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The HIH Disaster

. HIH. HIH was 2nd largest general insurer in Australia Majority of business in Australia but also written in:UKNorth AmericaNZ Asia PacificComplex corporate structure. HIH - Group structure. . . . . . . . . . . . . . . . . . . . . . . . Provisional liquidators appointed. Licensed insura

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The HIH Disaster

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    1. The HIH Disaster Lindsay Joyce & Peter Rashleigh 14 April 2003

    2. HIH HIH was 2nd largest general insurer in Australia Majority of business in Australia but also written in: UK North America NZ Asia Pacific Complex corporate structure

    3. HIH - Group structure

    4. Largest corporate insolvency in Australia’s history Over 1 million policy holders impacted globally Wide impact on Australian economy through large share of: Professional indemnity Public liability Workers’ compensation Compulsory motor vehicle Builders Warranty insurance

    5. Liquidation of HIH Unqualified audit report: June 2000 (signed Oct 2000) Net assets - $940m Provisional liquidators appointed: March 2001 Liquidators’ estimate of deficiency $3.6m Liquidators appointed: August 2001 Current estimated deficiency: About $5.3bn

    7. What is a Royal Commission? Inquiry established by Government – usually major issue Royal Commission Act (Cth) 1902 Letters Patent – Terms of Reference Don’t prosecute Don’t sue

    8. What is a Royal Commission? Don’t award damages Don’t “sentence” Civil & criminal proceedings usually follow Commissioner’s findings

    9. HIH Royal Commissions’ Terms of Reference Letters Patent dated 29 August 2001 Causes of the failure of HIH Undesirable corporate governance practices Breaches of any civil or criminal law Exercise of powers under Commonwealth/State laws Future regulation, prudential supervision and other insurers for the Australian general insurance industry

    10. The Commission The Royal Commissioner – Justice Owen The Secretariat The Legal Team – Counsel Assisting The Parties (more than 40 represented) The Website – http://www.hihroyalcom.gov.au

    11. The Hearing 1. Investigations by External Entities and the Final Days of HIH 2. Aspects of Reinsurance 3. FAI Issues 4. HIH Issues 5. Issues Relating to Government and Regulatory Agencies

    12. The Hearing 6. Future Policy Directions 7. Closing Addresses – Counsel Assisting 8. Closing Addresses – the Parties

    13. Statistics 194 witnesses 201 sitting days 25,000 documentary exhibits Database of 1.6 million images 18,700 pages of transcript (as at mid January 2003) Over 4,500 pages of Counsel Assisting’s submissions More than 1,000 possible breaches of Corporations Law Estimated cost to Federal Government of $40 million Estimated total cost of $100 million

    14. The Commissioner’s Report Due 4 April 2003 Causes of HIH’s collapse Future regulation of the general insurance industry Likely to refer individuals’ conduct to APRA, ASIC, DPP and Companies Auditors & Liquidators Disciplinary Board

    15. The Issues Reinsurance and ‘financial reinsurance’ Reserving practices within FAI and HIH HIH’s acquisition of FAI in 1998 HIH’s UK and USA businesses Regulator performance – APRA and ASIC Corporate governance Auditor and actuary independence Accounting practices

    16. The One Big Question? When did HIH first become insolvent? Will the Commission establish this?

    17. Principal Causes of the Collapse (according to Counsel Assisting) - Under provisioning Unprofitability of the UK business Unprofitability of the USA business Acquisition of FAI

    18. Future Policy Direction Regulation & prudential supervision of the industry Protection for general insurance policy holders Prudential regulation & price supervision in State & Territory statutory regimes Taxation Alternative risk transfer products and accounting for reinsurance products

    19. What’s Next? Criminal Prosecutions? Civil Recoveries Reinsurance Others Issues for Indemnity Insurers

    20. Who will pay? Possible prosecutions/civil proceedings against: Directors? Auditors? Actuaries? Officers? Advisers? Reinsurers? Regulators (the Australian Government?)?

    21. Liquidator’s Proceedings Commonwealth of Australia APRA Arthur Andersen (HIH’s auditors) David Slee (HIH’s external actuary)

    22. ASIC Proceedings Ray Williams Rodney Adler Dominic Fodera

    23. Implications for the Industry Problems confined to HIH Group? Pricing or should we say, underpricing Reserving Corporate Governance Transparency / Disclosure

    24. The Good Old Days are Long Gone! Prosecutions/litigation tomorrow? The party ended yesterday!

    25. The Legacy of HIH – What follows? - It will live long and not just for the benefit of lawyers! Has highlighted the role and importance of insurance in the fabric of modern society Is the industry ready and able to assume that responsibility?

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