Collapse of HIH Insurance (2001)
A major Australian property and casualty insurer, put into provisional liquidation in March 2001 with an estimated deficiency of up to 5.3 billion Australian dollars after failing to reserve for future claims.
A property and casualty insurer collects premiums today and pays claims over years, sometimes decades in the liability lines. Its profit therefore depends on an estimate, the loss reserve, and a reserve set too low makes an unprofitable business look profitable. HIH combined that under-reserving, concentrated in long-tail lines, with underpriced business written to gain market share and costly acquisitions. The balance sheet showed capital that did not exist, and the gap surfaced only when actual settlements outran the reserves. The Royal Commission found a failure of governance rather than deliberate fraud, and the case led Australia to strengthen the requirement for an independent actuarial review of reserves.
On March 15, 2001, the HIH board appointed a provisional liquidator for the company and seventeen of its subsidiaries; the Australian regulator, APRA, later put the deficiency at up to 5.3 billion Australian dollars, against 940 million of reported capital in June 2000. Justice Neville Owen's Royal Commission report was tabled in Parliament on April 16, 2003.
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