Bills Digest No. 162 2000-01
Appropriation (HIH Assistance) Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Appropriation (HIH Assistance) Bill 2001
Date Introduced: 7 June
2001
House: House of Representatives
Portfolio: Treasury
Commencement: Royal
Assent
To appropriate money to the extent
of $640 million to provide financial assistance to HIH eligible persons
under criteria proposed by the Commonwealth on 21 May 2001 and to administer
the Scheme. An HIH eligible person is a policy holder, insured or beneficiary
under an insurance policy issued by one of the following 7 authorised
general insurers under the Insurance Act 1973 and has suffered
a financial loss as a result of the insolvency of these companies.
- CIC Insurance Limited
- FAI General Insurance Company Limited
- FAI Reinsurances Pty Limited
- FAI Traders Insurance Company Pty Limited
- HIH Casualty and General Insurance Limited
- HIH Underwriting and Insurance (Australia) Pty Limited, and
- World Marine & General Insurances Pty Limited.
The financial assistance does not extend to other persons
who may have suffered financial loss caused by the insolvency of other
companies in the HIH Group.
The Background to this Digest is an extract from an E-
Brief prepared by the Parliamentary Library.(1)
On Thursday, 15 March 2001, HIH received approval from
the NSW Supreme Court to place the company into provisional liquidation.
Tony McGrath of KPMG was appointed as provisional liquidator to HIH and
17 of its controlled entities. Provisional liquidation is a temporary
form of administration that gives HIH time for the provisional liquidators
to review HIH operations and assess the financial position.
HIH comprised several separate government-licensed insurance
companies, including HIH Casualty and General Insurance Limited, FAI General
Insurance Company Limited (FAI), CIC Insurance Limited (CIC) and World
Marine and General Insurances Limited (WMG).
According to the HIH 2000 Annual Report the company had
gross premium revenue of $2.8 billion, total assets of $8.0 billion, total
liabilities of $7.1 billion, with net assets of $900 million.
On 11 May 2001,
the New South Wales Treasurer, Mr. Michael Egan announced an emergency
$50 million package to compensate motor accident victims and home owners
affected by the collapse of HIH. This initial announcement was followed
by an increase of the NSW Government commitment to $600 million on 22
May 2001.(2)
On 14 May 2001,
the Prime Minister announced its initial response to the collapse
of HIH. The Commonwealth Government announced:
- it was to open negotiations with other insurance companies with a
view to them taking over the bad policies or the bad underwriting books
of HIH
- it's intention to write to the Premiers and Chief Ministers seeking
their co-operation to undertake a thorough review of State and Territory
regulation with a view to introducing single national insurance schemes
in compulsory third party, workers' compensation and builders' warranty
insurance, and
- it would fast-track legislative changes (announced on 2 November 2000
by the Minister for Financial Services and Regulation, the Hon. Joe
Hockey, MP) to the general insurance industry to improve capital adequacy.
On 14 May 2001, the
Victorian Minister for Finance, Lynne Kosky announced a $35 million
rescue package for home-owners affected by the HIH collapse.
On 15 May 2001, the Prime Minister, The Hon John Howard, MP, and the
Minister for Financial Services and Regulation, the Hon. Joe Hockey, MP,
(http://www.pm.gov.au/news/interviews/2001/interview1060.htm
) announced the Federal Government's Response to the collapse of HIH.
This announcement included:
- the Government's decision to hold a Royal Commission into all matters
relating to the HIH collapse, and(3)
- a package worth more than $500 million to assist those people in hardship
as a result of the collapse of HIH. This package is funded from the
Federal Government budget.
On 15 May 2001, the Minister for Financial Services &
Regulation, the Hon. Joe Hockey, MP, announced the details of the change
in timetable for reforms to the prudential regulation of general insurance
(outlined above). The legislation is planned to be passed by both the
House and the Senate by October 2001 and will take affect from 1 July
next year. The proposed phased implementation will also be shorter than
initially foreshadowed by three years - brought forward from 2007 to 1
July 2004.
On 17 May 2001, the Minister for Financial Services &
Regulation, the Hon. Joe Hockey, MP, announced the formation of a new
non-profit company called HCS (HIH Claims Support Pty Ltd) (http://www.hihsupport.com.au/)
to process the Government support package for HIH policyholders in hardship.
On 18 May 2001, the Minister for Financial Services &
Regulation, Joe Hockey, MP, offered the services of the newly created
HIH Claims Support Pty Ltd (http://www.hihsupport.com.au/)
to the State and Territory Governments so they can process any financial
assistance they have for HIH policyholders.
On 21 May 2001, the Minister for Financial Services &
Regulation, Joe Hockey, MP, announced the criteria (http://www.hihsupport.com.au/policyholders.htm)
for Commonwealth Government relief for certain general insurance policyholders
suffering financial hardship as a result of the HIH collapse.
On 18 June 2001 the Prime Minister announced terms of
reference and that Western Australian Supreme Court Judge Neville Owen
will be the Royal Commissioner, to report by the end of June 2002.
Other Developments in Brief
There have been numerous applications made to the Supreme
Court of New South Wales in relation to arrangements for the management
of HIH's liquidation.
On 17 May 2001 in a judgement relating to HIH, His Honour
Judge Barrett stated(4)
...the winding up of each of the companies concerned
will be of its nature a long and complicated process probably extending
over years rather than months and involving a very large number of
claims under policies and otherwise. That being so there is a community
interest in having the administration of claims dealt with in an orderly
way, and orderly arrangements made for the provision of replacement
and renewal insurance to policy holders who are left, in effect, without
insurance by the company's collapse.
The rescue package establishes a not-for-profit company
HIH Claims Support Pty Ltd (HCS) to administer the scheme. The HCS is
a subsidiary of the Insurance Council of Australia. It is intended that
payments under the Scheme will be made from a trust fund to be set up
by the Commonwealth, and of which HCS will be the Trustee.(5)
Assistance is to be restricted to Australian citizens
or permanent residents, Australian small business proprietors, (with 50
employees or less), and Australian based not-for-profit organisations.
The Governments HIH Assistance Scheme will not cover some insurance that
is mandated by State and Territory governments such as compulsory third-party
motor vehicle insurance, workers' compensation, builders' warranty, and
compulsory indemnity insurance for legal practitioners.(6)
Details on eligibility or otherwise, including that eligibility will be
subject to an income test are contained in the Explanatory Memorandum,
not in the proposed law.
The measures contained in this Bill provide for the finance
to meet the Government's 21 May 2001 response to the failure of the HIH
Insurance Group.
Clause 3 is a definition section defining the meaning
of an HIH company to be any of the seven companies in the HIH Insurance
Group referred to in the paragraph on the Purpose of the Bill in this
Digest. It also defines an HIH eligible person to be a person who is a
policy holder, insured or beneficiary under a policy of insurance issued
by an HIH company and who has suffered financial loss as result of the
insolvency of the HIH companies.
The limitations specified in the Minister's second reading
speech are not provided for in the Bill. The Explanatory Memorandum sets
out the criteria for eligibility for financial assistance and foreshadows
an income test in some circumstances. It also envisages the establishment
of an appeal mechanism to consider disputes in relation to the application
of the eligibility criteria and cases involving anomalies in the application
of the criteria. The Explanatory Memorandum in addition states that in
order to qualify, the event which entitles a person to make a claim must
have occurred before 11 June 2001.(7)
As the Bill does not provide for the making of regulations
setting out the criteria for eligibility, Government amendments to the
Bill to give effect to the eligibility criteria by measures in the Bill
or in regulations may be expected.
Clause 4 formally appropriates $640 million for
the purposes of providing financial assistance and for meeting the administrative
costs associated with providing that financial assistance.
There are two types of appropriation Acts, standing appropriations
and annual appropriations. In Brown v West(8) the High
Court explained the distinction between the two as follows:
Historically, the need of the Executive government
to seek annual appropriations of the consolidated Revenue fund 'for
the service of the year' or 'in respect of the year' has been the
means, and it remains one of the critical means, by which the Parliament
retains an ultimate control over the public purse strings, but the
Parliament forgoes its annually-exercised power over expenditure by
government when a law containing a standing appropriation is enacted.
This appropriation is a standing appropriation for a
particular purpose that is stated in the Bill. The amount is stipulated
and known. A future Parliament can revisit the appropriation but there
is no on-going Parliamentary scrutiny of the rate and amount of expenditure
appropriated from Consolidated Revenue as is the case for annual appropriations.
It is yet early days to know how far the $640 million
assistance package for persons who had suffered financial loss under policies
issued by the 7 HIH companies will go to meet the actual losses. The AFR
on 12 June 2001 reported that a large proportion of small business operators
caught in the HIH debacle, claimed to be the biggest collapse in Australian
corporate history, are going to fall through the financial safety nets
set by the Commonwealth and State Governments for assistance. It also
stated that the Council of Small Business of Australia (COSBOA) will make
a submission to the Federal Government pointing out the difficulties facing
small business.(9)
If the appropriation of $640 million proves inadequate
to meet claims a further appropriation will be required if the financial
assistance scheme is not to end abruptly without meeting the financial
losses of all persons for whom the measures in the Bill were intended
to assist.
- Current Issues HIH Insurance Collapse at http://www.aph.gov.au/library/intguide/econ/hih_insurance.htm
- Collapse costs NSW $600m, AFR 22 May 2001.
- ABC News Online at C:\WINDOWS\TEMP\ABC News - WA judge to head HIH
Royal Commission.htm
- CIC; HIH Casualty & General; HIH Insurance [2001] NSWSC
438
- The Hon Joe Hockey, Minister for Financial Services & Regulation,
Second Reading Speech, 7 June 2001.
- ibid.
- Explanatory Memorandum to the Appropriation (HIH Assistance) Bill
2001, paragraphs 1.4 to 1.8.
- Brown v West (1990) 169 CLR 195 at 207.
- Small operators hit by HIH will miss safety net - Swamped by flow-on
effect; AFR 12 June 2001.
Dianne Spooner and David Kehl
19 June 2001
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 2000
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