Claudio Damiani, Naomi Bourne and Martin Foo1
The collapse of the HIH Insurance Group in 2001 was a watershed for Australia’s financial sector. The combined government and industry response to its collapse was swift, with the establishment of the HIH Claims Support Scheme to restore confidence to the market and protect a large number of HIH policyholders from potential financial hardship. Despite its rapid development and implementation, the scheme operated effectively and successfully met its objectives.
The collapse of HIH Insurance Limited (HIH) in 2001 was a critical event in the evolution of Australia’s financial system. HIH’s failure was the catalyst for substantial policy reform, notably in the regulation of Australia’s general insurance industry, but also in areas as diverse as tort law, corporate governance, audit standards and policyholder protection. Even today, almost 14 years since its collapse, the ghosts of HIH continue to resonate with policymakers and regulators.
From humble beginnings in 1968, HIH grew to become the second-largest general insurer in Australia. In addition to extensive Australian operations covering all major general insurance product classes,2 HIH operated a myriad of subsidiaries across the world. However, in its pursuit of domestic and global expansion, HIH sacrificed prudence in risk management and suffered from under-pricing, under-reserving, corporate governance failures, and mismanagement. These mistakes were to have disastrous consequences for the company and its employees, shareholders, and those policyholders not protected by government intervention.
In the wake of HIH’s collapse, the Government moved to restore confidence in Australia’s general insurance industry. The industry, with the imprimatur and financial backing of the Government, worked to develop a support scheme for many of HIH’s most vulnerable policyholders, who were left holding worthless policies. The scale of the collapse and its wide-ranging ramifications also motivated the Government to establish a Royal Commission.3 The Commission’s report outlined a litany of failures and questionable business dealings on the part of certain senior HIH personnel.
The HIH Claims Support Scheme (the ‘HIH Scheme’) commenced on 7 June 2001, less than three months after HIH was placed into provisional liquidation. First operated as a subsidiary of the Insurance Council of Australia (ICA), the peak body representing the general insurance industry in Australia, and later as a company directly controlled by the Treasury, the HIH Scheme saw a number of refinements and restructures over its more-than-decade-long lifespan. Throughout this time, the HIH Scheme continued to successfully provide financial protection to eligible policyholders who made valid claims under their HIH policies. Its success was in no small part due to the cooperation and trust developed between the general insurance industry, the Liquidator and the Government, the initiative of industry in managing the HIH Scheme in its early years, and the professionalism of the Treasury staff who were instrumental in its development and operation.
This paper briefly details the rise and subsequent collapse of HIH, considers the consequences of its demise, and outlines the Government’s response. The primary focus of this paper is the HIH Scheme itself — its structure (and restructure), mechanics, eligibility criteria, and operation under the ICA and later under the stewardship of the Treasury. The paper concludes with an analysis of the HIH Scheme’s final statistics, and a discussion of the main lessons learned.
1 Mr Damiani, Ms Bourne and Mr Foo are employees of the Australian Treasury. This article has benefited from comments, suggestions and information provided by John Anning, Jody Boatwright, Duncan Bone, Diane Brown, Moira Byrne, Chris Honey, George Karagiannakis, Trevor King, Kate O’Loughlin, Meghan Quinn, Nicholas Scofield and Bernadette Welch. The authors are particularly grateful to Dallas Booth, Peter Martin and Brian Walker for their detailed feedback, and to Qing Wang for her support with actuarial analysis. The views in this article are those of the authors and not necessarily those of the Australian Treasury.
2 General insurance includes, inter alia, home and contents insurance, motor vehicle insurance, business insurance, workers’ compensation and travel insurance. It excludes life insurance and health insurance.
3 The Australian Securities and Investments Commission (ASIC) commenced an investigation into the collapse of HIH but the Government was persuaded to establish a Royal Commission after receiving legal advice that the ASIC Chairman’s dual role as a member of the Australian Prudential Regulation Authority (APRA) Board constituted a technical conflict of interest.