No external events contributed to HIH’s failure - the liability insurer that collapsed 13 years ago was responsible for its own demise, Tony McGrath, chair of McGrathNicol, told the AILA conference.

However, industry supervision was insufficient and the HIH liquidator said it was unlikely a collapse of the same magnitude could happen again, given industry reforms implemented in the wake of the HIH Royal Commission.

Improvements included:

• A shift to risk-based capital, LAGIC, in line with the principles of Solvency II and the requirements of the International Association of Insurance Supervisors;
  
• Significant new prudential standards around capital adequacy, risk management and the roles of actuaries and auditors;
• A focus on encouraging better risk management, particularly for insurers to better understand and manage their risk, thus reducing the risk of failure;
• A risk-based approach to result in more efficient use of capital;
• Actuaries must now prepare annual financial condition reports for boards and APRA;
•  Internal capital adequacy assessment process reports must be submitted to APRA; and
• For future failures, APRA has established a policyholder support scheme, the Financial Claims Scheme. 

Before HIH’s collapse, APRA’s capital adequacy requirement was based on a simplistic approach and there was a weak correlation between solvency requirement and risk factors.

Mr McGrath said no one knew how to react to HIH’s collapse and the significant market failure that occurred because of its dominance.

How does a company reach that stage? “It was a soap opera in the last few years as it reacted to cash and balance sheet issues.” It was “in a tail spin” by the time liquidators were appointed, he said.

A key factor was its 1998 purchase of FAI Group, which was APRA’s “problem child” for a long time. “Combining both caused irreparable damage.” There was a low asset base and “chronic under-reserving in liability classes”, creating a $4.5 billion deficiency.

The company and the HIH board had “got it wrong” for a long time, with an inability to properly value insurance liabilities.

Key governance failures included company founder and former CEO Ray Williams being a dominating CEO who lacked the necessary skills to manage such a complex business. The board lacked independence and actuary David Slee was “almost an employee”, garnering 70% of his work from HIH.

Mr McGrath said while a similar collapse in future was unlikely, a different approach may have been taken in the post-GFC environment. “No one thought HIH was too big to fail. It was so badly diseased, the structure was not worth trying to save.”

But, in the future, it was possible a Federal Government could decide to underwrite an insurer to avoid a collapse.

Asked during the Q&A session about what role the legal profession could have played, Mr McGrath said it would not have mattered what legal advisers said. “There was an over-riding mode of practice.”

On the jailing of seven directors or senior executives, Mr McGrath said ASIC prosecuted on “the things they can get them on, not the fundamental issues”. Former FAI CEO and HIH executive “Rodney Adler didn’t go to jail for what he really did wrong”.

A climate of bad management practices became the norm at HIH. “You lose management discipline, and that was exactly the problem,” Mr McGrath said.

• Back to top