Sunday, August 14th, 2022

HIH and Ansett: how the Howard government was forced to act over giant corporate collapses | Cabinet papers


In 2001 John Howard’s government was forced to confront two major corporate collapses: HIH Insurance and Ansett Airlines, which at the time had roughly half the domestic airline market.

The release of the 2001 cabinet papers by the National Archives of Australia reveals the government was initially reluctant to intervene in either collapse, but quickly realised that was politically unsustainable and economically dangerous.

HIH, valued at $8bn, was one of Australia’s leading insurers. Its collapse was the largest in Australia’s history.

On 15 March 2001 Tony McGrath announced his appointment as provisional liquidator and estimated HIH had lost more than $800m over the six months to 31 December 2000.

He attributed the failure to reckless management, incompetence, fraud, greed and self-dealing, among other things.

The impacts were immediate. HIH operated in many sectors vital to the economy: workers’ compensation, builders’ warranty insurance, small business insurance and compulsory third party vehicle insurance.

On 18 April cabinet met to consider the unfolding catastrophe, noting that the collapse raised “serious and complex issues” about HIH’s corporate governance, market disclosure and possible insolvent trading.

It also raised questions about the supervision of the Australian Prudential Regulation Authority and protection of policyholders.

The cabinet agreed the government “should reject any suggestion that the Commonwealth fund any uncovered claims” and “reject any responsibility in relation to insurance claims of HIH policyholders where state governments have statutory responsibility”.

The government instead resolved to set up a taskforce to look into what had gone wrong, particularly in relation to the role of Apra and the Australian Securities and Investment Commission.

But by 11 May, that position was no longer sustainable.

Stories of personal hardship emerged almost immediately. Sick and disabled policyholders claiming on salary continuance policies with HIH stopped receiving payments (which they often relied on for day-to-day living expenses). In Queensland alone, car accident victims insured with HIH were left waiting for operations and other medical procedures worth $190m.

The Australian Rugby Union had to cancel games until replacement cover could be procured. The building industry was threatening to grind to a halt.

The cabinet was told “the HIH collapse is likely to be one of the largest ever insurance industry collapses worldwide”.

“Net outstanding liabilities could amount to $4bn worldwide including $1.3bn in Australia and a further $1.1bn relating to compulsory third party motor vehicle insurance and workers compensation.” They were in fact higher.

Within 10 days, the cabinet was considering a bailout package and had set up a company, HIH Claims Support, which would cover 100c in the dollar for claims relating to injury, income support and household policies for permanent Australian residents and citizens.

Small businesses would receive 90c in the dollar. The scheme would also cover the local government sector but would exclude non-citizens, non-residents and reinsurance.

On 4 June the cabinet decided a royal commission into the collapse was required.

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Investigations into the cause of the collapse led to the conviction and imprisonment of an HIH director, Rodney Adler, director and executive Ray Williams and businessman Brad Cooper.

More corporate trouble loomed in September.

The 9/11 attacks rocked the aviation industry, and came at a bad time for Australia’s second airline, Ansett, which had been losing $1.3m a day.

On 12 September the government refused to bail out the carrier, despite their counterparts across the Tasman saving Air New Zealand, Ansett’s major shareholder.

On 14 September Ansett and its subsidiaries had their fleets grounded and administrators appointed. This put about 16,000 employees out of work, the largest mass job loss in Australian history.

A cabinet minute from 14 September records the cabinet’s sense of urgency as it realised how devastating a collapse of this magnitude could be just weeks from a federal election.

Many Ansett employees had been with the airline all their lives, and were owed very significant entitlements, which they stood to lose.

Worse still, many regional areas depended on Ansett for their only air services.

The cabinet’s first priorities were to continue services and to address “stranded communities” urgently.

The cabinet noted it was “uncertain what Air New Zealand’s obligations were in relation to employee entitlements” and that “the government will pursue all available avenues in an effort to ensure that Air NZ meets its obligations”.

But in the meantime it resolved to implement a special employee entitlements scheme, funded through a levy on airline tickets.

There were several meetings over the coming days and weeks as the Howard government tried desperately to restore services.

On 17 September, the deputy prime minister, John Anderson, reported to the cabinet that 22 of the 32 regional routes serviced exclusively by Ansett had alternative services, and another five would be serviced by the end of the day.

Attempts to revive Ansett in some form continued into 2002 before being abandoned. For a while the administrators operated a pared back airline.

Ansett’s last flight took off on 4 March 2002, nearly 70 years after the airline was founded by Sir Reg Ansett.

The twin collapses in 2002 may have served as useful lessons for future governments. Even where private enterprise may be to blame, the failure of companies providing critical services can hit governments just as hard.



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