In media commentary over the past month there have been numerous criticisms of APRA, the prudential supervisor of HIH since the middle of 1998. While understandable in the circumstances, some of these comments have been quite inaccurate. In the interests of a better understanding of a complex situation, it is worth responding to these, even if it means going over some ground covered in our media release on 31 March.

A common criticism has been that APRA knew HIH would be unable to meet its obligations to policyholders almost a year ago, and did nothing about it.

It is true that APRA had concerns and questions about HIHs operations from around the middle of last year. We identified it as a poorly run company. Over the second half of 2000 we pursued our concerns with HIH, requiring it to give us extra information and improve its planning and management practices.

It was, however, not until recently that we had reason to question the companys solvency  the test of its ability to make payments. HIHs externally audited accounts for 1999/2000, issued last September, showed net assets of close to $1 billion; and they showed it comfortably meeting statutory solvency requirements. Further, its unaudited September report continued to show HIH meeting statutory solvency tests by a clear margin. One of APRAs roles is to check compliance with these requirements.

Consequently, we did not assess that there was a need (or that we had legal grounds) to take stronger action against HIH, for instance the appointment of an inspector. Such assessments are easy to second guess after problems have emerged. With the benefit of hindsight, its almost always possible to see that things could have been done differently or earlier. But the better test is whether our judgments at the time, made on the basis of available information, were reasonable or not. We believe they were.

A criticism that is the converse of the first is that, if we didnt know how deep HIHs problems were, we should have. It is a fact of life that supervisors like APRA necessarily rely heavily on the integrity of financial information provided to us by regulated institutions. While we can and do conduct spot checks, we dont have the resources ourselves to construct data on the financial condition of large and complex companies, and it was never intended that we would have.

Instead we depend on companies management and directors, their internal auditors and actuaries, and their external auditors.

As already noted, HIHs accounts up to September 2000 did not indicate it wouldnt be able to make payments due to policyholders. Whether these accounts were accurate - and, if they were, how things deteriorated so sharply in a few months - will only be determined in detail by the inspector appointed by APRA.

Another criticism has been that, even if we did not have grounds to appoint an inspector and possibly stop it writing new business earlier, we should have warned people of our concerns about HIH. The law governing APRA has strong provisions that stop us making such statements about the institutions we regulate. (Legally, we could not even say on 1 March that we had issued a show cause notice to HIH about appointing an inspector.)

It has also been suggested that APRA gave priority to protecting the interests of investors and shareholders in HIH. This is certainly not so. APRA has absolutely no obligation  legal or otherwise - to investors and shareholders. Our supervision is directed solely to protecting, as far as possible, the interests of policyholders.

While many people are still exposed to HIH, many more have had their previous cover fully taken over by other insurance companies. These arrangements have been facilitated and, in some cases encouraged, by APRA in recent months. (Details were in our 31 March media release.)

We have also helped put in place arrangements to help builders get replacement builders warranty cover with other insurers so that new home building work can proceed.

We will continue to do our utmost, in consultation with the industry and the provisional liquidator, to find ways of improving the position of those policyholders who remain exposed to HIH. Meanwhile, APRA also continues to work on introducing new prudential rules that have been in the pipeline for some time, and that will substantially reduce the likelihood of another HIH problem in future.

For further information contact:

Gloria Peterson
Public Affairs Manager
02 9210 3385 or 0419 250 286