HIH Report Cites Mismanagement as Cause of Collapse

April 21, 2003

The long-awaited report from the royal commission investigating the collapse of Australia’s HIH in March of 2001, has been issued. It concluded, that, although there may have been breaches of civil and criminal law by the company’s managers, the company’s forced liquidation was due mainly to numerous instances of mismanagement.

Royal commissioner Neville Owen, who headed the investigation, reportedly characterized the collapse of HIH as “a shambling journey towards oblivion.” Right up until it was forced into liquidation, HIH management was proclaiming that the insurer could be saved. Once Australia’s second largest insurance company, HIH lost large amounts in the London market, along with substantial sums on its U.S. business which focused mainly on workers’ compensation coverage. It sold renewal rights to its California operations to Alaska National in 2000, and the rest of the U.S. to Argonaut.

The sales didn’t help. HIH’s liabilities are now estimated at around A$5.3 billion (U.S.$3.25 billion). Although there are numerous policyholder and shareholder suits against the company, Owen concluded that outright fraud was not the proximate cause of its collapse. He also faulted Australian regulators for not spotting the problems and taking action sooner, and the company’s accountants, Arthur Andersen, for not fully examining the accounts they were supposed to be auditing. The result was a series of disasters that eventually forced the company into liquidation. “The royal commission’s report on the follies, indulgences and stupidities of the men who ran HIH would serve as a manual on how not to run an insurance company,” said The Australian Financial Review.

There may still be criminal charges against the managers, particularly founder and former CEO Ray Williams, whom Owen cited as possibly withholding a lot of the bad news from the company’s board and from stock market regulators. However, according to a report from the AFP, Owen stated that “Most of the instances of possible malfeasance were born of a misconceived desire to paper over the ever widening cracks that were appearing in the edifice that was HIH. The answer here is that HIH was mismanaged.”

The evidence has been turned over to regulators and the State prosecutor’s office for further investigation. Australian Treasurer Peter Costello was quick to promise a thorough investigation and, if warranted, a vigorous prosecution. “All of the evidence will be put before the courts, and if the courts convict somebody of criminal offence, yes, I believe it would be appropriate for a jail term to be imposed,” he told the Australian Broadcasting Corporation.

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