HIH was the price of the Australian insurance corporate world until it came down like a castle of cards. It surprised much of the corporate world and local communities and society in Australia. The strange thing about the collapse of the HIH was that it came down at a moment when it was undertaking an aggressive policy of mergers and acquisitions. What is strange is that a multibillion-dollar company that constantly is on the market buying other smaller and emerging companies, expanding its services offered, suddenly reports more than 3,6 billion Australian dollars of loss?!! As Westfield (2003) pointed out, this was by far the biggest company collapse in Australian history. This ‘historical point of view was not only in terms of the extent of losses but also for the far-reaching effects on the Australian community. There were many companies, governments, communities, and sporting clubs that suddenly found themselves in a bizarre situation, without insurance.
This bizarre situation happened despite much of the customers of the HIH Insurance Corporation had paid for their policies. In the aftermath, the cost of insurance rose dramatically in Australia, with many community organizations no longer able to ensure public events or any other related activity they wanted to conduct. But these are the effects of the failure of HIH Insurance. If we return to the reasons, the Royal HIH Commission put it in simple economic and financial terms: “The company ran out of money” (O’Neill 2005). The aftermath investigation showed that the company had been blowing up like a balloon for the last couple of years without proper control or strategy for the future.
The main problem for the HIH was that it found itself short of cash to provide for all of the claims it had. Thus, the main reason for the collapse of the company was the lack of cash flow to cover the potential liabilities it had. For an insurance company, this was a ‘strange’ situation. This situation came because:
“The insurance group was a huge collection of companies, running many systems on multiple platforms. As a result, the data was not adequately integrated and the group was unable to provide general ledger (GL) account reconciliations between 1996 and 2000” (O’Neill 2005).
The consequence of this situation was that the management executives and the Board of Directors did not have a clear idea of the true financial position of the company. In a certain way, they were making ‘blind’ decisions without knowing if they could afford to do them or not. Thus, it was basically an accounting system problem. As the HIH Royal Commissioner, Justice Owen, showed later, there were three specific problems in the accounting systems at HIH:
unreliable systems and unreliable data,
poor reconciliations of accounts,
the budget process.
The main system the company had for collecting and reporting management information left much to be desired. The lack of reliable information meant that those who directed and managed the company’s affairs were many times making decisions blindly, without having any clue of the future consequences. Worse, there was the filtering of information such that, on occasions, bad news reached the board only if it could not be avoided (O’Neil, 2005).
This situation led to underpricing and overpricing of the product packages offered in the market. Since every company member of the HIH group had its own accounting system and the main system (GED+) failed to reconcile all of the autonomous member companies’ systems, they gave their own pricing of the products without any knowledge of the overall situation of the finances of the Corporation. So, some member companies put out their product underpriced and other put them out overpriced. This damage the ‘mother’ corporation as its cash flow began to diminish.
Measures that could have been used to avoid failure and probable solutions.
HIH appears to have had two major recurring issues with information technology. The aggressive acquisition of companies was not matched by an effective consolidation or integration of systems, and as a result, the supply of accounting information to management and the board was inaccurate. In addition, the HIH policy system (the critical revenue system for an insurer), GEN+, appears to have been unreliable.
Given HIH’s aggressive merger and acquisition history, Bushell (2003) suggests that HIH could have undertaken sensible approaches to manage this. Firstly, integration of systems should have occurred as the acquisition occurred, not attempted years later. Secondly, the role of enterprise architect could have been established to construct comprehensive information architecture for the group.
Gen+ was a proprietary financial system developed by HIH. Among the key tasks of this system was the integration of various insurance premium systems from acquired insurance companies; the calculation of insurance premiums and the generation of debtor statements for customers of the HIH group of companies. It was unable to do this reliably. Processing was slow and inaccurate, leaving unreliable data within the system. Developed in 1997, Gen+ was a DOS-based application. Clearly unable to perform its role reliably, Gen+ was singled out for mention in the final report of the HIH Royal Commission (The HIH Royal Commission, 2003).
“Accurate information systems are a vital part of a viable insurance business. Without reliable financial data on liability for claims, an insurer faces the danger of underpricing its products and so trading unprofitably over an extended period. Similarly, information systems must be capable of producing material that will allow the board and management to assess properly the company’s financial position and performance and to detect any deterioration on a regular basis”. (The HIH Royal Commission 2003).
The lack of a “true and fair” view of the organization was compounded by poor budget and planning processes. HIH regularly failed to meet performance targets. Contributors to this failure included poor internal control systems, aggressive and unrealistic targets, and no effective monitoring. Justice Owen found no evidence that the board of HIH considered budget performance in their meetings, or even that the information was regularly given to the board.
HIH offers many lessons to the corporate world, and there are many issues raised by the conduct of that company. This case study offers only a small segment of what happened. Suffice to say that the consequences of the collapse on the Australian community in general, the corporate community, and the decision-makers from HIH were dire. State and Federal governments were required to immediately intervene in the insurance industry to support businesses and government operations which were suddenly uninsured through no fault of their own. The Federal Government initiated the CLERP 9 amendments to the Corporations Act. Finally, a number of key officers of HIH were indicted for criminal activities in breach of criminal law, with several being convicted and sentenced to jail terms. Others were found to have breached the Corporations Act and were banned from acting as Company directors (Delisted 2009).
Bushell, S 2003, Those Who Do Not Learn from History are Doomed to Repeat It, CIO, Web.
Delisted 2009, HIH INSURANCE LIMITED (HIH), Delisted.com.au, Web.
O’Neill, R 2005, ‘Justice Owen keeps it on the record’, The Age, 2005.
The HIH Royal Commission 2003, Volume I: A corporate collapse and its lessons, The Failure of HIH Insurance, Commonwealth of Australia, Canberra, Australia.
Westfield, M 2003, HIH: The inside story of Australia’s biggest corporate collapse, John Wiley & Sons Australia Ltd, Brisbane Au.