For watchers of the demise of Quinn Insurance, the saga of the collapse of Australian insurer HIH bears an uncanny resemblance. HIH grew recklessly. It offered cheap prices in a grab for market share but failed to set aside enough reserves to pay out on claims. It moved into lines of business where it had no experience and to countries where it had no knowledge of the market. It was led by a dominant figure who populated his board with cronies.

Almost a decade on, HIH remains the biggest corporate failure in Australian history, going bust with losses of more than AUS$5bn (€3.62bn) in March 2001. In a speech in May defending the appointment of administrators to Quinn Insurance, Financial Regulator Matthew Elderfield spoke about the impact the collapse of a major insurance company can have on an economy, citing the failure of HIH.

The collateral damage from the spectacular crash of HIH was enormous. Premiums rocketed across the board and some sectors, such as construction, struggled to get any insurance at all. Parks and playgrounds had to be closed as liability cover dried up. For policyholders making claims it was worse – payments stopped until the government stepped in. The government also had to put a levy on all insurance policies to meet the cost of the clean-up.

HIH started life as part of English insurance group before it was demerged and floated on the stock market in Sydney under the stewardship of chief executive Ray Williams. Throughout the 1990s it chased business, offering premiums at astonishingly low prices.

According to Andrew Main, one of Australia's leading financial commentators and the author of the definitive book on HIH, the company then used the cash coming in to pursue a disastrous expansion policy into the US and UK and into new lines of business from liability, professional indemnity (one of its biggest problems was losses arising from lawsuits against solicitors) and film finance. The company was involved in these areas at the worst time in the insurance cycle, when premium rates were low and claims were coming in thick and fast.

Behind all of this, Main told the Sunday Tribune last week in Sydney, was an insufficient amount of money set aside to pay out on claims. To keep cash coming in, it needed new business and to do that it had to keep its rates low. The company, he said, had in effect become a giant pyramid scheme, with premium income being used to settle old claims.

Towards the end of the 1990s, HIH made what would turn out to be its most disastrous acquisition when it bought FAI Insurance. If HIH was in a bad position with poor reserves, FAI – run by the notorious Adler family – was in equally, if not worse, shape. The Adlers were immigrants from eastern Europe and quickly carved out an empire that turned them into one of Australia's richest families. Larry Adler and his son Rodney were not particularly interested in running an insurance company but were attracted to using its profits for investing elsewhere, particularly gambling on the stock market.

Before the takeover was consummated, FAI was facing its own problems and needed to shore up its balance sheet quickly. One way of removing some of the risk on its books was to use reinsurance. Reinsurance is normal to most insurance companies but given the troubles with its reserves, FAI needed something drastic to make its profits look better.

To do that, Rodney Adler, now running FAI after the death of his father, turned to John Houldsworth, chief executive of General Reinsurance, which was based in Dublin.

Houldsworth was quite happy to work with FAI. There was no risk to his company and it earned a generous fee.

A source familiar with the agreement described it as a sham. No risk moved from FAI as side letters to that effect had been given to the reinsurer. It was a pure financial transaction, the sole purpose of which was to show FAI was making a profit, said the source.

As it became clear that HIH was in dire trouble in 2000, the company tried to take steps to deal with its underreserving. It agreed to sell its main trading business to Allianz. It would get back hundreds of millions that would prop up its books. The trouble was that selling the general insurance arm would starve it of vital premium income needed to make good on past claims. And it would have to put some of the cash it was getting from Allianz back into the unit it was selling.

The game was finally up early in the new year. In mid-March, KPMG was appointed as liquidator.

Tony McGrath, formerly of KPMG and now chairman of McGrath Nicol, one of the biggest insolvency firms in Australia, recalled the options he faced when he went into HIH. In an interview on the 31st floor of his central Sydney office last week, he said there were few choices. No trade buyer was interested in taking over the entire business given the scale of the liabilities; the government was not prepared to offer a cash injection to keep it going so the only prospect was liquidation. HIH's 1,000 workers lost their jobs.

To this day he is still the official liquidator. McGrath said about 85% of his work is complete and creditors are getting back 50 cents in the dollar.

Immediately after the collapse of HIH, the then Australian prime minister John Howard set up a Royal Commission (similar to a tribunal of inquiry) to establish why HIH collapsed.

After extensive hearings, Judge Neville Owen delivered a 1,500-page report. It was scathing of the executives, the lack of regulation that allowed it to take place and recommended major changes. Eight of those involved in the company's downfall went to jail, including Rodney Adler.

"HIH's business model was based on growing premium income without providing adequate reserves. It used revenue to generate more new business, without realising that it was unsustainable and was always bound to fail," McGrath said.