Hih Insurance Group Collapse

Topics: Insurance, Actuarial science, Workers' compensation Pages: 6 (1894 words) Published: September 26, 2011
Auditor-General’s Report to Parliament 2001 Volume Four


Collapse of HIH Insurance
KEY FINDINGS The collapse of HIH Insurance (HIH) in early 2001 will significantly affect NSW Government finances: ♦ A $600 million liability (estimated) has been included in the 2001-02 NSW Budget. This amount relates to a support package set up by the NSW Government for NSW residents who have HIH Compulsory Third Party (CTP) and home-owner warranty insurance claims. NSW public sector agencies have $30.5 million of outstanding and potential claims with HIH Insurance. A $28 million liability (relating to the Workers Compensation Act 1926) will now be recognised in WorkCover Authority from the failure of HIH. Some investment losses will be incurred by State agencies holding HIH shares.

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It is recommended that: ♦ ♦ ♦ The $600 million (estimated) liability for HIH CTP and home-owner warranty insurance claims should be closely monitored as such claims are usually subject to uncertainty and volatility. The regulatory roles of the Motor Accidents Authority and WorkCover Authority should be reviewed once the causes of the HIH collapse are determined. The current structure of the Treasury Managed Fund should be reviewed to determine whether it is beneficial to include all non-budget dependent agencies under the cover provided.

A Royal Commission into the causes of the collapse will report next year. The liquidator of HIH has the responsibility of determining the extent of the losses that arise. Whilst this determination will take some time, early estimates of these losses may exceed $4 billion, making HIH one of the largest corporate collapses in Australia. FINANCIAL IMPACTS NSW Policyholders Protection Fund In the 2001-02 Budget the Government announced that it would introduce legislation to establish the NSW Policyholders Protection Fund. This Fund will pay the claims against Compulsory Third Party insurance (CTP) policies in force with HIH prior to 31 December 2000 and claims under the Home Warranty Insurance Scheme for policies entered into prior to 15 March 2001. For Budget purposes, the gross liabilities for these claims have been estimated at $600 million, the majority relating to CTP claims. Up to 2004-05 total claim payments are estimated at $476 million and will be funded by: ♦ ♦ $200 million from the Budget - $50 million in 2001-02 and $150 million over the period to 2004-05 the introduction of the Insurance Protection Tax (IPT) from 1 July 2001. Special Reviews


Auditor-General’s Report to Parliament 2001 Volume Four

The IPT will raise $69 million per annum from all general insurance companies operating in NSW. It will be apportioned on the basis of each company’s share of the total premium income collected in the previous year from all classes of general insurance and CTP insurance in NSW. It is common, particularly with these types of insurance claims, for the estimate of outstanding claims liability to be subject to uncertainty and volatility. It is important that the exposure to the State through the Policyholders Fund is monitored closely in order to identify variations to the $600 million estimate, particularly as further claims experience is established. Public Sector Insurance Claims on HIH Soon after the collapse of HIH, NSW Treasury undertook an exercise to ascertain the extent of lodged and potential claims with HIH from NSW public sector agencies. The latest estimate of these claims is $30.5 million spread across many entities. A major part of this relates to a claim by Sydney Water Corporation of approximately $18 million for the water quality crisis of 1998. The Treasury Managed Fund (TMF) is a self-insurance scheme, comprising all budget dependent General Government entities, public hospitals and some Government authorities. As indicated above, some authorities had insurance arrangements outside of TMF and with the collapse of HIH, this has resulted in a cost to the State. Volume Six of the...
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