating it statutory solvency
• When requesting information APRA did comparatively little in enforcing its request of further information
• The decision to act was too late to intervene effectively

3. ACIS had little direct responsibility in relation to prudential regulation of insurers: That was APRA’s role
4. State regulators relied heavily on APRA as lead regulator in terms of botch access to information of initiatives. State regulators realized that the joint venture with Allianz threaten the ongoing Financial viability.
5. The EY report was not looked at for a almost 2 months, this significance was relized after the director read the report

Question 4

Key Recommendations

Answer 4

1. APRA’s organisational structure, create specialist teams to responsibilities for the supervision of general insurers
2. Develop a more skeptical, questioning and where necessary, aggressive approach to it’s prudential supervision of general insures.
3. Develop internal system for tracking all information concerning regulated entities. The KPG report on HIH was not looked at for over a month
4. Greater disclosure of information on authorized insurers
5. Effective exchanges with relevant foreign regulators information and intelligence an operations of Australia’s insures with international operations. There is an increased importance as more firms are becoming global
6. Introduce a systematic scheme to support the policy holders of insurance companies in the event of the failure of any such companies. The baker in the country town had taken out a policy for 13 years but never got paid the policy

Question 5

Impact of the collapse of HIH

Answer 5

1. Insurance is vital element of modern society. The object is to lighten the burden of loss to individuals and groups in the community. the risk of incurring liability to spread.
2. The objective is to tighten the burden of loss to individuals and groups in the community. when an insure falls the loss lies where it falls
3. The collapse of HIH was reverbrated throughout the community and can affect:
   INDIVIDUALS: Superannuation with HIH, Home insurance
   Community: The annual st patricks day parade through steers of fremantle nearly abonded

Question 6

What were the cause of the colapse

Answer 6

1. Not a cause of wholesale fraud or embezzlement.
2. Mismanagement and high risk evident in the balance sheet

Most of the instances of possible malfeasance were borne of misconceived desire to paper over the ever- widening cracks that were appearing in HIH.

3. aggressive expansion

Money was wasted by extravagance, paying too much for business acquired, and questionable transactions; there were some trading losses; mismanagement of HIH group; expansion errors;