Australia bows to pressure on HIH

Howard (left) and Joe Hockey announce details of the HIH insurance inquiry and rescue operation

In this story: Final debt much higher Rescue money RELATED SITES

By CNN's Geoff Hiscock, Asia business editor

SYDNEY, Australia -- Australia has called a judicial inquiry into the collapse of the country's second largest general insurer, bowing to public pressure ahead of an expected year-end election.

The failure of HIH insurance Ltd is shaping up to be one of the biggest financial debacles in Australian corporate history and is taking on political dimensions.

A weekend poll showed three out of every four Australians wanted a commission of inquiry into the collapse of HIH, which has left 28,000 policyholders stranded.

Prime Minister John Howard said on Monday the inquiry would take the form of a royal commission, which would cooperate with an investigation already underway by corporate regulator, the Australian Investment and Securities Commission (ASIC).

Howard, speaking at a press conference in Canberra, said this was no reflection on the competence of the ASIC investigation.

But there was a technical conflict of interest between ASIC chairman David Knott and his board membership of the insurance industry regulator, the Australian Prudential Regulation Authority.

Howard's conservative coalition had resisted the inquiry move for weeks, saying it could interfere with ASIC investigations already under way.

But Howard said on Monday an "overarching, omnibus" inquiry was needed to tackle the complex corporate collapse.

Final debt much higher

ASIC's Knott said last week the collapse of HIH was "now clearly identified as one of the largest and most significant financial failures in Australia's history."

When HIH went into receivership on March 15 its debts were thought to be about $400 million (Australian $800 million). But the final figure is expected to be much higher, and possibly above $2 billion.

Financial Services Minister Joe Hockey also announced a $265 million (Australian $500 million) rescue package to help HIH policyholders who suffer financial hardship from the group's collapse.

Hockey said last week the government would set up a new non-profit company to process applications for assistance from victims of the collapse. It will be known as HIH Claims Support and will be run by four insurance companies -- QBE, NRMA, Allianz and Royal & Sun Alliance.

Rescue money

Hockey said Monday the money for the scheme would come from the Federal Budget, due to be unveiled Tuesday by treasurer Peter Costello.

HIH's provisional liquidator, KPMG partner Tony McGrath, has warned creditors they could receive less than 50 cents in the dollar.

He told television program Business Sunday that HIH's problems stemmed from its aggressive pricing, and there were signs the business was "severely damaged".

ASIC has already seized documents from HIH and questioned a number of people. HIH founder and former chief executive Ray Williams declared last Thursday he had "nothing to hide" and would cooperate with the investigation.

Williams contacted ASIC to surrender his passport and say he had no intention of leaving Australia after media reports suggested he was about to flee. Another likely focus will be the company's auditors, Arthur Andersen, which signed off the 1999-2000 accounts without qualification.

Insurance regulator APRA has been criticized for not acting earlier. Its chief executive Graeme Thompson agreed last week that with the benefit of hindsight, APRA should have "dug harder" into the way HIH was being run.

Local media have depicted the corporate disaster as one last nail in the coffin of the government, which is trailing 10 points behind centre-left Labor in opinion polls after a string of unpopular policies and damaging scandals.

Howard's five-year-old coalition is battered by a backlash over tax reforms and a growing perception that -- as a leaked internal memo put it -- it is mean, tricky and out-of-touch.

A federal election is expected by December.

Reuters contributed to this report.

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