Analysing The Recent Situation Of HIH

Essay by PaperNerd ContributorUniversity, Master's October 2001

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On March 15, 2001, Australia¡¯s second largest insurance company HIH collapsed and an application for its liquidation was submitted. It soon escalated into Australia¡¯s biggest corporate failure in June after the insurer¡¯s final tally of losses was estimated to be about $3 billion in Australia and almost $5 billion worldwide, very well above the early estimate of $1 billion . HIH¡¯s demise was mainly due to the criminal and unethical activities that the company directors committed, as well as risk management practices and poor decision-making. As a result, most HIH¡¯s creditors, policyholders, shareholders, employees and many other businesses and departments, who are innocent victims, have been enormously affected.

In the early 1990s, HIH quickly expended business overseas through the Europe and the United States. However, it did not have the control in place. HIH started to reinsure from 1997 and it had been accepting too many risky insurance claims from other insurance companies.

Thus, it did not set aside enough capital to pay out over a number of years to policyholders. For example, HIH paid couples of hundred million dollars to cover workers compensation in California by raising its premium rates in another countries. Meanwhile, a wine company in NSW decided to take its money out of the insurance group, but HIH had no more capital to cover the cost.

Furthermore, the under-reserved position of the insurance group was greatly exaggerated when HIH bought Rodney Adler¡¯s FAI Insurance for $275 million by depressing share price in the late 1998. However, it escalated in September 2000 when it sold half of its personal insurance operations to the German insurer Allianz for $325 million, including the FAI brands. It clearly showed that the company was no longer viable because the amount it had to pay out on claims exceeded the income...