HIH Insurance Liquidation: A Case Study of Corporate Collapse in Australia

This report delves into the reasons behind the liquidation of HIH Insurance, one of Australia's largest insurance providers. It examines the events leading to the collapse, including aggressive expansion strategies, underpricing, and fraudulent accounting practices. The report also analyzes the role of financial stress, liabilities, and corporate governance failures in contributing to the company's demise. Through a comprehensive analysis of relevant literature and case studies, the report provides insights into the factors that can lead to corporate collapse and offers recommendations for organizations to mitigate such risks.

Accounting Financial ACC710
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Executive Summary
The report explains about all the reasons which led to the liquidation of the HIH insurance
Australia. All the facts which led to the liquidation of the company are explained so that the
actual analysis can be done about the wound up. There were major corporate collapse in
Australia and HIH insurance is one of those. According to the quantitative and the qualitative
analysis it was found that the collapse of the company is the classical case which is related to the
wrong pricing policies, strategic mistakes and the unbridled growth. The collapse of the
company is associated with the serious deficiencies which incorporate the weakness of auditing,
financial reporting and the poor performance risk. HIH Insurance liquidation took place in 2001
with the loss amounted to be $5.3 billion. HIH insurance was provided with the provisional
liquidation so that it may review its financial operations and also get the time to assess its
financial performance.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
1. Events that led the company to liquidation..........................................................................................5
2. Financial stress:.......................................................................................................................................6
3. Were Liabilities a major factor contributing to the liquidation of the company?.....................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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Introduction
HIH insurance was one of the second largest insurance provider company in Australia. It was
placed to the liquidation on 15 March, 2001. According to the investigators the cause of the
collapse led to the conviction and the imprisonment of various members of the HIH management
related to various charges of frauds. The events through which the company was liquidated and
the ethics and governance in the financial stress of the company is also explained by analyzing
the various journals related to same issue. The recommendations are also provided which can be
considered by all the other organizations so as to reduce the risk of liquidation.
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1. Events that led the company to liquidation
There were the many facts that led to the liquidation of the HIH insurance company but the basic
one was that of the insurances (Damiani, et. al., 2015). The setting of liabilities which was of
company with its assets is potential for the company that was led with the net assets of $133
million and the claims against insurance which is also not sufficient. The main difficulty was due
to its aggressive expansion and the business strategies. HIH created over 200 subsidiaries which
cover all the segments of insurance globally as well as domestically (Abid and Ahmed, 2014).
They entered into the business by offering the lower insurance premium but acquired some
difficulties in the insurance business with the high prices during the rapid growth. It has also
many of the fundamental problems such as the under pricing and the problem related to reserves
(Lane, 2016). The insurance were offered at the low prices but failed to cover its liability for
future. HIH’s actuarial advisor had advised the HIH’s risk management for their collapse but the
HIH took the decision for reinsurance rather than adding the extra capital to lay off its risk which
proved to be one of the wrong decisions for the organization as all the reinsurances ran out. With
this the problem was not only attributed to the business strategy but also to the various other
issues such as the false reporting, greed and self dealing and the frauds. With this the problem
was also leads with the manipulation of the stock market. The promoting of the false information
helps in making the wrong decisions for the organization which led to the collapse of the HIH
insurance (Lane, 2016). The businessman of the Sydney Brad Cooper was lead to the sentenced
in the Supreme Court on 23 June 2006, after which the jury laid it to the fraud of the 13 charges.
It was also found that the three officers of the HIH management were already hired by the Arthur
Andresen, who is the external auditor of the HIH. It raised the issues in the organization for the
reliability of the information in the HIH Insurance (Damiani, et. al., 2015). With that there were
various flaws also in the organization according to the Royal Investigation report which was
disclosed by the HIH Insurance (Cheng and Seeger, 2012). These flaws are:
 There was no independency for the non executive directors
 Dominance of Ray Williams, the CEO of HIH
 Information resources independency
 The risk management was inadequate
As HIH Insurance is the insurance company so the risk plays the vital role in its operations
(Cheng and Seeger, 2012). The board has set up the separate committee so as to appreciate the
investment of risk which shows that the risk management of the HIH Insurance is not well
shaped and informed. Analyzing of the risk factors in the investment decisions and the
appreciation of the risk related to the investment with adequate information sources this led to
the failure of HIH Insurance in the competitive market (Cheng and Seeger, 2012). The risk was
attained by the organization by taking the wrong decisions related to the investment and pricing.
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2. Financial stress:
Financial stress can be defined as a situation which represents the financial health and financial
problems which are faced by an organisation. It is a situation in which company does not have
enough funds to manage its repay obligations (Tayşir and Pazarcık, 2013). Financial stress is a
complex situation because an organisation is not able to meet its liabilities even after taking
external funding helps.
HIH insurance was leading insurance player in Australia and liquidation of this company was
create a shock for corporate word. There are various factors which are liable for the financial
stress of HIH insurance like inappropriate strategy planning and execution, wrong budgeted
estimations and management decisions. HIH insurance was liquidated with a loss of 5.3 billion
dollars in 2001 and it was shocking news for the corporate houses.
Ethical and corporate governance rules are very important not only for the investors but for
company growth also and helps to maintain dignity in the actions of the company. The fall in
ethical values arises due to high market competition and expectations (Lim, 2014). Liquidation
of HIH denotes that corporate governance is must to ensure the sustainability and following are
some factors which contribute to liquidation:
Inappropriate strategy planning and implementation:
The appropriate strategy is must to ensure the continuity of business. Corporate governance rules
work like surveillance on the unethical business actions to make the management more
responsible for their work. Liquidation of HIH insurance is a result of inappropriate strategy
planning, budgeting and reporting.
Monitoring failure:
An effective monitoring is must in every business organisation and the same thing is proved by
the liquidation of HIH insurance. During the operations of the company, there is a high
discrepancy in the internal monthly and quarterly financial reports, trial balance and balance
sheet. This situation arises due to lack of internal control system and review system. Company
auditor was also failed to fulfill the audit responsibility because he failed to find the heavy
mistakes and mismatched amounts which were accessible with audit trail and ageing process.
Ethical responsibility and Independence of management
Before the liquidation, HIH was a leading insurance company in Australia which was working
with 217 subsidiary companies in various countries. After the acquisition of FIA insurance
company follow an aggressive business policy and the same was liable to make a decrease in the
revenues of the company (Lim, 2014).Before the liquidation of the company, the CEO of HIH
receives a package of billion dollars which denotes the unethical behavior of company directors.
Failure in the reporting and accounting discloser:
Australian Accounting standard board has right to issue significant notification for governing the
accounting reporting matters along with the corporate governance discloser requirement. These
Accounting standards are issued to ensure the true and fair representation of financial statements
but the statement of financial position of the company had several items like inappropriate
valuation of goodwill, wrong amounts of intangible assets and incomplete discloser of
borrowings in financial statements which was required investigation. Audit process also failed to
find these frauds because three members of director board were the auditor of the
company(Tayşir and Pazarcık, 2013).
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Above discussion proves that compliance with ethical and corporate governance rules is
necessary to create a healthy business environment which will benefit not only for the investors
but business companies also.
3. Were Liabilities a major factor contributing to the liquidation of the company?
HIH was the second leading insurance company of Australia before the winding up in 2001.
There are several factors which are liable for the liquidation of the company and the liabilities is
one of them. The situation for liquidation arises when company borrow heavy fund to meet its
obligations and they were also not enough to repay the company liabilities. The company
reported 500 million dollars as borrowings in last financial statements and which was more than
170 million dollars from last year (Ramcharan and Rajan, 2014).
Heavy debts are liable to generate heavy outflow of funds as interest and another cost and this
situation create a complex situation for the business because the extra cost of borrowings affects
the profitability of the company. Following are some factors which were liable to increase the
liability of the company
HIH insurance was following an aggressive business expansion policy which includes the
acquisition of other business on high rates and a low pricing strategy. Due to this aggressive
policy, company face a heavy loss in the acquisition of FCI insurance company. Improper
accounting also a major factor which enhance the liabilities of the company and due to improper
accounting and reporting management get a chance to make fraud with company investors
(Jaimes-Valdez and Jacobo-Hernandez, 2016).
There are some other factors also which are liable for the liquidation and some of them are as
follows:
 Lack of audit effectiveness: audit is a process which is used to ensure the correctness of
financial statements but in the case of HIH insurance, the company was facing a complex
situation. Auditor of the company was the member of company board so they do not give
a true and fair view of the internal financial situation and company gone into liquidation
(Moazzin, 2015).
 Pricing strategy: HIH was having a great record of growth and to maintain it, company
follow a wrong pricing strategy. Insurance company receives a premium from a customer
for re-invest purpose and HIH provides heavy discounts to make high sales but this
policy generates heavy outflow of the fund in future which is also a reason for the
liquidation.
 Managerial ethics: company management failed to establish an ethical working
environment and take personal benefits from the company activities. It also contributes to
the liquidation.
Liabilities of HIH are very high in the comparison with assets. All insurance subsidies working
under the HIH group was clearly insolvent because they do not have enough assets to repay the
liabilities. Before the one year of liquidation, company advisor clearly advised the company
management that reinsurance agreement and problems related to reserves may contain the chance
of liquidation but the reckless management of company ignore it(Moazzin, 2015).
Above discussion proves that heavy liabilities are responsible for the liquidation of the company
and this situation arises due to various other factors which are also discussed above.
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Conclusion
It can be stated that the collapse of the HIH has increased the awareness for the significance in
the insurance of the wider economy. It has also provided the price signals to the other insurance
companies that they can utilize their resources in the productive uses. The collapse of the HIH
Insurance also served to boost the recognition of the ways in which the insurance markets can
fail and what all interventions must be taken by the organizations to improve its working. The
liquidation of the company has indicated various corporate governance failures which are very
common in the model of the corporate governance. The collapse of the HIH Insurance in
Australia were related to the factors such as the aggressive acquisition process and fraudulent
accounting practices which increases the level of the leverage sources according to the
accounting figures which are inflated and the lack of independency in the boards and directors.
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References
 Damiani, C., Bourne, N. and Foo, M., 2015. The HIH claims support scheme.
Economic
Round-up, (1), p.37.
 Cheng, S.S. and Seeger, M.W., 2012. Lessons learned from organizational crisis:
Business ethics and corporate communication.
International Journal of Business and
Management,
7(12), p.74.
 Lane, R.J., 2016.
Unexpected corporate failures in Australia through the decades:
commonality of causes (Doctoral dissertation, James Cook University).
 Abid, G. and Ahmed, A., 2014. Failing in corporate governance and warning signs of a
corporate collapse.
 Lim, H., Heckman, S., Montalto, C. and Letkiewicz, J., 2014. Financial stress, self-
efficacy, and financial help-seeking behavior of college students.
 Tayşir, E.A. and Pazarcık, Y., 2013. Business ethics, social responsibility and corporate
governance: Does the strategic management field really care about these
concepts?.
Procedia-Social and Behavioral Sciences,
99, pp.294-303.
 Moazzin, G., 2015. From Globalization to Liquidation: The Deutsch-Asiatische Bank and
the First World War in China. Cross-Currents: East Asian History and Culture Review,
4(2), pp.601-629.
 Ramcharan, R.G. and Rajan, R.G., 2014. Financial fire sales: Evidence from bank
failures.
 Jaimes-Valdez, M.A. and Jacobo-Hernandez, C.A., 2016. Sustainability and corporate
governance: Theoretical development and perspectives. Journal of Management and
Sustainability, 6(3), p.44.
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