20 years on and yet another financial disaster.

 Seemingly New South Welshmen are not good students of history. In March 2001, HIH Insurance was placed into liquidation with estimated losses totaling $5.3 Billion. In December 2020, the NSW workers compensation nominal insurer scheme (the scheme) managed by ICNSW (icare) is known to have fallen into deficit having lost the $4 billion surplus it inherited in 2015.

As I write, the scheme’s actuaries are desperately trying to find a means of softening the blow about to be delivered in the latest scheme valuation, as at 31.12.2020. That blow is a further deterioration of $1 Billion in the scheme’s finances, totaling losses of more than $5 Billion in a scant 5 years. 

When HIH went belly up there was a public outcry. The Commonwealth Government was forced to bail out small policy holders to the tune of $500 million, larger policyholders were left high and dry.

The demise of HIH was the largest corporate failure in Australia's history.

A Royal Commission was appointed. The Royal Commission did not find fraud or embezzlement to be behind the HIH collapse. The failure was more the result of attempts to paper over the cracks caused by over-priced acquisitions and too much corporate extravagance based on a misconception that the 'money' was there in the business. The primary reason for the failure was that adequate provision had not been made for insurance claims. Past claims on policies had not been properly priced. HIH was mismanaged in the area of its core business activity[1].

According to the leading Risk Management Consulting firm In Consult, there were many lessons to be learnt from the HIH collapse[2] most of which seem to have been lost by icare.

For example in relation to company directors, In Consult concluded “Using qualified and experienced directors doesn’t guarantee success; between 1997 and 2001, the HIH board included insurance experts, qualified accountants and a QC. With all the expertise, the board was still subservient to the CEO, did not ask enough questions, made poor decisions and were ineffective in managing strategy.

As far as Regulators are concerned, the “new APRA” will have an aggressive enforcement culture to make sure this does not happen again. The NSW Regulator of State Insurances is SIRA. SIRA lacks any aggressive enforcement culture simply because of the way it has been set up by the NSW Government. There are no current arrangements in NSW to prevent further deterioration in the scheme’s finances.

In relation to responsibility and accountability In Consult concludes: accountability and propriety is essential at all levels of the organisation “There was a lack of accountability among senior management; a singular failure to assess performance in the context of deteriorating financial results,” Mismanaged by the “lack of attention to detail, a lack of accountability for performance”. Unpleasant information was hidden, filtered or sanitised. And there was a lack of skeptical questioning and analysis when and where it mattered.

In the HIH fall out, several senior executives were prosecuted and jailed. Other managers were banned from holding managerial positions.

But what of icare? The scheme is the second largest failure (based on HIH) in Australia’s history. If the icare scheme were a private company, should some of the directors and managers now be facing the Courts? Are there in fact two sets of rules for compliance, risk and governance? One for the private sector based on the underlying principles of responsibility and accountability. The other for the public sector based on don’t care and no responsibility?

[1] Refer here: https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22library/prspub/XZ896%22

[2] Refer here: https://inconsult.com.au/publication/lessons-from-the-hih-collapse/