HIH Insurence Group Collapse.docx

HIH Insurence Group Collapse.docx

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HIHInsurenceGroupCollapse

∙Assessmentitem1:

WebBasedResearch

Length:

3000words

Task

GotothefollowingwebsiteabouttheHIHInsuranceCompany.http:

//www.aph.gov.au/library/intguide/econ/hih_insurance.htm（HIHInsuranceGroupCollapse）andreadthearticle.ItisasummaryofaverylargeinsurancecompanyfailureinAustralia.Youmayuseanyotherwebsiteorsourceofinformationwhichyouthinkmighthelp.

Makeahistoryofthemaineventsinthecollapseofthecompany.Canyouidentifythebadorwrongmovesthatcontributedtothecollapse?

Canyouidentifythemostimportantpeopleinthecompanywhomighthavecontributedtothecollapse?

Usingthedescriptionsofmanagementtypesdiscussedinthecourse,makecommentontheethicalbehavioursoftheprincipalmanagementpersonsinthecompanyandexplainthebasisforyourassessmentofthesepersons. 

Rationale

Ultimately,strategyandstrategicthinkingcanbeappliedtoorganisationstotakeadvantageofacompanyinamannerwhichwouldnotbeconsideredethical.Studentsarerequiredtoconsiderhowdifferentdecisionchoicesbythedirectorsmayhaveavoidedthecollapseofthecompany.

Markingcriteria

Thisitemisintendedtomakestudentsthink'outsidethesquare'andexaminetheneedtochangestrategyduringasequenceofevents.

Demonstratedappreciationofthesituation

25%

StrategicissuesrelatedtoCompanyissues

25%

 StrategicissuesrelatedtotheOperationsofthecompany

25%

 Summaryofhowdifferentlyyoumighthaverunthecompany

25%

AttachmentarticlefromAustraliagovernmentreports

HIHInsuranceGroupCollapse

E-Brief:

OnlineOnlyissuedDate29November2001

DavidKehlAnalysisandPolicy

Economics,CommerceandIndustrialRelationsGroup

Background

Therearefewsurpriseswhenitcomestoinsurance,butwhentheydocome,theynearlyalwaysbringbadnews.SuchwasthedemiseofHIHInsuranceLimited（HIH）:

bothasurprise（tomany）andverybadnewsformanypolicyholders.

OnThursday,15March2001,HIHreceivedapprovalfromtheNSWSupremeCourttoplaceHIHintoprovisionalliquidation.TonyMcGrathofKPMGwasappointedasprovisionalliquidatortoHIHand17ofitscontrolledentities.ProvisionalliquidationisatemporaryformofadministrationthatgivesHIHtimefortheprovisionalliquidatorstoreviewHIHoperationsandassessthefinancialposition.

HIHinsuranceisnowinrun–off,whichmeansitismanagingitsoutstandingclaimsandnotwritinganynewbusiness.Thiscouldtakeseveralyearstocomplete;somehavesuggestedaslongas10years.

FactsAboutHIHInsurance

HIHcomprisedseveralseparategovernment–licensedinsurancecompanies,includingHIHCasualtyandGeneralInsuranceLimited,FAIGeneralInsuranceCompanyLimited（FAI）,CICInsuranceLimited（CIC）andWorldMarineandGeneralInsurancesLimited（WMG）.

HIHwrotemanytypesofinsuranceinAustralia,theUSA,andtheUK.IlAu1t0alia,thisincludescompulsoryinsurance（suchasworkers’compensationandcompulsorythirdpartymotorvehicle）andnon–compulsoryinsurance（suchashomecontentsandtravelinsurance）.

AccordingtotheHIH2000AnnualReportthecompanyhadgrosspremiumrevenueof$2.8 billion,totalassetsof$8.0billion,totalliabilitiesof$7.1billion,withnetassetsof$900 million.

AbriefrecenthistoryofHIHisprovidedbelow.

Date

Event

Jun41992

BritishinsurancebrokerCEHeathfloatsoff45percentofitsunder–performingsubsidiaryCEHeathInternationalHoldingsLtd（HIH）onthestockexchange.HIHin1991hadnetassetsof$A39.7million.

April1995

HIHInsuranceLtdacquiresCICInsurance

Jun61996

HIHacquiresUtilitiesInsurance

Jan81997

HIHbecomesAustralia'slargestunderwriterofbancassurancebusinessafteracquiringColonialMutualGeneralInsurance.

Sep1998

HIHblacklistsstockbrokinganalystswhodisputeditsassessmentofthecompany

January1999

HIHwinsa$300-milliontakeoverbidforFAIInsurance

3March1999

HIHpostsa39percentfallin1998netprofitto$37.6million,blamingdamageclaims

19November1999

HIHadmitsitpaidmorethanitexpectedforFAI.

March2000

HIHreturnstoprofitabilityinfirsthalfof1999/2000.

June2000

AnalystsareconcernedaboutHIHaftertheAustralianPrudentialRegulatoryAuthority's（APRA）proposestoincreasecapitaladequacyrequirementsforinsurers

13September2000

HIHsellspartofitsdomesticpersonallinesbusinesstoGermaninsurancegiantAllianzfornearly$500million

14September2000

HIHsharestumbletoanall-timelowafteralower-than-expectedprofitresultandcriticismoftheAllianzdeal

12October2000

HIHchiefexecutiveRayWilliamsannounceshisretirement

15December2000

HIHshareholderscallforresignationofformerFAIchiefRodneyAdlerfromtheHIHboard

26February2001

RodneyAdlerresignsfromHIHboard

14March2001

NRMAInsurancebuysHIH'sworkers'compensationportfolio.

15March2001

HIHInsurancegoesintoprovisionalliquidationwithlossesof$800million

16March2001

APRAsaysHIH'swoesstemlargelyfromareassessmentofclaimsliabilities

11April2001

Provisionalliquidatorwarnsitcouldtakeupto10yearsbeforesomecreditorsarepaid.

16May2001

AustralianSecuritiesandInvestmentsCommissionlaunchesitsbiggesteverinvestigation,seizingHIHdocuments

18May2001

FormerHIHchiefRayWilliamshandsinhispassportandsayshehasnothingtohide

21May2001

ThefederalgovernmentannouncesaroyalcommissionintowhatisAustralia'sbiggestcorporatecollapse.

Source:

AAP,compiledbyRobLundie.

WhoIsAffected?

ShareholdersofHIHarelikelytoincursignificantlossesontheirinvestment,perhapstheirentirecapital.Theextentoftheselosseswillberevealedovertime.

ImmediatelyfollowingthecollapseofHIH,numerousreportsappearedinthepressaboutHIHpolicyholdersnothavingtheirinsurancecontractshonoredandtheirclaimsnotpaid.Thissectiondiscusseshowdifferentpolicyholderswereaffectedimmediatelyafterthecollapse.

PriortoandafterthecollapseofHIH,asubstantialnumberofpolicyholderswithparticulartypesofinsurancehadtheirpoliciestakenoverandhonouredbyotherinsurers.Thefollowingsections:

▪Explainwhichpolicyholdershavehadtheirpoliciestakenoverbyothercompanies

▪IdentifiesthosepolicyholderswithHIHanditssubsidiariesthatwereatriskofsufferingfinanciallossbynothavingtheirinsurancecontractshonoredandclaimspaid,and

▪Identifiespolicyholdersthatmayneedtotakeoutnewinsurancecover.

PersonalandDomesticInsurance

Accordingtotheprovisionalliquidator,AllianzAustraliaInsuranceLimited（Allianz）haveconfirmedthatprivatemotor,compulsorythirdparty（"CTP"）,privatepleasurecraft,homebuildingandhomecontentsinsurancepolicieswithHIH,FAI,CICandWMG,thatwerecurrentat1January2001orhavebeenissuedbyAllianzsincethisdate,arecoveredbyAllianz.Accordingly,policiesinthesecategoriesdonotneedtobereplaced.Foranyotherpersonalanddomesticinsuranceproductsnotlistedabove,customersshouldobtainadviceastowhethertheyneedtoobtainalternativeinsurancecover.

ClaimsonpoliciesinpriorperiodsofinsuranceandinrespectofthosepoliciesnotcoveredbytheAllianzarrangements,willconstituteclaimsagainstHIHandwillnotbepaidatthistime.Thereisthereforearealriskthatpersonalanddomesticpolicyclaims（withtheexceptionofCTPclaims）madeonpoliciesnotcurrentat1January2001andonpoliciesnotcoveredbytheAllianzarrangements,maynotbecapableofbeingfullysatisfied.

Accordingtotheprovisionalliquidator,CTPpolicyclaimswillbemetinfulleitherbyAllianz（policiescurrentat,orissuedbyAllianzsince1January2001）orthroughtherelevantstatestatutoryschemesregardlessofwhenthepolicywasissued.Accordingly,currentCTPpoliciesdonotneedtobereplacedandnormalclaimsprocessesremaininplace.

Workers'CompensationInsurance

Schemesexistineachstateandterritorytomakepaymentstoclaimantsundercertaincircumstances.InNSW,VictoriaandSA,HIHmanagedworkers’compensationclaimsfortherelevantstateauthority,whichwillcontinuetosettleclaimsinaccordancewiththeirnormalpractice.

Accordingtotheprovisionalliquidator,NRMAInsuranceLimited（NRMA）iscurrentlyintheprocessofseekingtotakeontherenewalrightsintheHIHworkers’compensationbusiness.TheprovisionalliquidatorhasagreedwithNRMAthatsubjecttocompletionofthetransaction,NRMAwillassumeHIH’sriskinrelationtocurrentworkers’compensationpoliciesfromthedateonwhichHIHwentintoprovisionalliquidation（ie15March2001）.Accordingly,currentpoliciesinthiscategoryofinsurancedonotneedtobereplaced.

Nonetheless,workers’compensationpolicieswritteninVictoria,WesternAustralia,TasmaniaandtheACThavebeenthesubjectofgovernment–fundedrescuepackages（seebelow）.

SmallBusiness,RuralandCommercialInsurance

Accordingtotheprovisionalliquidator,Allianzhaveconfirmedthatsmallbusinesspackages,ruralpackagesandmostsmallcommercialinsurances（suchascommercialmotor,fleetmotorlessthan150vehicles,propertywithassetvalueslessthan$20million,publicandproductsliabilitypolicieswithturnoverlessthan$5millionandmarine）arrangedthroughdistributorsotherthaninternationalbrokerswithHIH,FAI,CICandWMGthatwerecurrentat1January2001orhavebeenissuedbyAllianzsincethisdate,willbecoveredbyAllianz.Accordingly,mostcurrentpoliciesinthiscategoryofinsurancedonotneedtobereplaced.

Smallbusiness,ruralandcommercialinsurancepolicycustomersthatarenotcoveredundertheAllian