First. an debut and background relating to HIH insurance company will be given. Then the cause of HIH prostration is traveling to be discuss in the undermentioned portion. chiefly focused on the failure of fiscal hazard direction. the failure of hearer. the failure of ordinance and the deficiency of independency for non-executive manager. Third. harmonizing to the analysis of the job. the paper offers suggestions as to cover with those problems,followed by a brief decision at the terminal of this paper. 2. 0 Introduction and background
Prior to its prostration in 2011. HIH insurance was Australia’s 2nd largest insurance company. It was placed into probationary settlement on 15 March 2001 due to its inability to pay its debts as they fell due. Two yearss subsequently. the Royal Commission was established to look into the grounds for and the fortunes environing the failure of HIH.
The HIH prostration is considered to be the largest corporate failure in Australia’s history. with murderers gauging that HIH’s losingss can make up to $ 5. 3 billion. The prostration of HIH has a negative influence on the society and the involvements of the shareholders. general creditors and policy holder are besides affected by HIH prostration. 3. 0 Causes of HIH Collapse
3. 1 The failure of fiscal hazard direction
3. 11 Weak underwriting public presentation
The insurance industry is in the place of high hazard. particularly for long-tail hazard. Three of import vehicles for the insurance company to utilize against the high hazard and do a net income. which are risk pricing ability. proviso for modesty policy and the investing determination. The combination of inferior hazard pricing ability. under-reserving policy and failure investing determinations eventually exhausts the fiscal resource of HIH.
Underwriting is the nucleus facet to general insurer’s operations and it reflects the hazard pricing ability of the insurance company. Harmonizing to the probe study of HIH Royal Commission. in the terminal of twelvemonth 1997 HIH make an underwriting loss of $ 33. 8 million and net premium earned was $ 1233. 5 million.
By the contrast. for the twelvemonth stoping 30 June 2000. underwriting loss and net premium earned were $ 103. 5 million and $ 1995. 4 million severally. Those figures reveals that during this period. underwriting loss increased aggressively. resulted more proviso for claims outstanding. underwriting disbursals and reinsurance recoveries. ( HIH. 2011 ) 3. 12 Under-reserving policy
Another ground for HIH weakness is under-reserving. As the Royal Commission Report noted. “the largest individual point on the balance sheet of the general insurance company is the proviso that sets aside for payment of future claims” .
HIH had a high exposure in countries where superimposed rising prices has played a annihilating function. For Workers’ Compensation in California. the estimated of the growing was 23 % per twelvemonth ( 1987-1990 ) and 10 % ( 1990-1999 ) which reflected the comparatively high rising prices rate during that period. However. the growing estimated by HIH was merely 3. 8 % that is far below the market appraisal. As a consequence. HIH existent modesty was much lower than the market norm. 3. 13 Flawed investing determinations
There are three major failures in investing. which make a great part to its prostration. The first 1 was the UK operation in 1993. due to the defect of information direction which consequence in the losingss amounted to $ 1. 7 billion. The 2nd one happened in the US operation. The losingss were $ 620 million caused by the board of managers of HIH didn’t dependable measure the possible hazard during the operation.
The 3rd failure is the FAI acquisition. Although in the state of affairs of the deficiency of relevant paperss such as HIH Reports of fiscal advisor. HIH finalized the acquisition of FAI in 1998 resulted $ 590 million losingss. As a consequence. a hard currency flow crisis became more serious and the acquisition attributed to HIH prostration. ( Rogers. nd. ) 3. 2 Audit are non independent
Another ground for HIH Collapse is the deficiency of independent audit establishment. Audit independency is the warrant to supply a dependable consequences. HIH has both the internal and external audit commission. nevertheless. the internal audit commission fail to see the of import factors such as hazard direction and internal control.
For the construction of audit commission. the audit meeting of HIH attended by all managers including executive manager and the president of HIH. Geoffrey Cohen. was besides the president of the audit commission of HIH. which make the audit commission lose the independency. Audit commissions. who supervise the direction coverage procedure and communicate with the external hearers. should be consist of a bulk of non-executive managers thereby extinguishing the struggle of involvement. Furthermore. Andersen as the audit establishment. it accepted the actuary’s studies without any question. In peculiar. Andersen relied extensively on HIH’s internal concern audit procedures. ( The instance. 2007 ) 3. 3 The failure of ordinance
Two chief regulative establishments are responsible for the ordinance of insurance company in Australia which are APRA and ASIC. Although APRA did non do or lend to the prostration of HIH. it failed to observe warning marks. follow up information spreads and do effectual usage of its powers. The prostration of HIH is a chronic procedure. nevertheless ASIC and APRA as the ordinance establishment fail to carry through its liability of supervising.
3. 4 The failure of accounting method
HIH did non supply equal modesty border for future claim duties. but instead it sought reinsurance to cover the hazard. Actually. reinsurance can be recognized as loans. As a consequence. it could be perchance cut down the reported net income and increase the liability. which could consequently ensue in increased D/A ration.
Furthermore. the fiscal study of HIH did non reflect the true of its fiscal state of affairs. For illustration. good will. deferred acquisition costs and future revenue enhancement benefit were non serviceable for measuring the existent fiscal place. As they are merely occur in the fiscal statement and in fact. they can non neither conveying hard currency flows or net incomes for the company. As a consequence. hearers are on a close impossible mission to fulfill the joint standards of following with the accounting criterions and certifying to the truth and equity of fiscal statements. ( HIH. n. vitamin D )
3. 5 Lack of independency for non-executive manager
Figure1: Board Committees
From the figure above. we can deduce that the independency of the non-executive managers deserves to be questioned. Among five non-executive managers. two of them were former spouse of Andersen. which happened to be the major hearer and adviser of HIH.
Merely for one year-2000. HIH had paid $ 1. 7 million to Andersen for scrutinizing services and $ 1. 631 million for proviso of other non-auditing services. Furthermore. Justin Gardener who was the member of audit commission. used to be the hearer of FAI in 1980’s. As discussed above. the acquisition of FAI was one of the chief grounds for the prostration of HIH. as the misjudgment of the fiscal position of FAI. Justin Gardener must be put in the topographic point where his independency was questioned due to his struggle of involvement.
The few independent managers alleged that they were misled as to the true fiscal places of the several companies. ( HOW. neodymium ) 4. 0 Recommendations
Some recommendations are given based on the analysis of HIH instance survey: In the first topographic point. HIH should set up the auditing section independently to better its ability to analyse fiscal state of affairs of the company. Hearers must hold a province of head whereby they provide their sentiment without compromising their judgement while moving with unity. objectiveness and professional agnosticism. Second. the company should oversee efficaciously to guarantee equal solvency.
The ability to pay its debts as they fall due is the index to mensurate the fiscal state of affairs of the insurance company. at the same clip it is besides the requirement for the sustainable development for the concern. Indeed. HIH should beef up supervising to the board of manager and balance the involvements between stockholder and corporation. Annual general meetings are necessary to reply sensible inquiries from stockholders. 5. 0 Decision
To sum up. the prostration of HIH is caused by a figure of comparatively straightforward corporate administration failures. First. the weak underwriting public presentation consequences in more proviso for claims outstanding. underwriting disbursals and reinsurance recoveries are required. Second. under-reserving policy makes HIH existent modesty was much lower than the market norm.
Third. three major failures in investing leads to hard currency flow crisis in HIH and decline the fiscal state of affairs. The deficiency of independency of non-executive manager and hearer makes the company can non supervise direction efficaciously. Harmonizing to those jobs. the recommendations of set uping independent scrutinizing system. oversing the company’s fiscal ability and sufficient information unwrap of the board of manager are suggested.
6. 0 Bibliography
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HIH Insurance. ( 2013 ) . Retrieved at 7 October. 2013. from HIH Insurance: hypertext transfer protocol: //www. hih. com. au/
HIH Insurance Group prostration. ( 2011 ) . Retrieved October 07. 2013. from PARLIAMENT OF AUSTRALIA: hypertext transfer protocol: //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: hypertext transfer protocol: //www. longdog. com. au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan. pdf
Jiangbo. Ten. ( 2010 ) . HIH Insurance Limited: Corporate Administration and Corporate Excesses. Retrieved October 07. 2013. from hypertext transfer protocol: //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: hypertext transfer protocol: //www. thomsonreuters. com. au/product/AU/files/720502412/chapter_13. 2_case_studies. pdf
The instance survey of HIH insurance company. ( 2007 ) . Retrieved October 08. 2013. from web log. sina: hypertext transfer protocol: //blog. sina. com. cn/s/blog_4e284de701000b26. hypertext markup language