Edition 05/2001
Cheap
Cost May Be A High Price To Pay
Since
the appointment of provisional liquidators to insurer HIH on Thursday
15th March 2001 not a day has gone by without media outlets reporting
on some aspect of the collapse. Stories of financial hardships
brought about by HIH not being in a position to pay the claims of
their policyholders (many of which relate to sporting incidents; be
they personal accident claims or liability claims), articles
questioning the performance of the Australian Prudential Regulation
Authority in the affair and calling for a Royal Commission, stories relating to compensation packages
being put in place by state and federal governments and stories
querying negligence of directors of the company have all provided
interesting commentary. For those unfortunate enough to be
directly affected by the collapse and its devastating effects it has
been a nightmare.
Amid
reports of speculated debt of the company increasing to $4billion, I
came across an article in "The Courier Mail" on Saturday
19th May written by Tony Grant-Taylor titled "Cut-price premiums
major reason for HIH Insurance crash". The opener for the
article was "HIH's collapse can be traced back to one key problem
- its policyholders didn't pay enough for their cover."
Whilst I have read countless reports outlining the repercussions of
the HIH collapse and pointing the finger of blame, this was the first
article I had come across that had actually looked at the root cause
of HIH's financial disaster.
Quoting
the first two paragraphs of Grant-Taylor's story, "It may seem
like insult added to injury to policyholders caught up in HIH
Insurance's massive collapse, but the key reason for the insurer's
failure is that they, and thousands of other HIH customers over many
years, were undercharged."
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"Small
policyholders generally had no way of knowing this, of course -
though anyone getting a cheap deal should perhaps these days have
reason to pause. But industry insiders, admittedly from HIH's
competitors, have for years argued that HIH and its subsidiary
FAI's premiums were too low for safety."
An
article appearing in the Spring 2000 edition of the IEA Safer
Sports Newsletter, and appearing with other articles on our website
(www.ieasport.com.au) under the title "Sports Insurance -
Where To From Here", outlines in very broad terms the
methodology insurers use to provide for future claims. This
is particularly relevant to the various areas of liability
insurance, where often a great deal of time will elapse between
the time of the incident and the claim being reported and
subsequently settled. HIH wrote a large amount of liability
risks; it was the largest professional indemnity insurer in the
country for instance. As Grant-Taylor writes in his
"Courier Mail" article, "An insurer can be
travelling well, then suddenly be hit by a major disaster which
sends his claims through the roof".
Quoting
again from Grant-Taylors article, "General insurers do make
profits, of course, or they would all be out of business.
But they make them on investing the pool of premiums they hold as they
wait for claims to come in. Among the major insurers these
funds total billions of dollars." "But
an insurer charging $90 in premium while it's competitor is charging
$100 is by definition behind on investment income as well as premium
income - and needs to seek investments paying higher returns, which by
definition are likely to be riskier, to make up the leeway."
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