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Collapse of HIH Insurance

by J.A.C.
by

Colin Yong

on 14 November 2013

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Transcript of Collapse of HIH Insurance

HIH Insurance
by the J.A.C.
Case Study Objectives
1.One of the biggest names in the field of energy
2.Strong brand equity
3.High financial growth
4.Latest technology
5.Co-branding with Ferrari
6.Operations in over 90 countries having 44,000 stations

1.Legal issues
2.Over statement of oil reserves controversy
3.Ambiguous corporate communications affected marketing
4.Human Rights and environmental issues degraded image

1.Acquisitions by buying out competition
2.Increasing demand for fuel

1.Government regulations
2.High Competition
3.Environmental laws
4.Economic instability

To study the cause behind the collapse of HIH Insurance.

To analyze the lessons learnt from HIH.

To make suggestions in an attempt to prevent future corporate failures.
Was it the Auditor?
Must maintain ethical standards while working in the best interests of
shareholders.
Corporate Governance Model
C
onsistency
R
esponsibility
A
ccountability
F
airness
Is the Government accountable?
Australian Prudential Regulation Authority (APRA)
Company Act 2001
Insurance Act 1973
Financial Management & Accountability Act 1997
Commonwealth Authorities & Companies Act 1997
Conclusion
APRA should set in-place regulatories in the field of actuaries for better estimates of claim liabilities and governance.
System improvement should be continuously enhanced.
Review accounting standards&practices.
Mandatory rotation of auditors
"An antiquated Insurance Act meant that even if we had been a fully geared-up regulator, the collapse of HIH is inevitable because of deception and lying, as well as collusion by auditors and reinsurers"
(APRA's spokesperson)
The 1973 Insurance Act was "so outdated that it was completely incompetent for regulating in the 1990s," says APRA.

Insurance Council of Australia (headed by HIH chief executive Ray Williams then) lobbied to prevent any reforms from being implemented.
Did the CEO fulfill his role?
Ray Williams contributed to the collapse of HIH through:
Gross mismanagement
Decision to enter US & UK insurance markets
Uncontrolled expansion
The HIH Royal Commission
Is the Company Secretary to be blamed?
Board papers - financial & non-financial
Custody and use of company seal
hank
ou.
Janice Soon Jia Yang
Agnes Hii Wee Teen
Colin Yong Sheng Shieng
Company Background
Founded in 1968 (MW Payne Underwriting Agency Pty Ltd)
Australia’s 2nd largest insurance company
Liquidation position on 15 March 2001 with deficiency amount of $5.3 billion
Biggest financial collapse in Australia’s history
Case Study Issues
Did HIH's auditor carry out work ethically & responsibly?
Was HIH responsible towards all stakeholder?
Did the regulators fulfill their responsibilities and roles?
Who is responsible for HIH's collapse?
Were the Regulators at fault?
Two experienced and reputable actuaries, Richard Wilkinson (liquidator) & David Slee (HIH), gave differing estimates of outstanding claims liabilities, $9.7 billion and $4.4 billion respectively, just 12 months apart, based on the same data.
Was the Board of Directors effective?
T
ransparency
E
ffectiveness
D
eployed
'CRAFTED'
1999
HIH wins takeover bid for FAI

HIH posts 39% fall in profit
2000
HIH sells part of its domestic business to Allianz

HIH shares tumble to an all-time low
2001
HIH goes into provisional liquidation

Federal government ordered Royal Commission
Recommendations
Auditor
CEO
Government
Board of Directors
Company Secretary
To inquire into the circumstances surrounding the failure of the HIH Insurance Group.

PM of Australia, John Howard, tasked Justice Neville Owen of the Supreme Court of Western Australia to be the Royal Commissioner.
Lessons Learnt
Wrong business decisions can be costly and even fatal.
A sound system of risk management and internal control is required for identification and effective management of risk in any corporation.
Rodney Adler was not only a director at HIH but also one at FAI.

Three former partners from Arthur Anderson sat on HIH board.
"Organisations need to practice qualitative corporate governance rather than quantitative governance thereby ensuring it is properly run.”
Mak, T, Cooper, K, Deo, H & Funnell, W 2005, ‘Audit, accountability and an auditor's ethical dilemma: A case study of HIH Insurance’,
Asian Review of Accounting
, vol. 13, no. 2, p. 25.
Mirshekary, S, Yaftian, AM & Cross, D 2005, ‘Australian corporate collapse: The case of HIH Insurance’,
Journal of Financial Services Marketing,
vol. 9, pp. 249–258.
Zehnwirth, B 2002, 'HIH debacle reveals monitoring flaws',
Australian Financial Review
, November 15.
Sydney, MH 2002,
Australia’s regulator turns over a new leaf after the HIH debacle
, Insurance Day, viewed 10 November 2013, <http://www.insurancedayjobs.com/recruitment/default.jsp?zone=public_zone&area=news_area&page=newsdetail_page_1&news_id=20000058039>.
King, M 2009, 'The King Report on Corporate Governance for South Africa (The Institute of Directors in Southern Africa)'.
Allan, G 2006, ‘The HIH Collapse: A Costly Catalyst for Reform’,
Deakin Law Review
, vol. 11, no. 2, pp. 137-159.
Westfield, M 2003,
HIH: The Inside Story of Australia’s Biggest Corporate Collapse
, John Wiley & Sons, Sydney.
Westfield, M 2003, HIH: The Inside Story of Australia’s Biggest Corporate Collapse, John Wiley & Sons, Sydney.
Arguden, Y 2010, 'A Corporate Governance Model: Building Responsible Boards and Sustainable Businesses',
Global Corporate Governance Forum
, vol. 17, pp. 1-16.
Sydney, MH 2002,
Australia’s regulator turns over a new leaf after the HIH debacle
, Insurance Day, viewed 10 November 2013, <http://www.insurancedayjobs.com/recruitment/default.jsp?zone=public_zone&area=news_area&page=newsdetail_page_1&news_id=20000058039>.
John, RS 2001,
The HIH Royal Commission
, Commonwealth of Australia, viewed 10 November 2013, <http://www.hihroyalcom.gov.au/About/index.asp>.
Tricker, RI 1994,
International Corporate Governance: Text Readings and Cases
, Prentice Hall, New York.
Mills Oakley Lawyers 2012,
Company Secretaries – Know Your Obligations
, Mills Oakley Lawyers, viewed 10 November 2013, <http://www.millsoakley.com.au/company-secretaries-know-your-obligations/>
Mirshekary, S, Yaftian, AM & Cross, D 2005, ‘Australian corporate collapse: The case of HIH Insurance’,
Journal of Financial Services Marketing,
vol. 9, pp. 249–258.
“You cannot legislate good behaviour.”
Mervyn King
"The Board is the mind...the management team its hands!"
Dennings
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