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The Actuary The magazine of the Institute & Faculty of Actuaries

Actuaries disagree over HIH

The Royal Commission investigating the failure of Australian general insurer HIH completed taking evidence just before Christmas 2002 and news of its findings is eagerly awaited. However, not everyone is content to await the report from the commission.

There has been public disagreement between actuaries as to whether or to what extent the problems at HIH were a failure of reserving or of pricing. This may not be the most fruitful of debates, and hindsight certainly would suggest that both pricing and reserving could have been better managed. However, underpricing of long-tail insurance risks over a very long period was not a problem which was unique to HIH, and it is difficult to escape the view that it was a progressive pattern of failure to establish adequate reserves which caused the business ultimately to fail.

Another intriguing aspect of this story, which may hold lessons for supervisors and actuaries in other markets, is the extent of responsibility of government. The liquidator of HIH is apparently suing the Commonwealth of Australia because the failure of HIH arose directly from its acquisition of an allegedly seriously under-reserved FAI which it is suggested received favourable government treatment. There are some likely parallels with the probable development of the Equitable saga in Britain. Liquidators KPMG are also suing defunct accountants Arthur Andersen, a local consulting actuary, and the Australian supervisor.