It shows what went wrong that lead to Bankruptcy of HIH insurance company

1. CORPORATE FAILURE OF
HIH INSURANCE

2. COMPANY BACKGROUND AND ORIGIN
• HIH Insurance was founded in 1968 by Ray Williams and Michael Payne
and at this time it was known as “ M W Payne Underwriting Agency Pty Ltd “
• It was acquired in 1971 by British company CE Heath PLC and Ray Williams
was appointed to the board of CE Heath PLC.
• In May 1996, CE Heath International Holdings changed its name to HIH
Winterthur.
• Through 1997 and 1998, HIH Winterthur acquired a large number of
companies both in Australia and globally, including Colonial Ltd General
Insurance's operations in Australia and New Zealand, Solart in Argentina and
Great States Insurance Co in the United States.
• Most notably, HIH acquired the large Australian counterpart FAI Insurance,
whose chief executive Rodney Adler became a director of HIH in 1999.
• Winterthur Swiss sold its 51% share in HIH Winterthur to the public and HIH
changed its name to HIH Insurance Ltd.

3. THE (Sudden) COLLAPSE
• The March 2001 collapse of HIH Insurance sent shockwaves through the
Australian business community. The country’s second-largest employer, HIH
was at the tail-end of a major acquisition spree. With an estimated $8.1bn
asset base at the end of 2000, HIH was widely perceived as an extremely
robust and reliable company…
• However, private internal reports had begun to demonstrate that the
company’s debt leverage and insurance liabilities were so high that there
was a real risk of insolvency.
• Ultimately, in early 2001 the company’s precarious financial situation became
untenable and HIH endured the largest corporate collapse in Australian
history, going down with losses of more than $5bn. With the company
continuing to function purely so as to service old claims, with no new
business being taken on board.

4. MASSIVE COMMUNITY IMPACT
• The impact on retail policyholders, in particular, was dramatic
• Professional groups, community groups, small business owners, homeowners and
injured individuals were left stranded with unpaid claims for :
• Professional indemnity
• Public liability
• Home warranty
• Accident & disability
• Travel
• “ The failure of HIH caused widespread distress, loss, uncertainty and cost to the
taxpayer. The repercussions will echo through the economy and community for
years to come “
--- Mark Westfield

5. ROYAL COMMISSION
• Federal Government announced that it would establish a Royal Commission
to examine aspects of the company’s collapse.
• Headed by Justice Neville John Owen, the commission formed a new non-
profit company called HCS (HIH Claims Support Pty Ltd) to process the
government support package for HIH policyholders in hardship.

7. THE REAL STORY
• Many of HIH's business difficulties can be primarily due to it’s aggressive expanded
business strategies. Over a decade, HIH created more than 200 subsidiaries, and
the business covers almost all insurance business segments, domestically and
globally.
• It either entered the insurance market that is already overcrowded and competitive
by offering lower insurance premium (California, US), or chose a sector that it did not
fully understand which lead to business issues and legal risks (London, UK).
• HIH acquired some troubled insurance business with too high price during its rapid
growth period in 1990s.
• The most controversial acquisition is $ 300 Million to buy FAI from Rodney Adler,
who later became a member of HIH's board of director. FAI was later revealed only
to be worth $100 Million.
• “ It was likely at the time of the HIH takeover of FAI that both were commercially
insolvent, although they gave the impression to the outside world of being financially
strong in HIH's case, or, in FAI's situation, troubled but viable ... Williams was putting
two weak corporations together to form a potentially weaker combined entity “

8. • HIH also had many fundamental problems, such as underpricing
and reserve problem.
• It offered insurance with very low price, but failure to set aside
enough capital to cover it’s future liability.
• According to press reports, HIH's actuarial adviser had warned
HIH's risk management concern a year before company
collapse. However, instead of adding extra capital, HIH chose to
buy reinsurance to lay off its risk. It was proved as a wrong
decision when all the reinsurance cover ran out.

9. • Further more, the HIH's failure is not only attributed to the
business strategy and fundamental problem, but also includes
additional issues like false reports, reckless management,
fraud, greed and self-dealing.
• Stock market manipulation
• Disseminating false information
• Sydney businessman Brad Cooper was sentenced in the
Supreme Court on 23 June 2006, after a jury found him guilty on
13 charges, relating to bribes he paid a senior HIH official to
push through false claims in the months before the insurer's
collapse.
• It was found that three of HIH's board members in 2000 are
previously employed by Arthur Andersen, who is the external
auditor of HIH. It raised huge issues for the reliance of the
information provided by company and their auditors.

10. 10
Lack of independence
for non-executive
director
Dominance of Ray
Williams, the CEO of
HIH
Lack of independent
information resources
Inadequate risk
management
FLAWS
AS THE ROYAL INVESTIGATION REPORT OF HIH DISCLOSED,
THERE ARE SOME FLAWED ASPECTS REGARDING HIH
CORPORATE GOVERNANCE PRACTICE

11. Lack of independence for non-executive director
from the management
• Justin Gardener, member of audit committee, used to be the
auditor of FAI in 1980’s and FAI was sold to HIH in 1998. This
takeover transaction was regarded as the one of main causes
for the later failure of HIH Company as HIH has to pay huge
cost for the acquisition of FAI. Undue diligence for investigation
work and misjudgment of the financial perspective of FAI
contribute to this awful transaction. Justin Gardener must be
put in the place where his independence was questioned due
to his conflict of interest. Rodney Stephen Adler, the member
of investment committee in charge of the transaction also got
suspect in regard to the independence because the situation
should have been better had he paid due diligence.

12. Dominance of Ray Williams, as the CEO of HIH
• Ray Williams had an illusion that HIH is his own belongings not the
shareholders and he no doubt deserves to override the board.
Unfortunately the board of directors fails to refrain him from doing so, and
conversely indulges him to run the company dominantly. For example,
there were no clearly defined limits on the authority of CEO in some vitally
important areas within HIH.
• Dominant, unfettered CEO made HIH become an entrepreneurially run
company which was actually controlled by the senior manager and to run
primarily in the interest of the senior managers rather than in the interest of
stakeholders.
• The existence of a dominant CEO is a known big threat to the function of
the corporate governance model and increases the company’s risk of
departing from the interest of stakeholders and going into corporate
excess.

13. Inadequate risk management
• Given the nature of insurance company, the risk management
plays a vital role in the operation of the company.
• Although the board has set a investment committee to
appreciate the risk of investment and set investment
guidelines on currency and property dealings, the fact of
three major investment failure mentioned above provides
ample evidence that the risk management of HIH has not yet
been well shaped and performed
• Directors are negligent in terms of analyzing the strategy for
investment decisions and appreciating the risk in relation to
the investment with adequate appropriate information
sources, “risk management failure was just part of the bizarre
management style that sent HIH down the toilet”.

14. Lack of independent information resources for
NEDs to fulfill their responsibilities
• For the company as large as HIH, It is not feasible and economical for the
non-executive directors to collect and process the information necessary
for them to fulfill their directors’ responsibility by themselves, Hence the
non-executive directors’ fulfillment of their responsibility have to be
compromised because they have no choice but to depend on the
accounting system organized and directed by the management.
• There was no finance director included in the board and Ray Williams,
the chief executive, dominated the management and accounting
information provision.
• Due to the seemingly defect in the independence of the non-executive
directors who composed the audit committee, the function effect of the
audit committee deserved to be doubted. Accordingly, the non-executive
director can hardly fulfill their responsibility with independent information
resources.

15. Conclusion
In the case of HIH, not with standing the corporate
governance model “on paper” looks pretty well, the
actual practice of corporate governance is proved
to be flawed. The inadequacy of the corporate
governance practice always implies the high
inherent risk of the company at overall level and
might lead to corporate excesses.