HIH

HIH Insurance LimitedHIH Insurance Limited was the second powerful insurance company in Australia. It wrote many types of insurance in Australia, the USA, and the UK. But it collapsed suddenly because of previously concealed losses.The situation of HIH1.BackgroundThe HIH was established in 1969, after it struggle 20 years it gone public. Because of HIH is influential in Australia insurance market, its stock increase in front of Australia stock market. success in the capital market let it get massive funds to develop the oversea market.HIH comprised actually take several separate insurance companies in different country, including HIH Casualty and General Insurance Limited, FAI General Insurance Company Limited (FAI), CIC Insurance Limited (CIC) and World Marine and General Insurances Limited (WMG).(David. 2001.) HIH’s rapid expansion let it become a huge multinational corporation with the difficulty of management.On Thursday, 15 March 2001, HIH received approval from the NSW Supreme Court to place HIH into provisional liquidation. Tony McGrath of KPMG was appointed as provisional liquidator to HIH and 17 of its controlled entities. Provisional liquidation is a temporary form of administration that gives HIH time for the provisional liquidators to review HIH operations and assess the financial position. (David. 2001.) It is a big impact on the Australia insurance market, and the government examine the regulations carefully.2.FinancialThe case called Australia's Enron, Becky said “Australians may be forgiven for finding the Enron debacle painfully familiar, because the same story line unfolded here months earlier, in the collapse of the country's second-largest insurer, the HIH Group, with a negative net worth estimated at $2.8 billion. It is one of the biggest business failures in Australian history. (Becky. 2002. ) Because of decision failure, HIH is on a losing streak in 2000. Certainly, HIH did not wait the ruin, it adopted every method to survive, including use deceptive accounting to cover up the poor decisions and heavy losses.According to the prime search, there is 8 thousand million AUD on the book loss. Additionally the potential debenture, the number of the book loss would be more than 3.5 billion AUD. HIH collapse in the huge debenture which above its repaying ability and social condemnation.3.Strategic decisionAs a manager, it’s important to understand the company’s current financial performance and market standing, its competitively valuable resources and capabilities, its competitive weaknesses.Before into a new market the company should survey the industry and competitive environment, which to make sure the competitive force and changing industry conditions that might affect the company. There are five-force model to identify the competitive forces. They are suppliers of Raw Materials, parts, components or other resource inputs, firms in other industries offering substitute products, rotential newentrants, buyers and rivalry among competing sellers. (John.& Arthur. P. 44.). As a insurance company, it should consider the buyers and rivalry among competing more.But as we can see, HIH’s board of director make some deathful choice in the operation. The issue in England in 1993, the headquarter lake of useful supervision to British operation with faulty management information and the accounting system. It causer the 1.7billion AUS loss. The merger in US cause the 620million AUD loss with the risk assessment unbusinesslike.There are only three directors of the twelve present the meet about Takeover FAI. Ten weeks After takeover FAI, HIH into provisional liquidation with losses of $800 million. (David. 2001.)Top manager’s decision relate the company development directly. It is the reason that ability of manager is important for a company.Company strategic issues1.Strategy making and executionThe first step of strategic management is developing a strategic vision. And then is setting objectives. (John.& Arthur. P.15. ) analysis and survey must be done before making decision. The wrong strategic vision can result the strategic failure finally. HIH’s strategy making is not in a system. The top managers making a strategic dissection without all aspects of survey. Ultimately, HIH was in a big trouble.Evaluating performance and initiating corrective adjustments also are the significant step in strategic management . Along with the time gone market will be some different. Company must make sure their strategic will succeed in the differentenvironment. Otherwise, the strategic must be adjusted correctly. Successful strategy execution entails vigilantly searching for way to improve and then making corrective adjustment whenever and wherever it is useful to dos.( John.& Arthur. p.28. ).In the market of California, HIH developed from a subsidiary of CE Heath plc, and became the greatest employees' compensation insurance underwriter in a few years. Till 1955, HIH could get mild profits from the business. In 1955, California abolished on the setting of the statute of the lowest rates to encourage the insurer in the form of competition. HIH think insurance rates changes in three years usually for a cycle, so in this year HIH decided to temporarily leave California's employees compensation insurance market. Three years later, HIH returned to the market. And it is in this year, California court significantly raised the trace a mount of employees’ compensation, reinsurance person also require the dominant insurers in the market take more risks. HIH makes a strategic mistake in returning the California market this year, and the "three-year cycle" assumption is also miscalculated the risk status. HIH noticed the pressure comes from the market, but it didn’t make a decision to quit the market seasonable. HIH paid more than $300 million for its mistake.The impact of host government policies cannot be ignore when operate the strategy. The policies can affect the industry’s development through change the tax rate, national security concerns. It include some policies which focus on dominate market. But HIH operate the strategic without thinking about the variety of the market.2.Rapid expansionThe direct results of HIH’s large-scale expansion strategy are that it has had more than 200 branch companies within 20 years and the insurance income increased by 26% annually. Furthermore, the high speed comes with cut-throat competition and almost saturation market. How could HIH leaps into Multinational Corporation from a Cor. Correspondent within 32 years? Like other companies, which want to expanse quickly, HIH uses the strategy of low charge rates, high commission, engaging in risky business and merger other companies. You can understand it from several overseas marketing strategies of HIH here.Low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers. There are two ways to achieve Low-cost. The one is the impact of host government policies cannot be ignore when operate the strategy. The policies company effect the industry’s development trough change the tax rate, national security concerns etc. it include some policies which focus on dominate market. HIH use the old strategic in the new market environment. It is dangerous for company.3.Takeover FAIWhen Larry’s son Rodney Adler inherited FAI from his father in 1988,the company was in trouble, but Rodney Adler ran the company for ten years unexpectly, and successfully sold it to HIH for 3 billion Australia dollars in total , in which goodwill value worth 2.75 billion Australia dollars in September 1998. This deal was realized by an exchange between part of the cash and part of the stock, Rodney Adler became one of the members of the board of directors.For HIH, the decision of acquiring FAI by borrowing 3 billion Australia dollarswas not agreed by most investors, afterwards, investors who thought FAI just worth 1 billion Australia dollars criticized top managers of HIH because they irresponsibly took the reports offered by FAI as a judgment basis. However, the consequence of acquiring FAI was much worse than they thought, two years later, in September 2000, the loss lead by acquiring FAI was 4.05 billion Australia dollars in total ,which was much more than the price of acquiring it.More seriously, Mr. Martin said, the commission has evidence that FAI may have backdated a $104 million issue of preferred stock to help it comply with terms of loan agreements with banks. The idea of issuing the stock apparently was discussed at an audit committee meeting in October 2000 with Anderson executives in attendance, he said, but the issue was recorded in the company's accounts dated June 30. (Becky. 2002. )FAI turned out to be in deep financial trouble, and experts had said that it may have already been insolvent at the time of the deal. A lawyer for the commission, Wayne Martin, said HIH did not thoroughly analyze FAI before buying it. (Becky. 2002. )4.Top managers’ abilityThere are severe defects existing in the HIH management structure. The Modern Firm which adopts share-holding system is the managerial authority separates from the ownership of enterprise. The based relationship is more complex than sole proprietorship and partnerships. Therefore the standard adjusts the relationship among all parties, especially the relationship between owner and operator is depends on thesystem of corporate governance. According to the Agency Theory, the system means the management of client to agent. The contents of corporate governance are constituted and guaranteed by a series of contracts which include formal and informal contracts. The formal contracts consist of laws, articles of incorporation, listing rules, accounting standard, guild regulations, etc. The informal contracts rules based on culture and society. The corporate governance is divided into two parts: one is management structure, and another is administrative organization. The administrative organizations consist of equity structure, board of directors, board of supervisors, management teams, etc. Management structure includes personnel system, supervise system and encourage system.The formal governance structure should be like this: the management department proposes suggestions of business strategies, and the board of directors decides the goals. The chairman of the HIH board is Jeffery Cogan; he must examine and verify the events, make sure and solve the conflict of interests. But the HIH board become a merely formality, the managers decide agenda, the non-executive boarders rely on the information of managers to decision-making. The managers of HIH never explain the managerial decision-making, they couldn’t know the details.HIH’s board of director which lack of independence leads to performance deterioration and can’t evaluate the perf ormance of management system. Because the board have wrong decisions to speculative and be short of develop strategies, which leads to faulty decisions about overseas expansion and FAI. Roy William, who was one of the company founded people, as the CEO of the company until October 10thbecause retirement. But he still has unlimited rights on decision making, contribution, payment of stuffs, even he quitted the duty of CEO.Company operation1.AuditorInternal audit is an independent monitoring and evaluation activities, through review and appraisal business activities and internal control’s appropriateness, effectiveness and legitimacy to achieve the organizational goals.A formal public said, now examining what went wrong and how, with much of the attention focused on Andersen's role. And the findings so far have given new impetus to moves here and elsewhere to rethink rules on auditor independence and responsibility.Strange accounting covered the problem of solvency. The tools of budget control were useless. So the HIH took the way of calendar year accounting to cover the awful operating results. But the board and committee didn’t raise an objection.In January 1999, HIH takeover FAI with $ 300 million, but then it estimates shows that FAI was only worth $100 million. Several aspects of HIH's collapse that are being explored by the commission raise troubling questions about what Andersen knew or should have known. One is a controversial 1998 deal in which HIH paid a 60 percent premium to acquire another insurer, FAI, which was also an Andersen audit client. (Becky. 2002. ) It result HIH collapse.In July 2000, an audit report comes from Arthur Andersen demonstrates that HIHhas no financial problems, and the net asset of HIH is $9.39 million. Regulators based on the external audit results, said the problem was not found in HIH, so there was no investigators sent to HIH, although the share price of HIH has fallen from $1.05 to $ 0.45.HIH made up a large amount of investment income (average annual book to yield more than 13%), which cover up the insolvency. Because Andersen's Sydney office at times depended on HIH for more than 100 percent of its revenue, according to a former partner. (Becky. 2002. ) The negative coverage on the deceptive accounting bring a crisis of credit. As a insurance company, it is deathful.2.ReinsuranceDocuments before the commission also suggest that HIH may have used sham reinsurance contracts to inflate its short-term profits artificially. (Becky. 2002. ) Reinsurance contracts to be a financial tools again. Different from traditional insurance product that scattered risk on the space, it scattered risk on the time.In fact, the main purpose that HIH takeover FAI is also for adjusting the balance sheet, but turned out to the financial of HIH worsened. In this case the insurance trade became the focus.Reinsurance is an main approach to diversify risk and reinforce the solvency of the insurance company was used repeatly. but as reinsurance technology is more complex and higher requirement for confidentiality. It was often used to adjust the accounts and avoid the tax and the supervision. In particular transfer the insurance company’s financial risk to reinsurer. It played an important role in the HIH events.3.Risk management"Instead of adding a buffer – known in the industry as a 'prudential margin' HIH chose to lay off some of its risk by buying reinsurance from other insurance companies." According to HIH's actuarial adviser, "by June 2000 it had run out of reinsurance cover," and presumable did not have sufficient assets – or a sufficient prudential margin to pay claims. (David. 2001.)Risk management is a scientific management system that based on predecessors experience and the modern scientific achievement, which could identify and analysis to reply the risk of impact on strategies or the targets.The enterprise management of risk is a management science which is based on experience of forefathers and modern science ,also affect strategies or reach goals that identify ,analysis or dealing . the enterprise risk is process , including the risk of distinguish ,balance or control. The aim at diminished losses down and improve business efficiency.Internal audit department to ensure the assets safety of investor .It is essential for business risk management. internal audit have a hand in risk management to assess opportunities and risks of enterprise. Combine the characteristic of enterprise culture, development strategy, the situation, management methods and departments responsibility and authority, it can be making feasible risk management strategy to avoid risk ,and hence the position and function of enterprise.As level of economic globalization and international enterprises deepen, enterprise is facing risk. To reduce the risk of enterprises is a base of achieve the strategic objective. Internal audit as a department that independent of management department,have vision of independence and overall. It should be the main strength and affect reach goals , as far as be concerned to internal control, enforcement and control weak links ,it must affirm by feasibility of manage and improvement measure, assess the enterprise management of risk to control the effect degree of reach the objective4.Financial operationHIH’s board doesn’t understand the conception and relevance of conflict of interest. During the treatment, the board didn’t publish the interest initiatively and didn’t dispose the problems. Jun e of 2000, a sub company of HIH offered a loan to a real economy which belongs to a strong stock holder Alder of HIH. The company use 4 million Australia to make the lie that all the people thought Alder buy the stock in private made the price of stock fallen. Alder used the other 4 million to purchase private shares of ICT, at last, the investment failed. The last 2 million was lend to Alder without record. Alder was one of the members of HIH’s investment committee. The rules of the committee are the entire boarder should approve the program of loan. But the Alder’s investment hasn’t the processes.The commission's investigators said that HIH appeared to have misreported profits and liabilities to cover up the poor decisions and excesses of its executives. (Wayne. 2003. )HIH had three former Andersen partners on its board, two of whom were members of the board's audit committee. While still at Andersen, one of them, Justin Gardener, had written a document required for HIH's 1992 public offering, known as an investigating accountant's report. (Becky. 2002. )Summary1.SWOT analysisThere are five step in strategic management process (John.& Arthur. p.15.):Stage1. Developing a strategic visionStage 2. Setting objectiveStage 3. Crafting a strategy to achieve the objectives and the visionStage 4. Implementing and executing the chosen strategyStage5. Evaluating performance and initiating corrective adjustmentsTop management’s views about the company’s direction in the strategy making are related to the success on the operation. HIH’s board make decision without developing vision. therefore it failure operation in the England in 1993.In the market of California, HIH paid more than $300 million for its mistake. Because of loss the last step of strategic management which is the trigger point for deciding whether to continue or change the company’s vision, objectives, strategy, and strategy execution methods. (John.& Arthur. p.28.) The market change by the economic development, and the strategy must change by the market. Going out of the time will go out of the success.2.ImproveFor external situation, HIH must improve the ability of survey and analyses. Company should establish the auditing department independently. The authentic audit report can reflect the company’s financial situation, operation management and risk.Recognize the risk in market, company can adjust the strategic rapidly. Prevent company from collapse. HIH did not takeout the FAI with the authentic audit report Improve the risk evaluate is the key to HIH. That without risk evaluate is the one of the main reasons in HIH’s bankrupt. The low awareness of market risk results in misunderstanding strategic vision. The managers would make a mistake in beginning. It leads to failure directly.In this way, company can recognize the external environment. But it is also had some problem in internal management. The confused structure and indecisive regulation result the strategic process become simple and jump over some step.HIH must building a regulation to enhance management. Especially supervise the board of director. It should point the responsibility on each department. Corporation is a group, it is successful by departments coordinate. The chairman of the HIH board Jeffery Cogan; he must examine and verify the events, make sure and solve the conflict of interests. But the HIH board become a merely formality, the managers decide agenda, the non-executive boarders rely on the information of managers to decision-making. The managers of HIH never explain the managerial decision-making, they couldn’t know the details.REFERENCE LISTBecky Gaylord. (2002.). For Months, Australia Has Had an Enron of Its Own. The New York Times. Retrieved April. 02. 2011. From /gst/fullpage.html?res=9B01EFDA123EF931A15751C0A96 49C8B63&&scp=8&sq=HIH&st=cseWayne Arnold. (2003.). Insurer's Officers Broke Laws, Australian Inquiry Concludes. The New York Times. Retrieved April. 02. 2011. From /2003/01/14/business/insurer-s-officers-broke-laws-australian -inquiry-concludes.html?scp=5&sq=HIH&st=cseDavid Kehl. (2001.). HIH Insurance Group Collapse. Parliamentary Library. Retrieved April. 02. 2011. From .au/library/intguide/econ/hih_insurance.htmJohn. E. Gamble and Arthur. A. Thompson.(2009) Essentials of Strategic Management (2ed.ed.). Australia: Charles Sturt UniversityWu Jun & Han KeshenGe Yunhua, Xie Zhigang & Wang Teng.(2003.) The case of Australia HIH insurance bankrupt. Jing Suan Tong Xun. 4(3).。