Damien Grant: AMI bail out rewards poor business practice

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Why is AMI still trading?

The fire and general insurer gained market share by selling lower-cost insurance policies and, when it all went pear shaped, ran cap-in-hand to the Crown.

AMI's tactics have harmed well-funded competitors and exposed its customers to risk. It should be in receivership or statutory management and new managers should be brought in to determine its fate.

It appears the Crown will underwrite any loss from the failure of a large enterprise. BNZ (twice), Air New Zealand, finance firms, leaky homes, AMI.

Sir Roger Douglas called for the AMI support package to be conditional on the Government declaring that this will be the final such act of largesse.

But if the Government were to make such a declaration it would have the credibility of a chronic drunk swearing off the booze. Repeated bailouts have created an environment where poor decisions are not punished but rewarded.

To see this new reality in action look at the full-page advertisements being run by AMI's CEO John Balmforth, touting what amounts to the competitive advantage of the state's guarantee of his business.

Good firms and prudent consumers are being compelled to cover the cost of those who are not. Insurance managers like Balmforth, whose tenure is considerably shorter than the expected interval between large earthquakes, currently have an incentive to run underinsured and undercapitalised outfits, generating short-term profits and large bonuses. It is unconscionable to see them continue to profit.

Letting AMI fail need not mean abandoning those with current claims. Any shortfall could be covered by the state but this should be by way of a loan and secured on the property being repaired, to be recovered when the homeowner sells. The AMI board and management need to account for their performance, and prudent insurers should benefit from an influx of customers. This is what is meant to happen in a capitalist economy.

Bad firms fail and die. Capital, people and customers gravitate to successful enterprises and abandon insolvent ones, a positive process of creative destruction.

A survey last year by UMR found 48 per cent of people believed KiwiSaver was guaranteed by the Government and 35 per cent were unsure. KiwiSaver schemes are not guaranteed but, like AMI, there is an expectation the state will step in should there be a failure.

Part of the problem with AMI and the wider finance industry has been a lack of adequate regulation.

To Parliament's credit there has been heavy bi-partisan activity in this area and legislation bringing the insurance industry under the Reserve Bank's watchful eye has been passed but is not yet in force.

Unfortunately what continues to drive the success of finance and insurance firms has been the quality of the marketing and not the business fundamentals. It is time for the revenge of the actuaries.

damien@waterstone.co.nz