HIH case study

Topics: Board of directors, Corporate governance, Insurance Pages: 5 (1529 words) Published: October 16, 2013
Contents

1.0 Executive Summary
Firstly, an introduction and background relating to HIH insurance company will be given. Then the cause of HIH collapse is going to be discuss in the following part, mainly focused on the failure of financial risk management, the failure of auditor, the failure of regulation and the lack of independence for non-executive director. Thirdly, according to the analysis of the problem, the paper offers suggestions as to deal with those problems,followed by a brief conclusion at the end of this paper. 2.0 Introduction and background

Prior to its collapse in 2011, HIH insurance was Australia's second largest insurance company. It was placed into provisional liquidation on 15 March 2001 due to its inability to pay its debts as they fell due. Two days later, the Royal Commission was established to investigate the reasons for and the circumstances surrounding the failure of HIH. The HIH collapse is considered to be the largest corporate failure in Australia's history, with liquidators estimating that HIH's losses can reach up to $5.3 billion. The collapse of HIH has a negative influence on the society and the interests of the stockholders, general creditors and policy holder are also affected by HIH collapse. 3.0 Causes of HIH Collapse

3.1 The failure of financial risk management
3.11 Weak underwriting performance
The insurance industry is in the position of high risk, especially for long-tail risk. Three important vehicles for the insurance company to use against the high risk and make a profit, which are risk pricing ability, provision for reserve policy and the investment decision. The combination of inferior risk pricing ability, under-reserving policy and failure investment decisions finally exhausts the financial resource of HIH. Underwriting is the core aspect to general insurer's operations and it reflects the risk pricing ability of the insurance company. According to the investigation report of HIH Royal Commission, in the end of year 1997 HIH make an underwriting loss of $33.8 million and net premium earned was $1233.5 million. By the contrast, for the year ending 30 June 2000, underwriting loss and net premium earned were $103.5 million and $1995.4 million respectively. Those figures reveals that during this period, underwriting loss increased sharply, resulted more provision for claims outstanding, underwriting expenses and reinsurance recoveries. (HIH, 2011) 3.12 Under-reserving policy

Another reason for HIH failing is under-reserving. As the Royal Commission Report noted, "the largest single item on the balance sheet of the general insurer is the provision that sets aside for payment of future claims". HIH had a high exposure in areas where superimposed inflation has played a devastating role. For Workers’ Compensation in California, the estimated of the growth was 23% per year (1987-1990) and 10%( 1990-1999) which reflected the relatively high inflation rate during that period. However, the growth estimated by HIH was only 3.8% that is far below the market estimation. As a result, HIH actual reserve was much lower than the market average. 3.13 Flawed investment decisions

There are three major failures in investment, which make a great contribution to its collapse. The first one was the UK operation in 1993, due to the defect of information management which result in the losses amounted to $ 1.7 billion. The second one happened in the US operation. The losses were $620 million caused by the board of directors of HIH didn't reliable evaluate the potential risk during the operation. The third failure is the FAI acquisition. Although in the situation of the lack of relevant documents such as HIH Reports of financial adviser, HIH finalized the acquisition of FAI in 1998 resulted $590 million losses. As a result, a cash flow crisis became more serious and the acquisition attributed to HIH collapse. (Rogers,nd.) 3.2 Audit are not...

Bibliography: HIH Auditing Report. (n.d.). Retrieved October 11, 2013, from FREE ONLINE RESEARCH PAPERS: http://www.freeonlineresearchpapers.com/hih-auditimg-issue
HIH Insurance. (2013). Retrieved at 7 October, 2013, from HIH Insurance: http://www.hih.com.au/
HIH Insurance Group collapse. (2011). Retrieved October 07, 2013, from PARLIAMENT OF AUSTRALIA: http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance
HOW THE COLLAPSE OF ONETEL AND HIH INSURANCE CHANGED CORPORATE GOVERNANCE IN AUSTRALIA. (n.d.). Retrieved October 10, 2013, from longdog: http://www.longdog.com.au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan.pdf
Jiangbo, X. (2010). HIH Insurance Limited: Corporate Governance and Corporate Excesses. Retrieved October 07, 2013, from http://www.seiofbluemountain.com/upload/product/201010/2010jjfzh05a8.pdf
Rogers, P. (n.d.). ETHICAL OBLIGATIONS AND THE MANAGER: CASE STUDIES. Retrieved October 07, 2013, from THOMSON RERTERS: http://www.thomsonreuters.com.au/product/AU/files/720502412/chapter_13.2_case_studies.pdf
The case study of HIH insurance company. (2007). Retrieved October 08, 2013, from blog. sina: http://blog.sina.com.cn/s/blog_4e284de701000b26.html
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