HIH; What Went Wrong?
During 2000 at the Institute of Actuaries annual seminar on general insurance, two senior actuaries, Peter McCarthy and Geoff Trahair, presented a paper that rang alarm bells for HIH Insurance. Even though HIH was not mentioned in the paper [entitled “Lack of industry profitability and other stories”] the insurance industry was accused of under pricing policies, pressuring actuaries to reduce the projected level of outstanding claims liabilities and of having poor quality staff and senior management. This was a forewarning of what seems to have gone wrong at Australia’s second largest insurance company.
According to McCarthy and Trahair the main problem was bad management. They outlined “poorly trained and low-skilled staff, with inadequate or non-existent pricing models, combined with poor underwriting controls.” They also suggested that poor claims management, careless data management and imprecise monitoring led to incomplete analysis of portfolio performance, if done at all. Senior management did not escape criticism either. “The management progression path seems dominated by those who have risen through the ranks, starting out either as underwriters or case officers. Whilst this gave a good grasp of the micro picture, it fails to deliver the broader macro picture that is required to make the transition from managing individual policies and claims to managing whole portfolios or companies.”
Former HIH director, Rodney Adler, confirmed these views when he wrote to the managing director of HIH, Ray Williams, in September 1999. He claimed the long serving management team had fallen into a rut. Another HIH insider described the culture of the organisation as macho in which senior management knew about their own area only and nothing about the rest of the business.
In their paper, McCarthy and Trahair recommended greater actuarial influence on the pricing of policies and argued that any actuarial...