The collapse of HIH increased awareness of the significance of insurance to the wider economy. Insurance is socially valuable. It promotes financial security and personal responsibility. The insurance market generates price signals, helping to allocate resources to productive uses. Most fundamentally, the availability of insurance enables risk-averse individuals and entrepreneurs to undertake higher risk, higher return activities than they would in the absence of insurance, promoting higher productivity and growth.127 HIH’s collapse demonstrated that without insurance, a range of essential activities in commerce, trade and community life can simply grind to a halt.128
The collapse also served to boost recognition of the ways in which insurance markets can ‘fail’, and what regulatory interventions are needed to improve their functioning.129 For instance, the fact that insurance services are only produced and delivered after they are purchased by policyholders (an ‘inversion of the production cycle’) can create incentives for poor underwriting, under-reserving and insufficient capitalisation.130 In the case of long-tail classes of insurance, of which HIH was a significant provider, it is often possible to conceal past underwriting losses or management mistakes for long periods of time. The failure of HIH thus underscored the importance of management discipline and sound prudential supervision.
With the advent of the Financial Claims Scheme (FCS), the need for a general insurance policyholder support mechanism like the HIH Scheme is unlikely to arise again. In the case of HIH, if not for the introduction of the HIH Scheme, policyholders would have been pooled with other unsecured creditors in a complex and uncertain wind-up process and would have waited many years before any funds became available. Not only did the HIH Scheme expedite payments to eligible policyholders, it also significantly compensated them for financial losses, as assistance payments of 90 or 100 cents in the dollar were, in most cases, significantly higher than the recovery that policyholders would have received pursuant to Schemes of Arrangement. Formal policyholder protection schemes like the FCS are now considered international best practice.
Establishing the HIH Scheme was a unique response to an exceptional event. At the time, the need to develop a support scheme rapidly was imperative, to ensure that HIH policyholders (or claimants against HIH policyholders) with valid claims were not left in financial distress. However, the government had limited capability and infrastructure to support the management of claims. Recognising this limitation, it worked closely with the general insurance industry to ensure that the latter’s expertise formed the bedrock of the HIH Scheme’s structure. As recognised by the ANAO in its 2004 performance audit, this harnessing of private expertise was sufficient to not only:
… provide industry best practice in dealing with claimants, but also to satisfy the needs of the liquidator of HIH and provide confidence to the Commonwealth in proving its debts.131
The Government of the day noted that, ‘Without this partnership, the [HIH] Scheme could not have been so successful’.132 The close collaboration between the general insurance industry, the Liquidator and the Government was instrumental in establishing the HIH Scheme within just weeks of its announcement.133 The role of industry should not be understated. According to the current Government, the industry showed ‘terrific initiative’ in coming together to address the temporary crisis in insurance affordability and availability post-HIH.134
Creating the HIH Scheme under the umbrella of a formal agreement (the CMA) and Trust Deed — rather than through legislation — assisted in establishing it quickly and affording it the flexibility to evolve over time. While it lacked many of the controls that might ordinarily apply over the expenditure of taxpayer money, the HIH Scheme structure gave Claims Managers the autonomy to deliver efficient services, the Liquidator confidence that claims on the HIH estate were properly handled, and the government assurance that taxpayer dollars were disbursed in a judicious manner. Furthermore, the extensive (and at times, arduous) legal design process resulted in the HIH Scheme being established on a secure legal footing, with clear roles, accountabilities and relationships between the different parties. The only legislation necessary was the Appropriations Bill, which provided initial funding.
Ultimately, the HIH Scheme’s success demonstrates that industry and government can work together to deliver mutually beneficial outcomes. Future industry-government collaborations would be well informed by the success of the HIH Scheme.
127 Brainard (2008), page 1.
128 Shorten (2011).
129 Insurance Council of Australia (2014).
130 Baltensperger et al. (2008), pages 8-9.
131 Australian National Audit Office (2004), op. cit., page 41.
132 Coonan (2003).
133 Bowen (2008), op. cit.
134 Sinodinos (2014).