It was immediately apparent that the provisional liquidation of HIH would have wide-ranging ramifications, particularly for HIH policyholders left uninsured for claims made by or against them. This led to calls for immediate government action to assist policyholders experiencing hardship as a result of the failure.
The Insurance Council of Australia (ICA) proposed to provide industry expertise and resources to operate a policyholder support scheme. It further proposed that the scheme be funded through the introduction of a one per cent levy on all general insurance policies issued in Australia, coupled with an appropriate contribution from governments,69 with the levy offset by a reduction in existing taxes on insurance (fire services levies, stamp duties and GST).70 The levy proposal was not adopted.71
Following advice from the Provisional Liquidators that the financial situation at HIH was worse than first thought,72 the Government announced, on 14 May 2001, that it would move to help HIH policyholders suffering hardship by setting up an assistance package. The Government stated that it was ‘concerned for the welfare of the current 28,000 people who have HIH claims, and any people who might have claims in the future’.73 This was followed by an announcement that it would fast-track legislative changes to the prudential regulatory regime for the general insurance industry. Foremost among these changes was a new condition that all authorised general insurers must meet risk-based capital requirements, and a minimum entry-level capital requirement of $5 million (raised from the previous level of $2 million).74
Following extensive consultation with industry, the Government and the ICA announced on 17 May 2001 the formation of a not-for-profit company to oversee and administer the assistance package for affected HIH policyholders. HIH Claims Support Limited (HCSL) was registered as a company on the following day. Its sole share, with a notional value of $1, was owned by the ICA.
In announcing that HCSL would, on the Commonwealth’s behalf, administer the HIH Scheme, the Minister stated that:
Unlike the States, the Commonwealth Government has no existing infrastructure that is able to process the tens of thousands of claims from existing HIH policyholders. The non-profit corporation gives us a practical framework using existing industry infrastructure and expertise to help HIH victims.75
On 21 May 2001, the Government announced a HIH policyholder assistance package valued at more than $500 million, alongside the establishment of the Royal Commission.76 The Government’s announcement followed declarations by the NSW and Victorian Governments77 that they would fund support packages, totalling $50 million and $35 million respectively, for affected HIH policyholders in their respective state-regulated statutory insurance schemes (for CTP motor vehicle, workers’ compensation and builders’ warranty insurance).78
4.1. HIH Claims Support Limited
HCSL was established as a wholly-owned subsidiary of the ICA, with a board composed predominantly of independent non-executive directors. A five-year Commonwealth Management Agreement (CMA) signed between HCSL and the Government set out how HCSL would manage and administer the HIH Scheme on behalf of the Commonwealth. This included: receiving applications and assessing eligibility for claims; managing a call centre and operating a website; coordinating the claims management and payment processes; and reconciling assistance payments with the records of the Liquidator.
The CMA also set out a range of rigorous and regular disclosure obligations on HCSL (Box 2) and specified how the Commonwealth would provide the necessary funding to meet claims made by and against eligible applicants, as well as the administration and other costs and expenses of HCSL.
Box 2: Disclosure obligations on HCSL
Under the CMA, HCSL was required to provide the Commonwealth, via the Treasury, with:
- monthly reports on payments into and out of accounts dealing with HIH Scheme payments and management expenses;
- a monthly reconciliation of the account forming the Trust;
- a monthly operation report dealing with issues of significance, including the status of applications and payments made;
- quarterly internally audited accounts;
- annual externally audited accounts, together with the auditor’s report, and full financial statements each year;
- reports on performance reviews conducted by independent organisations (approved by the Commonwealth);
- any other reports in relation to matters of significance, at any time as HCSL considered necessary; and
- any reports requested by the Commonwealth.
In addition, the Commonwealth could, at its own expense, periodically examine or audit HCSL’s books and financial records or conduct a performance review. To facilitate this, it was provided access rights to HCSL’s premises.
In order for funds to be made available for HCSL to efficiently meet its obligations under the CMA, the HIH Claims Support Trust (the ‘Trust’) was established with HCSL as trustee. The Commonwealth appropriated initial funds for the Trust through the Appropriation (HIH Assistance) Act 2001, which provided for up to $640 million79 — this was the Provisional Liquidator’s initial actuarial estimate of the funds necessary to cover expected eligible claims arising through the HIH Scheme. The Trust would also receive a share of recoveries made from third parties to be used for the HIH Scheme. The Commonwealth was the ultimate beneficiary of the Trust, ensuring that it would be entitled to any residual balance of the Trust after the collection of recoveries and making of payments to claimants.
As part of its responsibilities for administering the day-to-day operation of the HIH Scheme, HCSL contracted claims management specialist Wyatt Gallagher Bassett (WGB) to operate the call centre and perform eligibility assessments on its behalf.80 HCSL also entered into tripartite Claims Management Agreements with the Liquidator and four ICA member insurers — Allianz Australia, Royal & Sun Alliance,81 QBE and NRMA Insurance (the ‘Claims Managers’) — under which those insurers would, on a cost-only basis:
- act as the Liquidator’s agent in providing claims management services — involving the examination, verification, adjustment, assessment, management and settlement of claims, including the determination of coverage entitlement in accordance with the terms of the HIH insurance policy;82 and
- act as the agent of HCSL in providing payment management and recovery services to those claims assessed as eligible by HCSL (via WGB) — involving arranging payment to related parties, establishing a bank account to deal with HIH Scheme transactions, calculating claims estimates, reporting to HCSL as per the terms of the CMA, identifying and pursuing recoveries from third parties, and accounting to HCSL and t
he Liquidator for their proportion of sums recovered.83
Each Claims Manager was engaged to provide services for different classes of insurance, with Allianz Australia handling retail, rural and small business claims excluding professional indemnity; Royal & Sun Alliance handling salary continuance claims; QBE handling corporate, professional indemnity, public liability and product liability claims;84 and NRMA Insurance handling claims for which the other Claims Managers held a conflict of interest. The four Claims Managers were selected by the ICA on the basis that they had expressed a willingness to participate in the HIH Scheme.85
One stakeholder commented that the numerous checks and balances built into the HIH Scheme revealed an interesting quid pro quo. The Government maintained a very low appetite for risk even though the structure of the HIH Scheme required the disbursement of large sums of taxpayer money through private-sector Claims Managers. To make this compromise viable, it instituted an extremely rigorous audit and performance review program on the HIH Scheme.
4.2. Eligibility for the HIH Scheme
On 21 May 2001, the Government announced the criteria for determining which HIH policyholders were eligible to receive assistance through the HIH Scheme. In making its decision, the Government considered the need to balance equity and simplicity,86 to ensure the HIH Scheme assisted ‘those people most in need’.87
Eligible policyholders were to receive either 90 or 100 per cent of the claim they would have received through HIH, depending on the type of policy and, in some cases, income level (Box 3). Any excess under each policy still applied, as did all the other terms, conditions and limits of the policy. In order to meet eligibility, an insurable event had to take place on or before 11 June 2001, regardless of when the claim was made. The few weeks between the 21 May announcement date and the 11 June cut-off date allowed for HIH policyholders to find alternative cover for their ongoing insurable risks.
Box 3: Eligibility criteria and maximum payout amount under the HIH Scheme88
- Australian citizen or permanent resident (including NZ citizens)
- 100 cents in the dollar for salary continuance, disability and income protection policies, as well as for claims of total loss on a primary place of residence.
- 90 cents in the dollar for other insurance policies if, for year 1999-2000;
- individual or family taxable income (one child, with $3,139 added for each additional child) was less than $77,234; or
- a claim was more than 10 per cent of a family’s taxable income.
- Small business
- 90 cents in the dollar.
- Australian owned with fewer than 50 full-time equivalent employees and carrying on a business as at 21 May 2001.89
- Not a related entity to a larger organisation.
- If operated through a trust, the trust instrument must confer on the trustee the power to carry on a business; and the trustee must be the policyholder, or a third party with relevant cut-through rights.
- Not-for-profit organisation
- 100 cents in the dollar.
- Australian based.
- If structured as a trust, the trustee must be the policyholder, or a third party with relevant cut-through rights.
- Lot owner in owner’s corporation90
- Criteria relating to individuals or small business.
- The owner’s corporation has levied a contribution in respect of the uninsured loss, and the contribution relates to the lot owner’s share of an amount that would have been paid to meet the uninsured loss.
- Trust (including family trust)91
- Trustee is an Australian citizen or permanent resident, or Australian company; and is the named policyholder or named insured.
- The trust must have assets equal to or less than $1.386 million as at 3 June 2001.
- The trust’s total income in 1999-2000 was less than $80,373, or the claim is more than 10 per cent of net income for the trust for that year.
- Claims covered on a one-for-one cost sharing basis with the respective state and territory governments.92
Policyholders or claims which were not covered under the HIH Scheme included:
- claims arising from HIH employees or directors, or individuals or associates who were in a position to influence HIH;
- claims arising from reinsurance contracts; and
- claims relating to insurance mandated by state and territory governments, including CTP motor vehicle, workers’ compensation and builders’ warranty insurance.93
4.3. The HIH Scheme mechanics
The HIH Scheme formally commenced operating on 7 July 2001. However, the Treasury, with approval from the Prime Minister, had earlier entered into an agreement with the Provisional Liquidators to resume payments to salary continuance claimants whose claims had already been approved by HIH.94
Applicants seeking assistance under the HIH Scheme were required to apply to HCSL for assistance and lodge with HIH, which was then in liquidation, a claim under an HIH policy relating to an incident in the period prior to 11 June 2001. Initially, applicants were required to contact the HCSL call centre (operated by WGB) to lodge an application. Application forms were then mailed out. During this time, the ICA and HCSL were finalising development of the HCSL website. Once the website was fully operational, applicants were able to download their own application forms and mail them to the eligibility processing centre run by WGB in Sydney. At its peak, this processing centre employed 32 staff with financial services or customer service experience.95
The WGB team worked with applicants to assist them in finalising their applications, requesting additional information as required. WGB then determined whether an application for assistance met the eligibility criteria. If eligible, an Eligibility Confirmation Certificate was generated and sent to the relevant Claims Manager, depending on the type of policy, to allow the claim to be managed under the HIH Scheme. The Claims Manager would in turn request the relevant file from HIH.96
Applicants assessed by WGB as ineligible for assistance could apply to have their application internally reviewed by the Managing Director of HCSL. In the event this internal review was unsuccessful, applicants could appeal the decision through the HIH Assistance Review Panel (HARP). The Panel, consisting of independent members appointed by the Minister for Financial Services and Regulation and assisted through secretariat support from the Treasury, was set up to review applications which did not meet the eligibility criteria due to particular anomalies.
Upon receipt of an eligible application from HCSL and the relevant claim file from HIH, the Claims Manager would assess the claim according to the applicant’s insurance policy. In this role, the Claims Manager acted as an agent of HIH (and its Liquidator) and was bound by the claims management processes of HIH. It was important that the Claims Managers complied with all the terms and conditions of the insurance policies and the claims management processes of HIH, and operated at arm’s length from government, in order to preser
ve HIH’s reinsurance arrangements and protect the rights of other creditors to HIH’s estate. Payments to eligible claimants were made, with the Claims Managers then recovering those payments on a monthly basis from a central HCSL account funded by the Treasury.
If a Claims Manager rejected a claim for payment, the claimant received no assistance under the HIH Scheme. The claimant would have the recourse normally available to policyholders of general insurance companies — an appeal to Insurance Enquiries and Complaints (IEC) or to a court. Disputed claims in relation to salary continuance could be appealed to the Financial Industry Complaints Service (FICS).97
A crucial element of the HIH Scheme was the assignment to HCSL of an eligible policyholder’s rights under their HIH policy. The assignment of rights was a pre-requisite for assistance. On assignment, the rights to pursue the Liquidator, through a proof of debt, for a recovery under the policy passed from the policyholder to HCSL. HCSL, as trustee of the Trust, would in turn have the right to line up as a creditor of HIH to pursue the recovery of monies owed to eligible policyholders through the liquidation process. In this way, the Commonwealth, as ultimate beneficiary of the Trust, became the largest creditor of HIH.98
Overall, the Treasury maintained responsibility for the implementation of the HIH Scheme. It was responsible for policy development and for providing advice to HIH Scheme participants, namely HCSL and the Claims Managers, on the interpretation of that policy. Monthly Strategy Management Committee meetings involving the major parties in the HIH Scheme ensured a formal communication channel to discuss issues as they arose.
Figure 2: Initial HIH Scheme structure
Source: Australian National Audit Office (2004)
4.4. The HIH Scheme in its early years
A little over a year after the HIH Scheme commenced operating, it was announced by the Minister for Revenue and Assistant Treasurer99 that over $100 million in funds had been disbursed to (or on behalf of) eligible policyholders through the HIH Scheme.100 Over that time, HCSL had received more than 9,500 applications for assistance, with 6,200 being processed and referred to Claims Managers and 1,900 receiving payment.
Around 39 per cent of all applications received by HCSL during its first year were for liability, 21 per cent professional indemnity, 13 per cent motor vehicle, 11 per cent property, commercial and household building, and the remaining 16 per cent spread across a number of other insurance product classes. In terms of applicant type, 58 per cent were from small businesses, 31 per cent from individuals and 11 per cent from not-for-profits.101
A performance audit of the HIH Scheme, completed in August 2002, found that it was meeting its objectives by assisting eligible policyholders facing hardship from the collapse of HIH and minimising risks to the Commonwealth. Additionally, the performance audit noted that the HIH Scheme provided a good example of how industry and government can work together constructively to produce mutually beneficial outcomes.102
4.5. HIH Scheme review and announcement of restructure
The number of applications received by HCSL slowed over time, particularly after the first year of operation. With evidence indicating that the bulk of applications had likely already been received, coupled with apprehensions about the HIH Scheme’s administrative costs103 and complexity, the Government agreed to a Strategic Review to consider whether the existing HIH Scheme structure was the most appropriate going forward. In December 2002, the Government commissioned Deloitte Touche Tohmatsu to report on:
- options for closing the HIH Scheme to new applicants;
- assessment of the ongoing role of HCSL and Claims Managers;
- identification of the political, operational and financial risks involved in changing the HIH Scheme;
- recommendations for the best structure for the HIH Scheme on a go-forward basis; and
- an updated assessment of the HIH Scheme’s liabilities.
The Strategic Review was completed in March 2003. Following consideration of the report’s recommendations, the Minister for Revenue and Assistant Treasurer agreed to restructure and streamline the administrative arrangements for the HIH Scheme. Under the new arrangements, applications for assistance would cease to be accepted after 27 February 2004. HCSL would be wound out of the HIH Scheme, with the Claims Managers phased out by 31 August 2004. The Treasury would assume HCSL’s role as HIH Scheme manager and in the place of the original Claims Managers would be a single firm that would undertake both eligibility assessments and claims management functions. The call centre would also be closed, given that the bulk of applications had already been received.
A ‘Gateway Facility’ for special circumstances claims was to be established, to be operational immediately after the HIH Scheme closed to new applications. Applications through the Facility would be considered by the HARP. Applications would only be accepted through the Facility under special circumstances, where an applicant, through no fault of their own, did not know and could not reasonably have known that they had a right to make a claim under an HIH policy or, alternatively, that a claim would be made against them.104
Following the Government’s announcement of streamlined administrative arrangements, the Treasury selected Gallagher Bassett Services (GBS, formerly WGB105) to perform both the eligibility assessment and claims management functions until August 2008, with an option to extend the contract to February 2009. Claims files were transitioned from the Claims Managers to GBS prior to the 31 August 2004 deadline, although HCSL would continue to wrap up outstanding issues, such as reconciling proof of debt with the Liquidator and litigation management, for some months afterward.
Under the new arrangements, WGB would assess applications and make payments to eligible claimants. WGB would have access and authority to make payments direct from an HIH Scheme financial account at the Reserve Bank of Australia (RBA).
Figure 3: Revised HIH Scheme structure following the Strategic Review
Source: Australian National Audit Office (2004)
4.6. ANAO audit of the HIH Scheme
A performance audit of the HIH Scheme was undertaken by the Australian National Audit Office (ANAO) and released on 10 June 2004. The audit found that the HIH Scheme exhibited many of the elements of good public sector governance, as identified in its publication Better Practice Guide on Public Sector Governance. It also found that: the HIH Scheme’s risk management frameworks were generally sound (having regard to the high level of inherent risk associated with its operation); it employed strong financial management controls; there was clear evidence of an ongoing commitment by participants to manage the HIH Scheme in an efficient and effective manner; and the HIH Scheme had successfully delivered assistance to a large number of Australian individuals, sm
all businesses and not-for-profit organisations affected by the collapse of HIH.
Overall, the audit concluded that:
… the [HIH] Scheme has achieved the Government’s objective of assisting policyholders affected by the collapse of HIH. This has been done in a manner that has, in the main, provided appropriate standards of public governance and stewardship.106
Despite this positive overall assessment, the ANAO audit found that it was not all smooth sailing during the early stages of the HIH Scheme. Frustrations between parties arose from time to time, in part because of the administrative complexity of the HIH Scheme and differing views on the most appropriate means of resolving certain issues. The ANAO audit noted the finding of the August 2002 performance audit that:
Given that one of the underlying objectives of the [HIH] Scheme was cooperation between the Commonwealth, the ICA and all participants administering the [HIH] Scheme, evidence suggests that the relationship amongst management is sometimes strained and this at times impacts the [HIH] Scheme’s performance.107
However, the ANAO also reported that as the HIH Scheme transitioned into a more mature and stable phase, the working relationship between HCSL and the Treasury improved.
There was a high level of awareness of the need to provide a sound governance framework for the significant sums of public money involved in the HIH Scheme. Separate, but related, fraud risk assessments prepared at the time revealed very high levels of inherent fraud risk.108 Similarly, the risk of ineligible claims being paid was inherent in the eligibility assessment process itself. The ANAO reported that the number of applicants assessed as eligible, who subsequently had been found to have provided incorrect information on their application form, represented a very small percentage of the over 10,000 applications that had been accepted by October 2003.109
The ANAO went on to make six recommendations to further strengthen the HIH Scheme’s governance and operational frameworks. The Treasury agreed with all six recommendations, many of which had been identified during the course of the audit process and rectified by the time the ANAO publicly reported its findings.
4.7. Treasury’s stewardship of the HIH Scheme
4.7.1. Schemes of Arrangement
By the time the Treasury formally assumed stewardship of the HIH Scheme on 1 September 2004, the number of new applications (via the Gateway Facility) had slowed significantly. HCSL continued to operate as part of the HIH Scheme, winding down its involvement while arrangements for the sale and transfer of its sole share from the ICA to the Treasury were being finalised. Following a due diligence review and conditions precedent being met, the sale and transfer of HCSL to the Treasury for the nominal value of $1 took place on 1 August 2005. Upon HCSL’s transfer, the operation of the Trust effectively ceased and the members of the Board of HCSL resigned. In their place, three senior Treasury officials were appointed to serve as the HCSL Board. Their initial responsibilities included overseeing the wind-up of HCSL.
The following year, the Australian Liquidator (now comprising Messrs AG McGrath and CJ Honey)110 convened meetings of creditors of the eight Australian HIH subsidiary companies that formerly held Australian general insurance licenses111 to consider and vote upon Schemes of Arrangement (SoAs).112 The SoAs would benefit claimants against the insolvent insurers by allowing for more efficient claims agreement and earlier final closure. Without an SoA, liquidation could continue for 20 years or more in order to protect the interests of creditors with long-tail insurance claims.The SoAs included an estimation mechanism whereby creditors of HIH with potential claims not yet agreed would receive payment based on an actuarial estimate of their claim after eight years.113
Following court approval, the HIH companies were placed into SoAs in Australia on 30 May 2006. Four of the companies were also placed into SoAs in the UK, on 13 June 2006. Under the terms of the SoAs, 2 September 2013 (midnight, British summertime) was the deadline for creditors to submit final estimations of claims against these companies.
4.7.2. Closure of the Gateway Facility
By early 2006, the number of applications being received was less than 10 per month on average. Many of these applications were exploratory in nature and ineligible for assistance. Given the expense of maintaining the Gateway Facility for few genuine applications, the Government agreed to close down the Facility. An announcement of the closure, effective 17 November 2006, was made in a 5 October 2006 press release by the Minister for Revenue and Assistant Treasurer.114 The announcement was also communicated across the Australian community through advertisements in major national newspapers. Additionally, GBS wrote to all people who had made enquiries to the Gateway Facility but had not yet lodged an application to advise them of the imminent closure.
The announcement of the closure included a proposal that exceptional applications could continue to be made after the closure date, although each application would need to show that the applicant was genuinely not aware of a claim made against them prior to 17 November 2006 and had received no prior notice of the claim, and the claim satisfied all normal eligibility criteria. The Treasury’s Insurance Programs Unit became the point of contact for any enquiries and assumed responsibility for assessing individual applications and providing a recommendation to the Minister for Revenue and Assistant Treasurer’s consideration. GBS continued to manage the HIH Scheme’s shrinking claims portfolio, although HCSL would continue to exist until all contractual obligations related to these claims (given they were entered into with HCSL) had been discharged.
4.7.3. Wind-up of the HIH Scheme
With the claims portfolio winding down and very few applications being received, the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs115 announced on 20 June 2008 that the Government expected claims to be finalised by the end of the year. The Government intended to wind up the HIH Scheme (and not accept new applications) once these claims had been finalised.116 At the time of this announcement, more than 16,000 applications for assistance under the HIH Scheme had been received, with approximately 10,900 having been assessed as eligible and less than 280 remaining to be finalised.
Of these 280, a cohort of around 50 salary continuance claimants remained. This insurance class represented the longest-tail portion of the HIH Scheme portfolio, and there were claims within that cohort with liability exposure for benefits to continue through to 2035. In order for the HIH Scheme to be wound up, the Government agreed in late 2008 to offer the salary continuance claimants an incentivised commutation package117 as an alternative to their expectation of continuing (monthly) payments under their HIH policy, and therefore the HIH Scheme.
Each individual claimant was contacted, interviewed and provided with the benefit of separate legal advice regarding their specific financial circumstances. Af
ter careful negotiation, all of the affected HIH salary continuance policyholders accepted a commutation package. Payments were made in 2009. This was a major step towards facilitating the closure of the HIH Scheme.
Despite the 20 June 2008 announcement foreshadowing the HIH Scheme’s wind-up, a number of claims continued to be unresolved for the next three years. By mid-2011, less than 25 claims remained to be settled (about half of these arose from exceptional circumstance applications). The Government agreed to bring forward a resolution of these remaining claims to allow the HIH Scheme to be finally wound up.118 Commercial settlement packages were negotiated with most of the remaining claimants.
With no further applications being accepted by the HIH Scheme, there was no need for HCSL to continue as a registered company. HCSL was formally deregistered in April 2013.
At the time of writing, only one residual claim remained under the HIH Scheme. This claim was settled, subject to the approval of the Supreme Court of Tasmania, at mediation in June 2014. Court approval of the settlement is expected to occur in December 2014. Once this claim is finalised, the entire HIH Scheme portfolio will have been definitively wound up. All other claims management activities have been completed and all physical files and related materials (along with the Commonwealth’s final proof of debt) have been returned to the Liquidator.
4.7.4. Final HIH Scheme statistics
Regular actuarial assessments of the HIH Scheme’s claims portfolio were undertaken by Trowbridge Deloitte (which was later spun off to form Finity Consulting) in early years and by the Australian Government Actuary (AGA) since 2005-06 (Table 3 and Chart 1). These estimates incorporated an allowance for future inflation and covered the expected cost of past and future claim payments and the associated expenses of managing the HIH Scheme.119 In the early years, these assessments were highly uncertain, because of the relative immaturity of the HIH Scheme and because a significant portion of claims were yet to be reviewed by the Claims Managers.120
A major reason for the substantial increase in estimated total liabilities from the initial estimate of $640 million was a larger than expected volume of claims arising. Others included the expansion of the HIH Scheme’s eligibility criteria to include lot owners, and an unexpected increase in the cost of liability and professional indemnity claims. Actuarial estimates then remained relatively conservative for a number of years. In 2006, the Government agreed to increase the HIH Scheme appropriation to a total of $861 million (from the initial appropriation of $640 million) to meet the actuarial estimate for that year. This additional funding was provided through annual appropriations.121
In later years, as the HIH Scheme matured and an increasing number of claims were finalised, the uncertainty in the estimated total liabilities reduced significantly. The most recent actuarial assessments indicate that the overall lifetime cost of the HIH Scheme has settled at a final figure of around $731 million in undiscounted terms (Table 3 and Chart 1).
|Date||Payments in financial year ($m)||Cumulative payments to date ($m)||Estimated total liabilities ($m)**|
Source: Australian Government Actuary
* These figures include administrative and claims management costs as well as assistance payments to local councils.122
** Estimates are provided on a gross undiscounted cost basis.
*** Estimated from Figure 3.2 in Australian National Audit Office (2004).
**** Prior to 2008, actuarial estimates appeared to include Treasury expenses (pertaining to the costs of consultants, auditors, performance reviews, HARP and so on). From 2008 onwards, the AGA began excluding these expenses, which it estimated to be approximately $24 million, from its actuarial estimates.
***** The relatively large outflow of payments in this financial year is mostly attributable to the salary continuance commutation project.
Chart 1: HIH Scheme payments and actuarial estimates of total liabilities
Source: Australian Government Actuary
The HIH Scheme was most active in its early years. By mid-2004, approximately half of the 10,953 eligible HIH Scheme claims had been finalised. By mid-2008, the vast majority of claims that the HIH Scheme would receive over its lifetime had already been both received and finalised (Chart 2).
Of the 10,953 eligible claims finalised by the HIH Scheme, 4,922 were for public liability, accounting for $334.3 million (or 45 per cent) of total payments. Professional indemnity claims totalled 2,213 (20 per cent), and property, motor vehicle and WorkCover top up claims (all short-tail claims) accounted for 1,588 (14 per cent), 1,195 (11 per cent) and 630 (6 per cent) respectively, or 3413 (30 per cent) combined (Chart 2 and Table 4). Of interest is the fact that although there were just 105 eligible salary continuance claims, the HIH Scheme paid out $74.8 million to salary continuance policyholders, more than the payments made under all of the short-tail classes combined. The uptick in the value of payments made for salary continuance claimants between mid-2008 and the end of 2013 reflects the completion of the commutation project.
Chart 2: Evolution of the HIH Scheme claims portfolio over time
Source: Australian Government Actuary
The HIH Scheme delivered assistance payments to 10,953 eligible claimants (Table 4). Public liability represented the largest class of claimants, with 45 per cent of the final HIH Scheme claims numbers, followed by professional indemnity at 20 per cent.
|Loss type||Final number of eligible claims||Share of total claims (%)|
|WorkCover top up||630||6|
Source: Gallagher Bassett Services
* For lot owners’ claims, Table 4 includes only those claims that were managed by GBS. Lot owners’ claims managed by Allianz Australia were not captured in the relevant data collection system.
4.7.5. Final phases of HIH’s liquidation
Eighty-two HIH Group subsidiary companies in Australia have been subject to liquidation. At the time of writing, the liquidations of 54 companies have been finalised, with a further 28 Australian subsidiary companies yet to be fully liquidated.123 The Liquidator has conducted approximately 350 commutations with HIH’s reinsurers, resulting in reinsurance asset recoveries to the HIH estate of approximately $850 million. The Liquidator has also settled, on a confidential basis, two major litigation claims against HIH’s former directors, auditors and advisors, resulting in substantial returns for creditors.124
From time to time through the liquidation process, distributions have been made to creditors of the eight Australian general insurance companies covered under the SoAs. Estimated final recoveries through the liquidation process vary greatly for different creditors of different companies (Table 5) and range from 11 cents in the dollar through to full recovery (100 cents in the dollar). To date, the Commonwealth, the largest creditor by way of HIH Scheme liabilities, has received payments from the HIH estate totalling approximately $318 million.125 This represents a recovery rate of approximately 44 cents in the dollar on the Commonwealth’s expected lifetime HIH Scheme outlays of $731 million.
|Scheme company||Estimated final (%)||To date (%)126|
|HIH||31 to 47||31 and 39.97 (a)|
|28 and 37.36 (a)|
|FAIG||60 to 68||57 and 59.15 (b)|
|CIC||65 to 91||63 and 64.48 (c)|
|FAIT||16 to 18||10|
|FAII||11 to 71||7, 10 and 55 (d)|
|HIHU||29 to 35||18|
Source: McGrathNicol and Partners
69 Insurance Council of Australia (2001).
70 Australian Broadcasting Corporation (2001b).
71 The New South Wales Government did, however, impose an Insurance Protection Tax (IPT) to fund the payment of claims (in relation to CTP and builders’ warranty schemes) and repay any borrowings made after the collapse of HIH. $65 million per year was levied on general insurers registered with APRA, with the remainder contributed by a one per cent ad valorem tax on overseas general insurers and domestic insurers not registered with APRA. The IPT was abolished in 2011. See Australia’s Future Tax System (2009), E8-1.
72 Hockey (2001).
73 Hockey (2001b).
74 Hockey (2001c).
75 Hockey (2001d).
76 Howard and Hockey (2001), op. cit.
77 The Queensland Government also later announced a rescue package for CTP insurance, and the WA and Tasmanian Governments did likewise for workers’ compensation. See Davis (2004), op. cit., Chapter 2.
78 Auditor-General of Victoria (2001).
79 The Consolidated Revenue Fund was appropriated for the purposes of providing financial assistance to eligible claimants under the HIH Scheme and meeting associated administrative costs.
80 WGB also performed proof of debt reconciliations (see Section 4.3 for further information).
81 Royal & Sun Alliance changed its name to Promina in 2003. Promina was acquired by Suncorp in 2007.
82 Australian National Audit Office (2004).
84 As well as a range of specialist lines including marine, aviation, livestock and bloodstock insurance.
85 ibid. Note: Some Claims Managers employed subcontractors to assist with claims management.
87 Howard and Hockey (2001).
88 Australian National Audit Office (2004), op. cit.
89 In early 2002, the eligibility criteria for small businesses was refined to include an explicit statement of a requirement that applicants must have been carrying on a business as at 21 May 2001.
90 This category was not part of the original eligibility criteria announced in the 21 May 2001 press release. After the legality of treating owners’ corporations as small businesses was raised, the Government approved additional eligibility criteria and assessment guidelines for residential owners’ corporations in February 2002 and for lot owners in commercial owners’ corporations in May 2002.
91 The Government agreed to eligibility criteria and assessment guidelines for small businesses operating through trusts and not-for-profits structured as trusts in February 2002, and for other types of trusts in May 2002.
92 The Australian Government consulted with the states and territories on the nature and timing of assistance from June 2001. The Government agreed to allow the HIH Sc
heme to cover claims from exposures incurred on or before 30 June 2005. This timeframe would give state and territory governments sufficient time to put in place contingency arrangements to manage any HIH-related liabilities which incurred after this date.
93 States and territories funded ‘rescue packages’ for their various mandatory insurance schemes through levies on general insurers (NSW), the building industry (Victoria), CTP insurance premiums (Queensland), workers’ compensation premiums (Western Australia, Tasmania and ACT), or through government funds (Victoria and Northern Territory). See Kehl (2001), op. cit.
94 Australian National Audit Office (2004), op. cit., page 31. This continuation of payments was important to protect sick or disabled salary continuance policyholders who depended on the regular payments for day-to-day living expenses.
95 WGB developed an intensive training package, call centre scripts and operational processes to ensure a consistent message and process was delivered to applicants. WGB’s team also worked with a software developer to create a bespoke eligibility database which contained the necessary business rules and a comprehensive file note function, so that all activity in the processing of an application could be recorded.
96 Commonwealth of Australia (2002), Attachment J.
97 In 2008, the IEC and FICS, along with the Banking and Financial Services Ombudsman, merged to form the Financial Ombudsman Service.
98 The Commonwealth is represented by the Treasury on creditors’ committees, which serve to protect the interests of creditors of the companies in liquidation. The committees provide oversight of the liquidation process, including the Liquidator’s remuneration, and vote on motions that relate to the operations of the liquidation, including the release of dividends.
99 The Minister for Revenue and Assistant Treasurer assumed responsibility for the HIH Scheme following the November 2001 federal election.
100 Coonan (2002).
102 Australian National Audit Office (2004), op. cit., page 33.
103 As at April 2004, $35.9 million had been paid out for administrative expenses incurred by HCSL and the Claims Managers. See Australian National Audit Office (2004), op. cit., page 97.
104 Coonan (2002), op cit.
105 US-based Gallagher Bassett Services acquired the remaining 50 per cent stake in its Australian joint venture, Wyatt Gallagher Bassett, in 2004.
106 Australian National Audit Office (2004), op. cit., page 19.
107 ibid, page 38.
108 ibid, page 42. The ANAO noted one case of possible fraud involving false statements on a statutory declaration, which was referred to the Australian Federal Police for investigation.
109 ibid, page 47.
110 Messrs AG McGrath and ARM Macintosh, partners of KPMG Sydney, were appointed as Provisional Liquidators of HIH Insurance Limited and many of its subsidiaries in Australia. On 1 July 2004, the Corporate Recovery divisions of KPMG Australia separated to form an independent entity, McGrathNicol and Partners. On 1 July 2005, ARM Macintosh retired as Liquidator of the Australian HIH Group companies and was replaced by CJ Honey. AG McGrath and CJ Honey (both now of McGrathNicol and Partners) are the current Liquidators and Scheme Administrators of the HIH companies in Australia.
111 These companies were: HIH Casualty & General Insurance Limited; FAI General Insurance Company Limited; CIC Insurance Limited; FAI Insurances Limited; FAI Reinsurances Pty Limited; FAI Traders Insurance Company Pty Limited; HIH Underwriting & Insurance (Australia) Pty Limited; and World Marine & General Insurances Pty Limited.
112 A Scheme of Arrangement is a scheme put in place to bind a company’s creditors and/or members to some form of rearrangement of their rights and obligations. The arrangement must be approved by a court as well as the creditors and/or members of the company, or any class or classes of them.
113 HIH Insurance (2013c).
114 Dutton (2006b).
115 The Assistant Treasurer and Minister for Competition Policy and Consumer Affairs assumed responsibility for the HIH Scheme following the November 2007 federal election.
116 Bowen (2008).
117 A commutation is a commercial agreement between two parties, in this case the Commonwealth and the HIH salary continuance policyholder, whereby, subject to the payment of a mutually agreed sum to the policyholder, the Commonwealth is discharged of all past, present and future liabilities arising from the policy. The commuted value is essentially the net present value of the future payments which would have been made under the policy.
118 The Government sought to wind up the HIH Scheme and establish the final liability of the claims portfolio before the Liquidator commenced the estimation process, which was scheduled to begin on 26 May 2013.
119 Treasury (2013), op. cit., page 162.
120 Treasury (2002), page 139.
121 Treasury (2013), op. cit., page 162.
122 The Commonwealth offered to assist local councils suffering financial hardship as a result of the collapse of HIH. Calculations were based on a hardship threshold, defined as 15 per cent of a council’s Ordinary Rates Base. The HIH Scheme would meet 50 per cent of the amount of the deficiency above this hardship threshold, provided it was matched by funding from the respective state or territory government. The process for eligibility assessment and claims management was unique (eligibility was determined by Treasury, rather than WGB, and claims were managed by the council or its appointed manager). As such, local councils are not described in any of the eligible categories in Subsection 4.2.
123 McGrathNicol (2014).
124 McGrathNicol (2014b).
125 Sum total of HIH Group liquidation proceeds, unadjusted for inflation, calculated from the Treasury’s annual reports as follows: $26.356 million in FY2005-06; $43.646 million in FY2006-07; $55.271 million in FY2007-08; $22.860 milli
on in FY2008-09; $53.776 million in FY2009-10; $62.244 million in FY2010-11; $23.479 million in FY2011-12; $4.045 million in FY2012-13; and $26.257 million in FY2013-14.
126 (a) HIH Casualty & General Insurance Ltd creditors with insurance claims in Australia have been paid 39.97 cents in the dollar, and creditors with insurance claims that are not in Australia have been paid 37.36 cents in the dollar. HIH Casualty & General Insurance Ltd creditors with non-insurance claims in Australia have been paid 31 cents in the dollar, and creditors with non-insurance claims that are not in Australia have been paid 28 cents in the dollar.
(b) FAI General Insurance Ltd creditors with insurance claims worldwide have been paid 59.15 cents in the dollar, and all other FAI General Insurance Ltd creditors have been paid 57 cents in the dollar.
(c) CIC Insurance Ltd creditors with insurance claims in Australia have been paid 64.48 cents in the dollar and creditors with non-insurance claims in Australia have been paid 63 cents in the dollar.
(d) FAI Insurances Ltd creditors with insurance claims in Australia have been paid 55 cents in the dollar, and creditors with insurance claims that are not in Australia have been paid 10 cents in the dollar. Creditors with non-insurance claims in Australia have been paid 10 cents in the dollar.