The Guardian May 23, 2001


HIH collapse: greed and corruption

by Anna Pha

In the world of global financial institutions the law of the jungle 
applies. Ever on the prowl for greater profits in what economists call "a 
highly competitive climate", these financial giants will use whatever means 
they see fit to dominate the market. It is in this cut-throat environment 
of greed and corruption that HIH insurance has been wiped out, leaving two 
million policy holders stranded and HIH workers facing a bleak and 
uncertain future. After a great deal of public pressure the Howard 
Government has reluctantly agreed to a Royal Commission into the collapse. 
Its members and terms of reference are yet to be announced.

The Government has also announced a payment plan in which it will pay:

* 100 cents in the dollar for salary continuance policies and personal 
injury claims; claims for a total loss of primary residence; claims by 
Australian not-for-profit organisations;

* 90 cents in the dollar where the family of the insured has a taxable 
income less than $77,234 plus $3,139 per child; income is more than $77,234 
if the claim is more than 10 percent of family taxable income;

* 90 cents in the dollar for small businesses with fewer than 50 employees; 
NSW Treasurer Michael Egan came up with the not unreasonable proposal that 
an extra tax be applied to all insurance companies to pay for debacles like 
HIH. HIH was the second largest general insurer in Australia. It claimed to 
have net assets of $940 million as of June 30, 2000  a claim confirmed by 
one of the largest auditing companies in the world as recently as last 
October. Today, it is in the hands of the provisional liquidators, with 
estimated liabilities of $400 billion or more.

Two million insurance policies became worthless  leaving some people 
homeless, others bankrupt. Workers, retirees, self-employed professionals 
and small businesses have all been affected. Shareholding superannuation 
funds and retirees have lost their savings.

There are HIH's employees, the forgotten victims, whose jobs and 
entitlements are on the line. As the taxpayers are called upon to come to 
the rescue, there are well-justified demands for tougher regulation of the 
industry and a high level inquiry into the collapse.

The Government, the regulators, the auditors and company directors 
certainly have a lot of explaining to do. HIH has been a big donator to 
Liberal Party coffers. At the time of HIH's takeover of FAI insurance two 
years ago, FAI's customers were welcomed by the company's managing director 
who reassured them that their insurance needs "remain in the safest of 
hands".

"I am sure that you will find it a very rewarding partnership and we're 
looking to the future with a great deal of confidence."

The crash has raised many other questions about auditing practices, 
corporate accountability, shareholder information, and responsibility for 
criminal or negligent behaviour by company directors or executives.

The Finance Sector Union (FSU) has called for the roles of the Australian 
Prudential Regulatory Authority (APRA) and the HIH Board to be investigated 
and has supported the calls for a Royal Commission.

"The collapse of HIH left around 1000 employees in the same sinking ship as 
the policy holders", said FSU Secretary Tony Beck.

Around 530 employees have been transferred to the NRMA in NSW which has 
taken up some of HIH's business.

On Friday last week, the Australian Industrial Relations Commission handed 
down a decision protecting the severance pay of the stranded HIH employees.

There were many warning signs at HIH, obvious to many in the insurance 
business, but these warnings were clearly not acted upon by the authorities 
in a decisive manner.

Deregulation

This is the first really big crash since the Howard Government revamped the 
financial regulatory system in 1998 (in line with the Wallis Inquiry's 
recommendations).

The newly formed APRA took over responsibility for the supervision of 
banks, life and general insurance companies and superannuation funds.

The Australian Securities and Investments Commission (ASIC), which is 
presently carrying out an investigation into the crash, is responsible for 
"market integrity" and consumer protection across the financial sector.

The Reserve Bank, which at the moment appears to be taking a back seat, is 
responsible for monetary policy (in particular interest rates and 
currency), and maintenance and stability of the financial system.

This restructuring was a first step in a transition to self-regulation by 
the industry and financial institution.

APRA is presently in the process of discussing the next stage, where APRA's 
role would become one of monitoring procedures and management strategies, 
leaving insurance companies to certify their own compliance performance  
a move which makes basket cases like HIH inevitable.

In the area of reinsurance, where HIH fell down badly, APRA says, 
"Responsibility will be transferred to the insurer to monitor its 
reinsurance arrangements to ensure the insurer complies with APRA's 
prudential requirements"  what APRA calls "self-assessment".

The Government has been under considerable pressure from the industry, some 
of whom. It has stalled on raising capital requirements and failed to put 
in place a tight, external regulatory and enforcement regime.

"Cosy" relationship

Like APRA, the employees, policy holders and shareholders (including 
workers' superannuation funds) rely heavily on the company's reporting and 
the external and internal auditing to monitor the company's performance and 
the security of their investments.

The financial media have described the relationship between the independent 
auditor Arthur Anderson "one of the "Big Five" global accounting firms) and 
HIH Board Audit Committee as "cosy".

HIH paid Arthur Anderson $1.7 million for its auditing and another $1.6 
million in consultancy fees. In other words the auditor had a commercial 
interest in the company it was examining  raising questions of its 
independence and possible conflict of interest.

Two of the four members of the HIH Board's Audit Committee and one other 
board member are former partners of Arthur Anderson. The other two have had 
business relationships with HIH.

One of them was a consultant to a firm which provided HIH with over half a 
million dollars of legal services in the last two years. This same director 
is a director of another company which provided services of nearly a 
quarter of a million dollars over the same period.

The other member is a legal advisor to the company.

HIH also did $398,000 of business with companies associated with yet 
another board member, Rodney Adler.

There are other questions about the legality and ethics of a trust fund set 
up with HIH money which traded in HIH shares.

Five out of 12 board members resigned in the months preceding the collapse, 
including Adler.

It will take some time before it becomes clear exactly what went wrong. 
Pressure needs to be maintained to ensure that those who have caused the 
HIH collapse and the ensuing hardship are brought to justice.

Back to index page