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Wednesday, 22 August 2001
Page: 29992


Mr KELVIN THOMSON (4:17 PM) —Prior to question time, I was speaking on the General Insurance Reform Bill 2001 and my second reading amendment and I was raising issues which the royal commission into HIH ought to be considering. I was on the topic of the reinsurance arrangements which HIH entered into which require examination, and the two concluding arrangements are: an internal reinsurance arrangement established through Hannover that allowed a higher net retention to be held on certain portfolios—this created opportunities for recognising profits on these layers of exposure potentially before they should have been; and HIH America reinsurance arrangements which generated profits in year one with premiums to be paid in subsequent years for minimal likelihood of risk exposure, as considered at the time.

The range and nature of the reinsurance transactions clearly assisted in creating a greater degree of difficulty in determining the true results of HIH. Unless the nature of these abnormal transactions is properly identified, quantified and understood, then the interpretation of the financial statements of a general insurer is nigh on impossible.

Labor have indicated that we believe the royal commission's terms of reference are inadequate. One of the things that we believe needs to be canvassed is the role, if any, played by political donations. The royal commission should call Mr Ron Walker, the federal Treasurer of the Liberal Party, as a witness and ask him to identify both on how many occasions he sought and received political donations from Mr Ray Williams as chief executive officer of HIH and whether on any of those occasions Mr Williams sought any political favours or political action to be undertaken by the Liberal Party. The royal commission should call Mr Andrew Peacock as a witness and ask him whether he at any stage received an HIH consultancy and whether he used HIH office space for his business activities. If so, how much was he paid, what activities did he carry out and what work did he do on behalf of HIH?

The royal commission should also call Mr Alan Stockdale as a witness and ask him: what work was done by HIH for the Victorian Liberal opposition prior to the state election in 1992 and what political donations were made to the Victorian branch of the Liberal Party? Mr Stockdale should be asked to identify the nature of the work done by HIH for the Victorian Liberal Party and what use was subsequently made of that work by the Kennett Liberal government.

The royal commission should call—and I daresay it will—Mr Rodney Adler as a witness and ask him to identify what political donations he made to the Liberal Party both during the period he was associated with FAI insurances and during his subsequent period with HIH insurances. It should ask him whether on any occasions he requested Liberal Party parliamentarians or personnel to take any action concerning insurance matters which would have been of assistance to FAI or HIH, including in the course of this legislation making its way here to the parliament. It should also ask him whether FAI engaged in artificially closing files to improve the look of its balance sheets and whether FAI sold off its reinsurance cover such that the cover was not available when it was supposed to be available. It should also ask him about the extent of personal trading in HIH shares and whether any such personal trading was in conflict with his duties as a director. It should also ask him about the use made of money from a $10 million trust fund set up using HIH money to which Mr Adler had access, and in particular whether $6 million or a similar amount was used to purchase shares belonging to Mr Adler in stocks that he owned in other companies which were losing value as a result of the so-called tech wreck. The federal parliamentary Labor Party pushed strongly for this royal commission to be established, and we believe that these issues need to be examined to ensure ongoing public confidence in the integrity of general insurance in Australia and indeed in the integrity of Australia's political processes.

I want to also turn to some of the things that the royal commission needs to be doing in relation to FAI. The significance of the financial impact of FAI on HIH needs to be fully examined. Clearly, there were black holes across much of FAI's balance sheet for several years. These ranged from undervalued claims reserves in relation to professional indemnity and inwards reinsurance; legacy costs on reinsurance contracts; overstated property assets; overstated values for investments in associated companies; generous deferred expenditure; and overstated tax assets. The June 1998 balance sheet of FAI presented a company trying to get itself sold. The use of executive contracts which provided significant termination benefits made talking up the interests of the company and protecting the market expectations of the results very beneficial to the senior executives in the event of an acquisition.

The royal commission needs to fully examine the preparation of the June 1998 financial statements. HIH were effectively embarking on a course of legal action against FAI, and the liquidator needs to pursue this action vigorously. While the extent of the unbooked liabilities and overvalued assets might be disputed on an individual basis, clearly there was a pattern across all areas. In the aggregate there are serious questions to be asked by the royal commission.

I turn now to the role of APRA. As I have said before, the role of the regulatory authority in addressing problems in the general insurance industry has been disappointing, to say the least. The problems with APRA are: inadequacy of the legislation through the Insurance Act, which we are debating here; inappropriateness of its organisational structure; lack of general insurance industry knowledge held by staff; loss of historical knowledge of the industry when Canberra based personnel did not move to Sydney when the old Insurance and Superannuation Commission became APRA; lack of general insurance accounting and actuarial practices; lack of a proactive approach for fear of hurting the industry; and an increased number of new entries to the financial services industry tying up resources.

What should APRA have done differently in the FAI and HIH cases? First, it should have undertaken a much greater degree of scrutiny of FAI from earlier years when they were left with a pile of Bond Corporation assets of questionable value—that is, St Moritz, Emu Brewery and Oceanic Coal. Second, it should not have allowed the various intercompany loans within the FAI group as admissible assets—they were clearly fooled into allowing this to occur. Third, there should have been much closer examination of the FAI acquisition by HIH—this was a disastrous combination. Fourth, there should have been more proactive attention to the cries of the industry and the press. The depth of information provided to APRA in June 2000 both verbally and in documented form should have evoked an immediate response, and for APRA's chief executive now to talk about gifted amateurs or people being wise after the event simply does not do justice to the amount of information which I have catalogued elsewhere which was provided and available to APRA by the middle of last year. Fifth, clearly HIH was lost in November 2000. Westpac had secured all the liquid assets and there was no cash, so why was there no action then by APRA? Sixth, there was a lack of any review of actuarial valuations of HIH; a simple request for it would have identified that there were none prepared on the total group. Seventh is the extent of review and understanding of the one-off reinsurance contracts entered into by FAI and HIH. Eighth, APRA should use all of its currently available powers, including requesting an independent actuarial review.

Unfortunately, time is against me, but the important question with this legislation is: what should APRA be doing now to prevent another HIH happening again? The royal commission needs to focus on a number of key areas, including looking to see whether there are other Australian insurers with similar exposures to those of HIH—that is, growth into unfamiliar areas, group assets tied up by overseas regulators, long-serving management, large bonuses or share options for staff dependent on profits being reported, smoothed results over time using reinsurance contracts and, dare I say it, Liberal Party connections. All those areas need to be examined to ensure that we do not see other insurers going the way of HIH.

Another area of concern which time prevents me from going into—but my colleague the member for Jagajaga may touch on this—is that of self-insured professional societies of the legal and medical professions. The activities of those medical defence organisations and how they are placed—the adequacy of their prudential arrangements and the regulatory arrangements surrounding them—are also a matter of concern. (Time expired)


Mr DEPUTY SPEAKER (Mr Jenkins)—Is the amendment seconded?


Mr Tanner —I second the amendment moved by the honourable member for Wills and reserve my right to speak.