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from the HIH audit by Arthur Andersen's 2000 annual report to regulatory agencies, audit material, is now sufficient evidence that the large number of falsestatements and records.
cash assets Short-term receivables current investment Other current assets Total Current Assets Long-term account receivable permanent investment fixed assets Other noncurrent assets Non-current assets total Total assets 1999 638,700 2000 461,600 reserve Don't earn premium 1999 2000 1,038,900 1,069,400 loss 1,415,500 1,423,400 period 623,900 164,500 46,300 381,000 19,600 83,700 outstanding 1,498,900 2,081,500 reserve Accounting 1,485,200 693,800 882,400 cope with 25,000 borrowing Drawing expense in 4,316,600 3,450,500 advance Total Other Current Liabilities 3,289,100 3,026,300 35,000 1,388,900 outstanding 1,189,000 1,753,100 reserve 147,800 164,600 term debts loss 2,284,000 3,007,500 335,800 504,400 2,037,000 738,800 accrued expenses Other noncurrent 6,000 -- 4,100 -- 3,408,800 4,045,400 liabilities The total amount of 7,725,400 7,495,900 current liabilities total liability 3,489,900 3,530,500 6,779,000 6,556,800 book value 935,100 927,500 Table 1: the HIH balance sheet (Unit: $ 1000s. Source: www. ninemsn.com.au)
3 .Company strategic issues
3.1 Strategy making and execution
The first step of strategic management is developing a strategic vision. And then is
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setting objectives. (John.& Arthur. P.15. ) analysis and survey must be done before making decision. The wrong strategic vision can result the strategic failure finally. HIH’s strategy making is not in a system. The top managers making a strategic dissection without all aspects of survey. Ultimately, HIH was in a big trouble. Evaluating performance and initiating corrective adjustments also are the significant step in strategic management . Along with the time gone market will be some different. Company must make sure their strategic will succeed in the different environment. Otherwise, the strategic must be adjusted correctly. Successful strategy execution entails vigilantly searching for way to improve and then making corrective adjustment whenever and wherever it is useful to dos.( John.& Arthur. p.28. ). In the market of California, HIH developed from a subsidiary of CE Heath plc, and became the greatest employees' compensation insurance underwriter in a few years. Till 1955, HIH could get mild profits from the business. In 1955, California abolished on the setting of the statute of the lowest rates to encourage the insurer in the form of competition. HIH think insurance rates changes in three years usually for a cycle, so in this year HIH decided to temporarily leave California's employees compensation insurance market. Three years later, HIH returned to the market. And it is in this year, California court significantly raised the trace amount of employees’ compensation, reinsurance person also require the dominant insurers in the market take more risks. HIH makes a strategic mistake in returning the California market this year, and the \noticed the pressure comes from the market, but it didn’t make a decision to quit the market seasonable. HIH paid more than $300 million for its mistake.
The impact of host government policies cannot be ignore when operate the strategy. The policies can affect the industry’s development through change the tax rate, national security concerns. It include some policies which focus on dominate market. But HIH operate the strategic without thinking about the variety of the market.
3.2 Rapid expansion
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The direct results of HIH’s large-scale expansion strategy are that it has had more than 200 branch companies within 20 years and the insurance income increased by 26% annually. Furthermore, the high speed comes with cut-throat competition and almost saturation market. How could HIH leaps into Multinational Corporation from a Cor. Correspondent within 32 years? Like other companies, which want to expanse quickly, HIH uses the strategy of low charge rates, high commission, engaging in risky business and merger other companies. You can understand it from several overseas marketing strategies of HIH here.
Low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers. There are two ways to achieve Low-cost. The one is the impact of host government policies cannot be ignore when operate the strategy. The policies company effect the industry’s development trough change the tax rate, national security concerns etc. it include some policies which focus on dominate market. HIH use the old strategic in the new market environment. It is dangerous for company.
3.3 Top managers’ ability
There are severe defects existing in the HIH management structure. The Modern Firm which adopts share-holding system is the managerial authority separates from the ownership of enterprise. The based relationship is more complex than sole proprietorship and partnerships. Therefore the standard adjusts the relationship among all parties, especially the relationship between owner and operator is depends on the system of corporate governance. According to the Agency Theory, the system means the management of client to agent. The contents of corporate governance are constituted and guaranteed by a series of contracts which include formal and informal contracts. The formal contracts consist of laws, articles of incorporation, listing rules, accounting standard, guild regulations, etc. The informal contracts rules based on culture and society. The corporate governance is divided into two parts: one is management structure, and another is administrative organization. The administrative organizations consist of equity structure, board of directors, board of supervisors, management teams, etc. Management structure includes personnel system, supervise
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system and encourage system.
HIH’s board of director which lack of independence leads to performance deterioration and can’t evaluate the performance of management system. Because the board have wrong decisions to speculative and be short of develop strategies, which leads to faulty decisions about overseas expansion and FAI. Roy William, who was one of the company founded people, as the CEO of the company until October 10th because retirement. But he still has unlimited rights on decision making, contribution, payment of stuffs, even he quitted the duty of CEO.
4. Company operation
4.1Reinsurance
Documents before the commission also suggest that HIH may have used sham reinsurance contracts to inflate its short-term profits artificially. (Becky. 2002. ) Reinsurance contracts to be a financial tools again. Different from traditional insurance product that scattered risk on the space, it scattered risk on the time. In fact, the main purpose that HIH takeover FAI is also for adjusting the balance sheet, but turned out to the financial of HIH worsened. In this case the insurance trade became the focus.
Reinsurance is an main approach to diversify risk and reinforce the solvency of the insurance company was used repeatly. but as reinsurance technology is more complex and higher requirement for confidentiality. It was often used to adjust the accounts and avoid the tax and the supervision. In particular transfer the insurance company’s financial risk to reinsurer. It played an important role in the HIH events.
4.2 Risk management
Risk management is a scientific management system that based on predecessors experience and the modern scientific achievement, which could identify and analysis to reply the risk of impact on strategies or the targets. The enterprise management of risk is a management science which is based on experience of forefathers and modern science ,also affect strategies or reach goals that identify ,analysis or dealing . the
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