Hih case study dissertation
Firstly, an introduction and background in relation to HIH insurance carrier will be presented. Then the source of HIH failure is going to be discuss in the pursuing part, generally focused on the failure of financial risk management, the failure of auditor, the failure of regulation as well as the lack of self-reliance for nonexecutive director. Finally, according to the examination of the problem, the newspaper offers ideas as to cope with those problemsï¼Œfollowed by a quick conclusion at the end of this paper.
2 . 0 Introduction and background
Prior to its fall in 2011, HIH insurance was Australia’s second largest insurance provider. It was include in provisional liquidation on 15 March 2001 due to its incapability to shell out its debts as they droped due. 2 days later, the Royal Percentage was established to investigate the reasons for and the instances surrounding the failure of HIH.
The HIH fall is considered to be the largest corporate failure in Australia’s history, with liquidators estimating that HIH’s losses may reach up to.
three or more billion. The collapse of HIH has a negative effect on the culture and the passions of the stockholders, general creditors and policy holder are also affected by HIH failure. 3. 0 Causes of HIH Collapse
3. 1 The failure of economic risk management
3. 11 Weak underwriting performance
The insurance industry with the position an excellent source of risk, specifically long-tail risk. Three significant vehicles for the insurance company to use up against the high risk and make a profit, that are risk pricing ability, provision for hold policy plus the investment decision. The combination of substandard risk charges ability, under-reserving policy and failure investment decisions finally exhausts the financial reference of HIH.
Underwriting is a core aspect to standard insurer’s businesses and it reflects the danger pricing capability of the insurance company. According to the exploration report of HIH Royal Commission, eventually of season 1997 HIH make an underwriting loss of $33. 8 mil and net premium earned was $1233. 5million.
By contrast, pertaining to the year ending 30 06 2000, underwriting loss and net high grade earned had been $103. a few million and $1995. 5 million correspondingly. Those numbers reveals that during this period, underwriting loss improved sharply, lead more supply for says outstanding, underwriting expenses and reinsurance recoveries. (HIH, 2011) 3. doze Under-reserving coverage
Another reason to get HIH failing is under-reserving. As the Royal Commission Report known, “the major single item on the balance sheet of the basic insurer may be the provision that sets aside for repayment of long term claims.
HIH had a excessive exposure in areas where superimposed inflation has played a devastating function. For Workers’ Compensation in California, the estimated from the growth was 23% per year (1987-1990) and 10%( 1990-1999) which mirrored the relatively high inflation rate in that period. Yet , the growth predicted by HIH was only 3. 8% that is significantly below the industry estimation. Consequently, HIH genuine reserve was much lower compared to the market typical. 3. 13 Flawed purchase decisions
You will discover three major failures in investment, that make a great contribution to their collapse. The first was the UK operation in 1993, as a result of defect details management which will result in the deficits amounted to $ 1 ) 7 billion. The second a single happened in america operation. The losses were $620 mil caused by the board of directors of HIH don’t reliable measure the potential risk during the procedure.
The third failure is the FAI acquisition. Even though in the situation in the lack of relevant documents just like HIH Reviews of financial mechanic, HIH completed the purchase of FAI in 1998 resulted $590 million losses. As a result, a cash flow turmoil became more severe and the purchase attributed to HIH collapse. (Rogers, nd. ) 3. a couple of Audit are not independent
Another reason for HIH Collapse is a lack of impartial audit institution. Audit self-reliance is the assure to provide a reliable results. HIH has both internal and external taxation committee, yet , the internal examine committee are not able to consider the key factors just like risk management and internal control.
For the structure of audit committee, the examine meeting ofHIH attended simply by all directors including executive director and the chairman of HIH, Geoffrey Cohen, was also the chairman from the audit committee of HIH, which make the audit committee lose the independence. Audit committees, who also supervise the management reporting process and communicate with the external auditors, should be consist of a majority of nonexecutive directors thus eliminating the conflict of interest. Furthermore, Andersen since the taxation institution, it accepted the actuary’s reports without any query. In particular, Andersen relied extensively on HIH’s internal organization audit procedures. (The case, 2007) three or more. 3 The failure of regulation
Two main regulating institutions are responsible for the regulation of insurance provider in Australia which are APRA and ASIC. Though APRA would not cause or contribute to the failure of HIH, it failed to detect indicators, follow up info gaps and make successful use of its powers. The collapse of HIH is actually a chronic process, however ASIC and APRA as the regulation institution fail to match its legal responsibility of supervision.
3. four The inability of accounting method
HIH would not provide enough reserve margin for future claim requirements, but rather this sought reinsurance to cover the danger. Actually, reinsurance can be named loans. Consequently, it could be perhaps reduce the reported profit and increase the the liability, which could consequently result in elevated D/A ration.
Moreover, the financial statement of HIH did not echo the true of its financial situation. For example , goodwill, deferred buy costs and future taxes benefit weren’t serviceable intended for assessing the true financial position. Because they are just take place in the economic statement and fact, they can not neither provide cash runs or earnings for the corporation. As a result, auditors are on a close to impossible objective to satisfy the joint requirements of complying with the accounting standards and attesting for the truth and fairness of financial statements. (HIH, n. d)
3. 5 Lack of independence for non-executive director
Figure1: Board Committees
From your figure previously mentioned, we can infer that the self-reliance of thenon-executive directors deserves to be inhibited. Among five nonexecutive administrators, two of them were previous partner of Andersen, which happened to be difficulties auditor and advisor of HIH.
Only for one year-2000, HIH acquired paid $1. 7 mil to Andersen for auditing services and $1. 631 million pertaining to provision of other non-auditing services. Furthermore, Justin Gardener who was the member of examine committee, accustomed to be the auditor of FAI in 1980’s. As discussed previously mentioned, the acquisition of FAI was one of the main reasons intended for the collapse of HIH, as the misjudgment in the financial point of view of FAI. Justin Garden enthusiast must be make the place in which his independence was wondered due to his conflict of interest.
The few impartial directors alleged that they had been misled as to the true monetary positions with the respective firms. (HOW, nd) 4. zero Recommendations
Some recommendations get based on the analysis of HIH example: In the first place, HIH should set up the auditing department separately to improve their ability to assess financial situation in the company. Auditors must have a state of brain whereby they give their thoughts and opinions without compromising their wisdom while acting with ethics, objectivity and professional scepticism. Second, the business should regulate effectively to assure adequate solvency.
The ability to pay out its debt as they show up due is the indicator to measure the financial situation of the insurance provider, at the same time it is additionally the requirement for the sustainable expansion for the company. Indeed, HIH should strengthen supervision for the board of director and balance the interests between shareholder and corporation. Total annual general group meetings are necessary to resolve reasonable questions from investors. 5. zero Conclusion
Last but not least, the collapse of HIH is the effect of a number of relatively straightforward corporate governance failures. Firstly, the weak underwriting performance ends in more dotacion for statements outstanding, underwriting expenses and reinsurance recoveries are required. Subsequently, under-reserving coverage makes HIH actual hold was lower than the market average.
Thirdly, three significant failures in investment brings about cash flow turmoil in HIH and intensify the financial situation. The lack of independence of nonexecutive director and auditor makes the company cannotmonitor management effectively. According to prospects problems, the recommendations of building independent auditing system, supervising the company’s economical ability and sufficient information disclose in the board of director will be suggested.
6th. 0 Bibliography
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HIH Insurance. (2013). Recovered at six October, 2013, from HIH Insurance: http://www.hih.com.au/
HIH Insurance Group failure. (2011). Retrieved October 07, 2013, via PARLIAMENT OF AUSTRALIA: http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance
HOW THE FAILURE OF ONETEL AND HIH INSURANCE TRANSFORMED CORPORATE GOVERNANCE IN AUSTRALIA. (n. d. ). Retrieved August 10, 2013, from longdog: http://www.longdog.com.au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan.pdf
Jiangbo, X. (2010). HIH Insurance Limited: Business Governance and Corporate Excesses. Retrieved October 07, 2013, by http://www.seiofbluemountain.com/upload/product/201010/2010jjfzh05a8.pdf
Rogers, P. (n. d. ). ETHICAL RESPONSIBILITIES AND THE DIRECTOR: CASE STUDIES. Retrieved August 07, 2013, from THOMSON RERTERS: http://www.thomsonreuters.com.au/product/AU/files/720502412/chapter_13.2_case_studies.pdf
The case analyze of HIH insurance company. (2007). Retrieved October 08, 2013, from blog page. sina: http://blog.sina.com.cn/s/blog_4e284de701000b26.html