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The fundamental problem was that HIH had been offering insurance at too low a price, and
had not set aside enough capital to cover its future liabilities. Most breaches of the law were
designed to cover up the consequential increasing financial difficulties which were engulfing
HIH. Most of the multi-billion dollar deficit arose because claims arising from previously
insured events were far greater than the provisions which had been made. Payments of these
claims came out of present income and this created an unsustainable situation. This under
reserving was the main cause of HIH¶s failure and, according to Commissioner Owen, the
reason for this major under-reserving and failure to properly price risks was mismanagement
and poor business decision making and execution. This was largely due to poor corporate
governance. The failure of corporate governance could be seen as part of the corporate
culture which was central to poor decision-making.? This led the Commission into making
many findings of 'undesirable corporate governance' in circumstances where it stopped short
of finding that a breach of the law might have been involved, including findings that:

‡ The Board of HIH was compromised by the influence of senior management, and failed to
subject management proposals to sufficient scrutiny

‡ The absence of strategic discussions at Board level affected its ability to operate as an
effective check on management

‡ There was a culture where senior management failed to bring important facts to the Board's
attention

‡ The Board failed to monitor systematically the performance of management and generally
failed to hold executives to account in the interests of the company

‡ The Board failed to ensure that the agenda for the Board was controlled by the Board rather
than management

‡ The Board was involved in a systemic failure in stewardship of the Group's assets, including
executive remuneration, termination payments and 'inappropriate corporate excess'

‡ The Board failed to implement mechanisms to identify and resolve conflicts.