Editorial: AMI's collapse shows up flaw in market

Finance Minister Bill English. Photo / Mark Mitchell

Opinion

The virtual collapse of AMI Insurance under the weight of Christchurch earthquake claims raises serious questions about the insurance market.

AMI, a "mutual" insurance company owned by its policyholders, appears to have prospered by offering low premiums that it could afford by carrying too little insurance itself.

In this way it captured a 35 per cent market share of fire and general insurance in Christchurch but had insufficient capital and reinsurance arrangements to cover its risk. The earthquakes have found it out.

In ordinary times it would not have warranted a Government rescue. If its liabilities threatened to exhaust its reserves it would surely be wound up and its policyholders could find a new insurance company.

If they lost some insurance they had paid for, that would be a lesson to them and other householders that the cheapest policy is not necessarily the safest.

But in this instance the Government had to come to their rescue. The Christchurch catastrophe is not an ordinary insurance event. The scale of the damage is unprecedented in this country and the needs of many thousands of people are urgent.

The city's recovery needs to start by giving owners of damaged homes some decisions about what can be repaired and what has to be replaced.

Those decisions in most cases lie with their private insurance companies and they have been delayed ever since the first earthquake by the necessary role of the public disaster insurer, the Earthquake Commission.

EQC, funded by a levy on all household policies, is liable for the first $100,000 of damage. Replacing a house costs considerably more than that, hence the private insurer's contribution is vital.

Many claimants from the first Christchurch earthquake have already got their $100,000 from EQC. Many others are having smaller claims accepted by the commission.

It has a stated policy of "maximum entitlement", expressly giving the benefit of the doubt to claimants. After the first earthquake it was also paying out to uninsured home owners with damage.

With ample reinsurance arrangements and the Government standing behind it, EQC can afford to be generous. Private insurers probably have to be more rigorous in their claims assessment.

But in serious cases EQC will have already given the householder hopes that are hard for another insurer to challenge. AMI might not be the only company finding Christchurch even more expensive than it expected.

All New Zealand households will find their premiums much higher next time they renew their insurance, not only to replenish EQC's funds but to help their insurance company recover its position.

Rivals are understandably angry at AMI's bailout. They call it a "cheap shop" with "stupid rates" that price the others out of the market. A Vero spokeswoman said it showed people "you don't just go for the cheapest, you go for the company that you know will be able to pay the claim".

Well, yes, but how is the buyer to know? Unless there is clear independent certification of the capital backing of insurance providers, the ordinary buyer can only be wise after an event such as Christchurch has suffered.

They will at least be extremely wary now of the mutual insurance model, which AMI retained against the trend of recent years. Policyholders are not effective shareholders, their concern is premiums, not the capital returns that enable any company to survive. A pity it has taken a disaster to expose that risk.