How the HIH Collapse Has Affected Practitioners

HypnosisAustralia, May 2001

By Katrina Fox

If you are a clinical hypnotherapist, psychotherapist or counsellor in private practice, the collapse of insurance giant HIH will have hit you hard, if you held a professional indemnity policy with the firm.
Some practitioners may have had a period when they were not covered for any claims that may have been made against them as their policies became null and void. Some will have turned away clients during this time rather than expose themselves to the potential risks of claims and thus incurred losses to their business.
Practitioners will also have had to take out new policies with a different firm, adding further costs to their practice.

Will you be compensated for your losses?

The government has announced a support package for people affected by the HIH collapse. This will be administered through a company set up for this purpose - HIH Claims Support P/L. But whether practitioners will be eligible for such support is unclear as yet.

The package is quite clear about which categories of people will be excluded from the package. These include claims where the insured is not an Australian citizen or permanent resident, or where the business is not Australian or does not meet the definition of a small business ie one which has 50 employees or less.
HIH Claims Support is not prepared to issue blanket statements saying that practitioners will or will not be eligible for support under the assistance package, or if they come under the definition of a small business. Anyone who wishes to submit a claim should contact the firm and their case will be decided on an individual basis. David Farrell, deputy chairman of Aon Risk Services, one of the country's leading insurance brokers, advises practitioners to consult their broker in the first instance if they have one.

Importantly, practitioners will only be eligible for help if they made their claims before 11 June 2001, or if the claim related to an event that happened before that date. As for the premiums paid, Farrell says practitioners will 'have most likely foregone' these. Any attempt to reclaim them would have to be done through HIH's liquidators. Bearing in mind the losses of the company are estimated to be as much as $4 billion, practitioners are likely to be among those at the very bottom of the queue to receive any handout available.

What can be done to stop this kind of thing happening again?

The demise of HIH has been a huge embarrassment to both the government and the insurance industry. Minister for financial services and regulation Joe Hockey announced this month that the government is to set up a Royal Commission to investigate the matter. It will also look into the role played by industry body the Australian Prudential Regulatory Authority (APRA), which licenses insurance companies. APRA is also conducting a separate review on the capital adequacy and reporting requirements of HIH.

Clearly there were several factors contributing to the HIH's collapse, and it is not the purpose of this article to go into these in detail. But one factor which has bearing on practitioners is that of cost. HIH was extremely competitive in the market, offering cheap premiums. It also underwrote risks that other companies would not touch. Minister Hockey has acknowledged the problems of different regulation in different states and different tax levels in different states. For example, a policy in regional Victoria is the highest cost in Australia because of Victorian state taxes. 'So these sort of factors really do have a big impact on the way insurance companies manage their risk,' Hockey says. 'And it's time that the states also started to put themselves under the same scrutiny as we're prepared to put ourselves under.' To this effect, a new package of financial reforms is currently going through the legislative timetable.

There has also been talk of insurance firms paying money into an industry fund so if a company goes under, consumers are protected to a degree. According to Farrell, these type of funds are common in countries where insurer collapses are a more regular occurrence. 'But usually the protection provided is limited to domestic rather than business or professional consumers, and clearly would incur a cost increase to cover the necessary funding mechanism,' he explains.

But a cost in premiums is likely to be on the cards anyway, Farrell warns. 'Even before the HIH Liquidation, world insurance markets were reviewing the cost of working capital and the worldwide loss ratios, and price increases were being factored into both the wholesale and retail markets. 'Because no insurance company wants to replicate the HIH example by underpricing their products, there is likely to be a period of cost increases in the insurance industry, although the industry size and competitive nature does act as a braking mechanism in this regard, and well managed risks with a good loss record should not be unduly penalised'.

Co-insurance arrangements are one way of sharing the risk between several insurers, although this is shared for their own part and not for another. So, the surviving companies would only contribute their rateable proportion of a loss, and would not compensate for the share of a failed insurer. 'However, by spreading the risk, there would be greater inherent security with a co-insured programme', Farrell says.

What should practitioners look for when buying professional indemnity insurance?

When buying insurance, Farrell advises that practitioners should look for:
a) the ambit of cover, to ensure their practice modalities fall within the policy spectrum.
b) the level of cover to recognise both defence costs and the effect of inflationary legal precedents.
c) the identity of the insurer for both security and service purposes, and the expertise of the broker who delivers the service to both individuals and affinity groups.
d) the cost of the product relative to the extent of cover and market cost
comparisons.

Resources

For claims eligibility, call the HIH Claims Support P/L hotline on 1800 055 544 or visit their website at www.hihsupport.com.au

For more information about your HIH policy or to check the details of your cover, call the HIH Information Hotline on 1800 600 400.

If you are in extreme need as a result of the HIH failure, call the Centrelink Hotline on 1800 050 015.

©HypnosisAustralia, May 2001

If any practitioners who held policies with HIH would like to share their experiences, please email the editor.