Thursday 12th May 2011
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Treasury advised that it was better to provide financial support to AMI Insurance than put it in statutory management and was against supporting failed Queenstown company Western Pacific Insurance.
Documents released by Treasury today show that the Government was advised that the consequences of AMI failing were severe and included delaying the rebuilding of earthquake ravaged Christchurch by several years.
AMI is New Zealand's second-largest residential insurer and has 35% of the Christchurch market.
Treasury said support of AMI, rather than statutory management, would allow timely processing of claims, preserve AMI's existing contractual relationships, remove the need for customers to switch insurers and give the Crown control via support arrangements.
But Treasury officials did not recommend providing support to Western Pacific, which went into voluntary liquidation on April 4.
Treasury said that Western Pacific did not have a sound business model and its failure would have a very limited impact on insurance markets. Support would send a poor signal about the Government's willingness to support weak insurance companies.
Western Pacific wrote to the Minister of Finance on March 11 seeking access to a $500,000 government bond and a $5 million government guarantee for five years.
The Government agreed to provide a $500 million backup support package to AMI.
"While it is an objective of the Government to ensure that the rebuild of Christchurch following the February earthquake is not jeopardised by solvency problems experienced by insurers, this must be balanced against the Government's policy imperative to, where possible, have market discipline and commercial solutions drive the outcome for insurers facing any sort of financial distress," Treasury said.
AMI said today that Goldman Sachs will assist in determining the level, type and structure of capital required to both settle claims and to satisfy prudential regulatory requirements.
AMI expects to be able to quantify its exposure to the February 22 earthquake by the end of August, which will clarify its need for fresh capital.
Although all claims are not yet in, the company believes they will exceed the $600 million of re-insurance cover it holds for that event.
AMI's recently announced arrangement for the Government to provide up to $500 million in extra capital, if necessary, has freed the company to use its own capital of $350 million to meet claims once the $600 million of existing reinsurance cover has been exhausted, without breaching the regulations governing the insurance industry.
Finance Minister Bill English said the Government had taken a balanced and responsible approach in providing the package to AMI.
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