Fear of failure spreading spurred bailout by Govt

Support for AMI could cost the Government $1 billion. Photo / Natalie Slade

The Government was warned that a contagion could spread through the insurance and banking sector and AMI Insurance's 50,000 Christchurch policyholders could be left out in the cold if the insurer failed, documents reveal.

Previously secret Treasury documents were released yesterday on the Government bailout of the struggling insurer, hit hardest by the Christchurch quake because of market share and lack of reinsurance.

Last month the Government announced a support package for the insurer that Finance Minister Bill English acknowledged could top $1 billion and leave the Crown liable for up to $200 million a year in ongoing claims.

Yesterday, documents were released after Official Information Act requests to the Treasury and English on the bailout.

Those showed that the Treasury told ministers including English and Prime Minister John Key that without a rescue, a wider financial collapse was possible.

The Treasury warned strongly against letting the insurer founder.

"Given AMI's scale, the winding-up of AMI is likely to have serious adverse impacts on the nationwide insurance market including: AMI's 400,000 policyholders outside of Christchurch needing to find new insurance providers (this may be difficult at least in the short term given current market conditions); and contagion effects to other insurers and banks that rely on insurance to secure the value of collateral," the Treasury told the ministers.

The rebuilding of Christchurch's would be delayed without the bailout.

"If AMI was wound up, it could be expected that there would be significant delay in the claims process, holding up the rebuild in Christchurch possibly for years with flow-on effects to demand in the economy and medium-term tax revenue," the Treasury said.

Without government money, AMI's claims might exceed its capacity to pay policyholders, making the business insolvent. But the documents said this might take a year to ascertain.

The Government needed to act to ensure the city's rebuilding proceeded and tohelp maintain soundness, efficiency and confidence in the country's insurance sector.

The Treasury advised that it was better to provide financial support to AMI Insurance than put it in statutory management.

But the documents also warned that the Government bailout would damage the country's sovereign credit rating, but that had to be balanced against not acting.

AT STAKE

AMI Insurance
* 450,000 NZ policyholders
* 1.2 million NZ policies

AMI in Christchurch
* 35pc share of the market
* 50,000 policyholders
* 140,000 policies

Source: Treasury briefing paper to ministers