HIH Claims Support Scheme - Governance Arrangements
The objectives of this performance audit were to: - review the governance and accountability framework for the Scheme, and - assess the efficiency and effectiveness of Treasury's implementation and management of that framework.
The HIH group of companies (HIH), one of Australia's biggest providers of insurance services, was placed into provisional liquidation on 15 March 2001. Joint liquidators (the Liquidator) were appointed on 27 August 2001.
On 14 May 2001, the Government decided to implement a scheme to provide assistance to policyholders experiencing financial hardship as a result of the HIH collapse—the HIH Claims Support Scheme (the Scheme). The Scheme formally commenced operations on 7 July 2001, although, with the Prime Minister's approval, the Department of the Treasury (Treasury) had begun making payments to salary continuance claimants in June 2001.
The responsible Minister was initially the then Minister for Financial Services and Regulation (MFSR). Following the November 2001 general election, responsibility for the Scheme was transferred to the Minister for Revenue and Assistant Treasurer (the Minister). Treasury is the Commonwealth department responsible for administering the Scheme.
HIH Claims Support Limited (HCSL), a wholly owned subsidiary of the Insurance Council of Australia (ICA), was formed in May 2001 as a non-profit company to oversee and administer the Scheme. Under the Commonwealth Management Agreement, HCSL is responsible for the Scheme's day-to-day administration, including managing the call centre and website; receiving applications and assessing their eligibility; coordinating the claims management and payment process; and reconciliation of the proof of debt with the Liquidator. HCSL contracted a commercial service provider to operate the call centre and perform eligibility assessment and proof of debt reconciliation functions on its behalf.
Under tripartite Claims Management Agreements, four Australian insurers (Claims Managers) were appointed by HCSL and the Liquidator to perform separate, but related, services in respect of particular classes of claims. The Claims Managers agreed to participate in the Scheme on a cost-recovery basis. They act as the Liquidator's agent in providing claims management services, and as HCSL's agent in providing payment management and recovery services. The Commonwealth is not a party to the Agreements, and plays no role in the claims management process.
The Appropriation (HIH Assistance) Act 2001 appropriated funds, to a limit of $640 million, for the purposes of providing financial assistance and meeting associated administrative costs. To date, Scheme payments have been made through the HIH Claims Support Trust, in which the Commonwealth holds the residual beneficial interest. The Commonwealth funds the Trust on a periodic basis. HCSL, as trustee, is responsible for distributing funds for claim payments and administrative expenses.
Process for receiving assistance
On 21 May 2001, the MFSR announced the criteria for determining which policyholders would be eligible to receive assistance.1 An applicant who is denied eligibility in the first instance can seek an Internal Review by the Managing Director of HCSL. Where the Internal Review is unsuccessful, the applicant can appeal to the HIH Assistance Review Panel (HARP).
Once an applicant has been assessed as eligible, the application is forwarded to the relevant Claims Manager. The Claims Manager then requests the applicant's claim file from HIH, and proceeds to assess and manage the claim. The Claims Managers are required to manage claims in a manner that is consistent with sound industry practice and the obligations of the insurer toward its policyholders under the terms of the relevant policy and the general law. Once the Claims Manager has, on behalf of the Liquidator, determined or settled the amounts to be paid under a claim, they are responsible for paying the relevant parties on behalf of HCSL.
In applying for assistance, an applicant is required to offer to assign their rights under their policy. This includes the right to pursue, through a proof of debt, recovery from the Liquidator of amounts owed as a creditor of HIH. Through this process, the Commonwealth will ultimately seek to recover a proportion of claim payments made under the Scheme.
Scheme review and closure
Following a Strategic Review of the Scheme, the Government agreed in August 2003 to its closure to new applicants six months from the date of the closure announcement. The Scheme closed on 27 February 2004, with a limited gateway being established for ‘special circumstances' applications made after that date.
Consequently, the eligibility assessment and call centre functions provided by HCSL will be no longer required2. However, claims management and payment functions for eligible applicants will continue for some years. Based on the findings of the Strategic Review, Treasury concluded that it was no longer cost-effective to maintain the existing service delivery structure, and the Government agreed to the phasing out of HCSL from the administration of the Scheme.
The existing Claims Management Agreements will also be terminated. Six months after Scheme closure, the claims management task will be consolidated with the remaining administrative tasks formerly undertaken by HCSL (including management reporting, data management and the proof of debt reconciliation). A new claims manager(s) to perform all of the consolidated tasks will be selected through competitive tender, and engaged on a commercial-fee basis under a new tripartite agreement with the Commonwealth and the Liquidator.
Audit scope and objectives
The objectives of this performance audit were to:
- review the governance and accountability framework for the Scheme, and
- assess the efficiency and effectiveness of Treasury's implementation and management of that framework.
The audit scope did not include independent testing of the existing operational functions, given the extent of previous internal audit and review activity, and the fact that the operational approach was to undergo extensive change. The audit focussed on providing assurance to the Parliament regarding the effectiveness of the Scheme's existing and prospective administrative arrangements in terms of appropriate standards of public sector governance and stewardship. The claims management services undertaken by the Claims Managers on behalf of the Liquidator were also excluded from the audit scope.
Governance framework (Chapter 2)
Access to industry expertise and infrastructure was critical to the Commonwealth's ability to implement a scheme of this nature in the short timeframe involved. As a result, delivery of the Scheme has involved a complex combination of public and private sector organisations. Treasury is responsible for policy development, and providing advice to Scheme participants on the interpretation of that policy. HCSL, through its Board, has been responsible for administering the implementation of the Scheme by its sub-contractor and the Claims Managers (and their sub-contractors and service providers).
Having regard to the urgency required in originally developing the Scheme, the framework established exhibited many of the key elements of good public sector governance, as identified in the Australian National Audit Office's (ANAO) Better Practice Guide on public sector governance3. However, the Scheme experience has also served to highlight the governance challenges that can arise in developing such a structure for the distribution of Commonwealth financial assistance.
Treasury's capacity to ensure that issues with policy implications were adequately identified, and subsequent decisions implemented, in a timely and effective manner has been inhibited in some respects by the nature of the existing responsibility and communication channels. Equally, concerns were expressed, at one point, within the HCSL Board regarding the nature of Treasury's involvement in various decision-making processes relating to eligibility criteria and assessment procedures. This particularly related to the extent to which the Board was consulted prior to decisions applicable to the operations of the Scheme being taken.
The occurrence of issues of this type declined as the Scheme matured. However, Treasury has identified that the enhanced degree of direct control it will have over some aspects of Scheme operations, under the more streamlined administrative structure to be established following its closure, will be of benefit.
The risk management arrangements for the Scheme have been generally sound, having regard to the high levels of inherent risk associated with its operation. In particular, the Scheme documents were designed to provide extensive levels of audit and performance oversight. A robust audit program will continue to be important as the Scheme transitions to the new phase of operations.
For the most part, eligibility assessment is undertaken on the basis that reliance will be placed on the information provided by applicants, which must be supported by a statutory declaration stating that the information is true and correct. The use of this approach was primarily motivated by the urgency involved, and the desire to avoid placing additional burdens on policyholders already experiencing hardship.
Between March 2002 and August 2003, the HCSL internal auditor sought to verify the eligibility of a sample of applicants who had been assessed as eligible4. Of the 174 applications examined 5, 12 (seven per cent) were found to be ineligible. Payment of $171 433 had been made in respect of one of those applicants6.
In May 2004, HCSL advised ANAO that the error rate identified by the internal audit process ‘reflects the fact that the applications selected for examination were in fact deliberately chosen on the basis of potential issues they might raise.' Nevertheless, given the internal audit results, there is still a clear risk that other applicants have been assessed as eligible based on inaccurate, and/or potentially fraudulent, information provided in their application. In future similar circumstances, it would be good practice for the responsible agency to identify, prior to implementing the scheme, the risks inherent in the use of a self-assessment application process, and document the considered risk treatment by the relevant decision-maker.
In establishing new contractual arrangements for the administration of the Scheme, ANAO considers that Treasury should identify the means by which there will be regular scrutiny of the new claims manager(s)' compliance with its privacy obligations. The contractual arrangements should also address the means by which actual or potential conflicts of interest will be managed and reported. These were areas that were not adequately addressed in the original Scheme documentation. The Commonwealth Management Agreement was amended in August 2003 to incorporate a clause addressing conflict of interest issues.
Scheme planning and implementation (Chapter 3)
There is clear evidence of an ongoing commitment by the Scheme participants to assist applicants and manage the Scheme in an efficient and effective manner. However, the logistics involved in establishing Scheme operations were very challenging. Consequently, it took longer than had been anticipated, or intended, to achieve significant progress in making claim payments to eligible applicants.
Progressively, the operation of the Scheme became more stable. As a result, it has been successful in delivering assistance to a large number of Australian individuals, small businesses (as defined in the Scheme eligibility criteria) and not-for-profit organisations affected by the collapse of HIH. As at April 2004, about $339 million in claim payments had been made, representing 46 per cent of such payments estimated to arise under the Scheme7. The majority of outstanding claims were ‘long-tail' in nature, and may take many years to resolve.
Over time, Treasury has been comprehensive in its consideration of the key elements required to successfully implement a grant program of this nature. However, due to the context in which the Scheme was initially planned and established, a number of issues important to its effective management were necessarily addressed concurrent with, or in a number of cases some time after, the commencement of Scheme operations.
In particular, when it was first established, there was not a full understanding of the extent of insurance business HIH had been involved in. Nor of the entities likely to apply for assistance. As a result, variations to the Claims Management Agreements had to be negotiated in order to provide for the handling of additional claim types. A number of circumstances have also arisen that necessitated clarification and/or enhancement of the originally announced eligibility criteria.
In March 2002, the HCSL internal auditor also identified a significant procedural weakness in the eligibility assessment process for small business applicants. In April 2002, it was further identified that some applications from universities had been approved as eligible under the not-for-profit category, without having provided the documentation required by the relevant procedure manual.
These factors had adverse consequences for the efficient and effective delivery of assistance to some applicants, particularly during the first year of the Scheme. Processing for a number of applicant groups, including some who had already been advised they were eligible, was temporarily halted while the various issues relating to eligibility criteria and assessment processes were addressed. Some applicants experienced significant delays before processing of their claim was able to commence or resume8. Whilst it is clear that the actions taken were motivated by a desire to protect the Scheme's integrity, they did result in uncertainty for affected parties.
The eligibility assessment issues that arose resulted in some applicants being incorrectly assessed as eligible. In a small number of cases, payments had been made. The options to recover such payments are limited (see below).
Financial management (Chapter 4)
Based on current estimates, the existing appropriation will not be sufficient to meet the expected cost of the Scheme. In the event expenditure reaches the $640 million limit, no further payments will be able to be legally made without a further appropriation, or an increase provided to the existing appropriation. Treasury has not yet sought any additional appropriation, given the underlying uncertainty as to the final cost and the fact that spending to date has not yet approached the limit of the existing appropriation. As at April 2004, a third actuarial review of the Commonwealth's liabilities under the Scheme was underway.
The Financial Management and Accountability Act 1997 (FMA Act) provides the central legal framework for Commonwealth financial management. It imposes obligations on officials in relation to the handling of public money in order to provide an appropriate degree of control of, and accountability for, the expenditure of such money. Legal advice provided to Treasury on 23 July 2001 was that, although the contrary is arguable, the money held on trust by HCSL for the purposes of the Scheme did not satisfy the definition of public money set out in the FMA Act. On the basis of that advice, the arrangements set out in the FMA Act framework were not required in respect to the handling and expenditure of Scheme funds by HCSL and the Claims Managers. Commonwealth oversight of the funds has been provided less directly through the reporting obligations imposed on those parties by the relevant agreements and the HIH Claims Support Trust Deed.
Over half of the expenditure expected under the Scheme had yet to occur at the time of audit. Accordingly, strong financial management controls will continue to be required for some years. In January 2004, the Treasury Executive Board agreed to arrangements for the engagement of the new claims manager(s) that will result in Scheme funds in its hands being regarded as public money. Consequently, future expenditure of those funds, including the engagement of sub-contractors or service providers, will be subject to FMA Act requirements. Treasury's legal advice was that their status as public money should give the Commonwealth greater control over the Scheme funds than at present.
The financial management arrangements to be implemented by Treasury for the new Scheme structure provide a sound basis for providing appropriate accountability for the significant amount of taxpayers' funds yet to be expended.
The original Scheme documents did not address the question as to how payments made to ineligible applicants could be recovered, or an applicant's eligibility withdrawn. Legal advice obtained by Treasury in May 2002 was that, in a number of scenarios, there would be grounds on which to seek recovery of payments made to applicants later found to be ineligible. However, Treasury has also been advised that, in some scenarios, the Commonwealth's options for recovering or withholding both claim payments and service provider costs may be limited by the operation of contract law and/or the principle of estoppel.
Treasury has sought legal advice regarding the potential to pursue the recovery of a number of payments made to applicants later found to be ineligible, totalling at least $1 022 153. As at March 2004, Treasury had decided that, based on legal advice received, it would not be pursuing recovery of two of those payments, totalling $668 933. A decision in respect of the remaining amounts had not been made at the time of audit.
An important aspect of the Scheme structure was the provision by the Commonwealth of extensive indemnities and performance guarantees to HCSL, its officers and directors, the Claims Managers and the Liquidator in respect of liabilities that may arise in connection with their participation in the Scheme. This was an essential element in obtaining the participation of the private sector parties, which is a reflection of the non-profit basis on which HCSL and the Claims Managers had agreed to participate. The indemnities are very broad in their terms, but do not apply where the recipient has acted ‘dishonestly', defined to mean actual fraud, dishonesty, bad faith, or wilful breach of a material term of the relevant contract.
None of the indemnities contains a financial limit. There was no evidence of a documented risk assessment, including consideration of the potential financial implications, having been conducted prior to the issuing of the initial indemnities under the Scheme in July 2001. At a minimum, the advice to the MFSR proposing that the agreements be executed should have explicitly recognised that the potential financial implications were unknown. This was not the case.
In February 2004, Treasury advised ANAO that it is expected that there will be no indemnities provided under the revised Scheme arrangements. This will represent a significant reduction in the risks being carried by the Commonwealth in respect of the future management of claims under the Scheme. At the time of audit, there had yet to be any call made on the indemnities already provided. However, the original participants will continue to be indemnified in respect of their actions under the Scheme up to the time their involvement was terminated.
Overall audit conclusion
Although much remains to be done (given the ‘long-tail' nature of the bulk of outstanding claims), the Scheme has achieved the Government's objective of assisting policyholders affected by the collapse of HIH. This has been done in a manner that has, in the main, provided appropriate standards of public sector governance and stewardship for the significant amount of funds involved.
Overall, the structure initially adopted has proved effective in achieving the Scheme's objectives. The outcomes achieved to date are to the credit of the parties involved, given the challenging circumstances in which the Scheme was designed and implemented. The first year of operation was particularly difficult, with some applicants experiencing delays and frustration while gaps or problems in the eligibility assessment process were addressed.
The experience gained through the operation of the Scheme has provided a number of lessons that would be of benefit to agencies responsible for implementing any future Commonwealth financial assistance schemes. In particular, it has highlighted that the efficiency and effectiveness of the service provided to applicants, as well as the responsible agency's stewardship of the funds involved, is likely to be improved by maximising, to the extent the prevailing circumstances permit, the analysis undertaken to inform the design of eligibility criteria, application material and assessment guidelines. In addition, ANAO considers that, wherever possible, it is desirable for agencies to seek to maximise the extent to which financial arrangements for which they are responsible fall within the scope of the FMA Act.
ANAO found that, at the time of audit, Treasury was applying a comprehensive approach to planning the design of the revised Scheme structure and documents. The opportunity to undertake a more considered and complete analysis of each element of the revised structure, prior to it being implemented, should be of benefit to the Department in achieving a smooth transition.
ANAO made six recommendations to improve the governance, eligibility assessment and financial management arrangements for future Commonwealth financial assistance schemes. Treasury agreed with all six audit recommendations. Treasury's more detailed responses to the recommendations are shown in the body of the report immediately after each recommendation.
Treasury's full response to the section 19 proposed audit report was as follows:
The HIH Claims Support Scheme (Scheme) is a unique example of Government and industry working together under considerable time constraints to implement a program of assistance. The impact of the collapse of the HIH Group on policyholders was immediate, and the preparedness of the insurance industry to rapidly pull together a structure for service delivery meant that timely assistance was made available. Within seven weeks of the Government's announcement, the policy framework was established, the Treasury had commenced making payments to salary continuance policyholders and HIH Claims Support Limited (HCSL) was ready to process applications.
Since the commencement of operations the Treasury and HCSL have continually identified and acted upon opportunities to further enhance and refine both eligibility policy and operational performance. A comprehensive audit program has also been an effective mechanism to highlight where there is scope for improvement. A part of this program is the verification audit process, which utilises targeted judgement based sample selection criteria and has been very successful in identifying applications with the highest likelihood of failure.
Due to the ongoing focus on improvement, many of the issues raised in this report had been internally identified and actions taken to mitigate the risks. The most obvious example is the current restructure of the Scheme, which will result in a streamlined service delivery framework best suited to the future rate of claims run-off, within the scope of the Financial Management and Accountability Act, 1997 (FMA Act).
This report will provide some valuable insights regarding lessons learned from the Treasury's experience of developing and implementing a program within a very short timeframe, with limited information and with an industry-based cost recovery service delivery structure.
1 Press Release, Minister for Financial Services and Regulation, Criteria for HIH Hardship Relief, 21 May 2001.
2 Other than for those accessing the Scheme through the limited gateway. Eligibility assessment for late applicants is to be undertaken by an independent person or organisation with insurance industry experience.
3 ANAO Better Practice Guide, Public Sector Governance, Canberra, July 2003, Volume 1, pp. 7–8.
4 This involved the internal auditor verifying the applicants' eligibility through interviews and confirmation of application details from source documents.
5 This represented less than two per cent of applications assessed as eligible as at October 2003.
6 The eligibility of a further four applications, involving payments totalling $135 261, was still being investigated as at March 2004.
7 Based on the actuarial review of the Commonwealth's gross liabilities under the Scheme completed in April 2003.
8 Delays in the resumption of processing for some applicants were exacerbated in part by the administrative care-taker arrangements that came into effect in the lead up to the Federal general election held in November 2001.