Government throws another $250m at Southern Response without calling anyone to account for what's likely to be NZ's largest bailout, costing taxpayers much more than expected

Government throws another $250m at Southern Response without calling anyone to account for what's likely to be NZ's largest bailout, costing taxpayers much more than expected

By Jenée Tibshraeny

Another $250 million of taxpayers' money has been set aside for Southern Response, as the bill heads towards $1.25 billion.

After it was found AMI didn't have enough reinsurance to cover its 2010/11 Canterbury earthquake claims, AMI's non quake-related business was sold to IAG, leaving the taxpayer with Southern Response, which is responsible for settling outstanding quake claims. 

At the time of the quakes, AMI was the country's second largest residential insurer and had a 35% share of Christchurch's residential insurance market.

A document released under the Official Information Act reveals that in March 2012, Treasury's "best estimate of the likely cost of the AMI support package over its life" was only $98m. While the Government in April 2011 subscribed to $500m of convertible preference shares in AMI, Treasury thought it would only need to cough up for $98m of these. 

Yet the cost to the taxpayer is ballooning, as Southern Response’s estimated gross cost of settling claims before reinsurance (including project management and claim management costs) has increased from $1.86b in June 2011, to $3.03b in March this year.   

The government in its latest Budget allocated an additional $250m to go towards helping Southern Response settle its outstanding quake claims.

So all up the Government committed a convertible preference share facility of $500m in April 2011, following AMI’s request for Crown support to help it meet its quake claims; an uncalled capital facility for $500m, entered into in January 2013 and callable by Southern Response to pay claims when the Company exhausts the funding available under the convertible preference share facility; and in June this year, an extention to the uncalled capital facility by $250m.

Drawdowns on the convertible preference shares started during the year to June 2016, with the balance of this facility to be drawn during the June 2017 year. Drawdowns under the uncalled capital facility were due to begin this month.

If the Government pays out all the money it has set aside for Southern Response, the AMI bailout will become the largest corporate bailout in New Zealand history, topping the likes of South Canterbury Finance, Air New Zealand and BNZ. And it may not be over.

Newstalk ZB earlier this month reported that Finance Minister Bill English “has given no indication how much additional money Southern Response may receive in coming years”.

With its total estimated claims cost increasing by 15% from 2014 to 2015, it’s possible it could keep rising.

As at June this year, Southern Response had fully settled 76% of the 7,194 claims on its books. It is likely the unsettled claims are the complex and expensive ones.

English: Directors not liable for not securing enough reinsurance

The situation taxpayers are in at the moment begs the question, should the Government be asking more questions of the now retired directors who were at the helm of AMI before it was bailed out?

English in April 2011 told Stuff: "At some stage we will need to go back and have a look at whether the company was run prudently."

Interest.co.nz has put this statement back to the Minister, asking what inquiries the Government has made to ensure AMI was run prudently prior the quakes.

English has responded telling interest.co.nz: “The Reserve Bank investigated the level of reinsurance held by AMI. It concluded that the company’s catastrophic reinsurance limit was in line with usual practice for NZ-based general insurers at the time.”

It is worth noting the Reserve Bank only started supervising insurers and setting minimum solvency standards once the Insurance (Prudential Supervision) Act 2010 kicked in.

English goes on to say: “Prior to the Canterbury earthquakes AMI Insurance was a successful and profitable company. After the quakes, AMI’s directors sought support from the Crown. This action and the rapid response of the Crown preserved funds which could have been lost had AMI collapsed and ensured that AMI customers’ claims were met in full.”

Asked about the level of accountability AMI’s former directors have now, English confirms: “Directors have no legal liability for decisions made after they resign.”  

Furthermore, under the Limitation Act 2010, which essentially sets a time limit within which you can file a lawsuit or make a claim related to a certain event, it is possible AMI's old directors won't be able to be held to account for any possible negligence or duty of care as of February 2017. 

AMI's former chief executive, John Balmforth, in April 2011 told Stuff: "We had more than adequate reinsurance for the first earthquake, but the limit of $600m for the second quake is likely to be tested. 

"Our reinsurance was set against a 1000-year event. An aftershock of the scale of the February 22 event is virtually unprecedented in terms of the damage caused."

English: Govt hasn’t questioned why AMI’s former CEO received a $3m paycheque on retirement 

AMI’s reinsurance levels aside, Balmforth has come under some fire for receiving high salaries during a time his company was being rescued by taxpayers.

In 2011 he was paid $992,069, while in 2012 he was paid $875,741, according to a Southern Response annual report.

Yet before resigning in April 2012, and after AMI changed hands, Interest.co.nz believes Balmforth may also have received an additional $2.1m.

The financial results of AMI Insurance Limited - a company incorporated in December 2011 as AMI’s affairs were re-shuffled - show an unnamed employee was paid $2.1m.

It is unlikely any employee other than the outgoing CEO would’ve been paid $2.1m in the six months the results reported on.

Asked whether the Government has ever questioned Balmforth receiving this level of pay when his company was so strapped for cash, English says:

“During 2011 AMI’s business and affairs remained under the direction of the AMI Board of Directors who set salaries for company executives. I understand that directors considered stable leadership was important to minimise disruption to customers and facilitate the sale of AMI’s ongoing business.

“Mr Balmforth was employed by AMI Insurance Limited, subsequently renamed Southern Response Earthquake Services Limited, until 5 April 2012. On 5 April his employment was transferred to AMI Operations Limited, a subsidiary of AMI Insurance Limited, which was sold to IAG. The Government has no responsibility for his employment status post 5 April 2012.”

AMI's former chairperson, Kerry Nolan, in September 2011 told Stuff Balmforth's salary was on par with his industry peers. Furthermore, he said: "The salary of the chief executive is a matter of contract between company and individual, and there is simply no linkage between that and the assistance from the Crown."

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"Too big to fail" is not an apt description. "Too socially devastating" might be better. The excessive salaries seem to be part and parcel of modern finance and I wouldn't expect the govt can (or want to) do anything about that.

14
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So what would the government do if IAG experienced a similar problem with it's about 70% of the NZ domestic insurance. It is unbelievable that they permitted them to acquire so many of it's compeditors.

What are the risks to NZ Inc if this company was to fail?

IAG are probably bigger than NZ Inc.

21
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So to paraphrase English;

"They were as crap as everyone else was back then so that's ok - nothing to see"

I don't think I've ever seen a government either so utterly deluded, or utterly incompetent. I wonder if its possible to sue MP's for negligence? (I'm guessing not)

13
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and who's next, first finance company, then insurance company, will the next bailout be a bank?

Yes

16
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Can my business have a bailout please? not that I need one...... cause my business isn't a casino like sham operation!
They should have to pay it back + interest! Only fair. Otherwise this sets a two tiered level of accountability which translates into government corruption.

Nothing to see here .... 1.2bn

The article should have noted that AMI is not alone in exceeding its reinsurance cover.
IAG and Tower have both done that, and other may have done as well.
No one expected the hit that Christchurch got from the Port Hills Fault, and combined with the full replacement policies, it cost everyone a lot more than they had provided for.

We have written separate stories about both IAG and Tower exceeding reinsurance cover.

Don't worry, The tax payer is bailing out the govt have a look at the debt escalation national has borrowered something like $80 billion no one talks about that, they mainly focus on the govt operating surplus or deficit.

Strewth, The Truth. Right on the head, you hit it!

11
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Yet no mention of this on Stuff or NZ Herald? Awesome work NZ Journalists (excepting Interest.co.nz of course!)

Am not a particular fan of Bill English, but in this case, when asking myself the following questions, am not sure I would have come up with different answers:
Did there need to be a bailout? Yes, a large number of people had insured with AMI as a reputable brand, and it would not have been societally acceptable to leave them high and dry? AMI was owned by its policyholders- there were no other shareholders who somehow got rich out of the exercise; nor were there shareholders who reasonably could/would have stumped up the cash.
Had previous directors allowed enough for such a contingency? It's actually rather moot, as what would you do if they hadn't? Those directors haven't got the money. Certainly the earthquakes were beyond what most of us imagined could occur.
Have they managed the actual insurance payouts well? Impossible to tell from afar. Most companies seem to have costs now in excess of original allowances.
Has there been a small group who somehow got rich out of the bailout? Not really. IAG paid $380 million for the balance of the company, and that went to reducing the earthquake liability. I doubt anyone would have paid more. The ex CEO probably got too much on leaving, but the amount was trivial in the scheme of things. South Canterbury Finance was a bigger cock up by far.
Where I often have an issue with Mr English is in not opening the purse for other infrastructure when Treasury borrowing costs are ~2%.
But on AMI am happy to give him a pass.

Lotta faux outrage amongst common taters.

  • The proximate cause of the AMI separation into 'good, going concern' and 'bad, honour the policies via Govt support' companies was a series of five or six (depends who is counting) large earthquakes spread over six years (Sept 2010 to February 2016)
  • Which occurred in a heavily populated area with 160,000 properties
  • Where many policies specified 'replacement'
  • And many thousand aftershocks (16 or so and counting) to add uncertainty to any rebuild effort
  • After which the legal implications of policy wordings such as 'replacement' and 'to the former condition' are still being worked through the Courts in some cases
  • Especially as the policies did not contemplate the individual or combined effect of many quake events in quick succession

$250m is $1562.50 per property.

Get a sense of scale and priorities, folks.....

I wouldn't say "faux outrage"

"was a series of five or six (depends who is counting) large earthquakes spread over six years (Sept 2010 to February 2016)"
We live in NZ a geologically active area of the world. If you aren't living on a volcano, you are living on a faultline. A major event was always probable. Insurance was always going to be a risky business.

"Which occurred in a heavily populated area with 160,000 properties"
AMI had 35% of the market or approx 56,000 households paying premiums for many many years. Where did all that money go? It can't have just been used up because that would imply AMI execs could not run an insurance company.

"Where many policies specified 'replacement'"
Who agreed to that? AMI weren't forced into this by customers. They made a business choice and got it wrong. Again reeks of mismanagement.

"And many thousand aftershocks (16 or so and counting) to add uncertainty to any rebuild effort"
Read the first point. While the time/place was not predictable - it is almost guaranteed that somewhere in NZ would get hit by a major earthquake. Imagine if it had been Akld or Wgtn?

"After which the legal implications of policy wordings such as 'replacement' and 'to the former condition' are still being worked through the Courts in some cases"
Could argue all day about "insurance" and "Legal wording" - just about all British Common law is based on what a reasonable person would think. Replacement and former condition are pretty simple terms really. Only reason to argue is to wriggle out of contracts.

"$250m is $1562.50 per property.
That's only the latest payment, what about the other billion, and any future payments. Not to mention the massive precedent that is being sent. Really we might as well just can private insurers, pay a grand or two extra in tax each year and have public insurance.

"Where did all that money go? It can't have just been used up because that would imply AMI execs could not run an insurance company."

Well, there wasn't enough to pay the claims, but there was enough to pay the head sherang a whacking great lump of money. As for the rest?

But it doesn't seem that the failed insurance company was very good at insurance, what with it having fallen over and gone down the toilet.

So why the payout?

You are right Noncents it is not faux outrage but the cause of this is something I've pointed out before.

Insurance companies, like banks (and I suspect a few other business's) have become a rort. To go back to basics and keeping it simple; we, the public, choose to offset our risk. We shift it on to others through an insurance policy. Insurance companies know that for any population base a certain amount of those risks will be realised in any one year and that every now and then they will have a bad year. They have calculations of risk and likelihood, based on historical data and other accumulated knowledge, from which to work out the premium. Most of a premium will go towards the more likely lower cost issues, but a portion will go towards the major disasters like a house fire or , in this case, and earthquake which flattens the whole house. The problem is they have fallen into the trap of believing because it hasn't happened in living memory, or perhaps even records, then it won't. Also having funded re-insurance, their version of covering off for the bad years, they have believed that what is not paid out in claims must then be profit, rather than looking at the total liability of their very worst risk and knowing that what ever occurred they must have that amount available to them at anytime. Re-insurance is really supposed to provide cover until they build up their own pool of reserves, but instead has come to replace it.

Another issue is that they have become so good at wrapping up terms and conditions so that they can weasel out of paying on a claim that they came to believe in their own superiority. Thus for years they have been able to rake off huge "profits" with no accountability, because those "profits" were actually unpaid claims against major disasters.

A way of looking at it is that most if not all communities carry insurance, just like Christchurch. One, Christchurch, got hit hard by the earthquake, but not totally flattened. Insurance companies have been receiving premiums for years for all communities, not just Christchurch so just paying out for one should have been a breeze no matter how big it was. Now imaging if following the ChCh earthquake imagine what would be the picture if the big one hit Wellington? How much money would the insurance companies have to pay out for that? Probably close to zip because it has all been raked off as profits! Welcome to the free market economy - zero regulation!

"they have believed that what is not paid out in claims must then be profit"
That is the key point. Insurance will never make a "profit". At some point something will happen.

I still shudder to think what happens if an Earthquake hits Auckland, let alone LA/San Francisco, or even Tokyo. Even the re-insurers would be running for the hills.

My understanding is there is more insurance taken out than could ever be paid out by the insurers (much like there are more mortgages than can ever be paid back).

Great analogy about re-insurance, its a bit like my mortgage, I have income protection to protect the cash flows to be able to pay off my mortgage if I can't, but once it is paid off I don't need insurance for that particular cash flow. I don't keep topping up my mortgage and relying on income protection insurance to pay it off. Works well when the mutual organisation thinks like this, but they don't, excess reserves is seen as lazy and wasteful except when you need them in a disaster.

My sentiments precisely! One could foresee public insurance made law, after many bailouts to prop up their incompetence and cover their shenanigans, all courtesy of the tax payer and our elected officials.

Re Waymad
$1.25B then would be around $7500/prop then, all out of tax payer money.

Thats a lot of hip replacements for JK's elderly Chinese immigrants that won't be able to be done.

In other words, AMI were way way underinsured.

How much is enough? How bigger disaster do you reserve for?

Get a sense of scale and priorities, folks.......
Million homes paying couple of grand a year over many years, isn't this what insurance is about. Scale and risk.
I've still not heard a good reason for the bailout. Covered the banks asses/mortgages?

Covered the banks asses/mortgages
I think that has been over looked. what would have happened if AMI had folded, would the government have stepped in to cover the mortgages or let the banks take the losses . this was at a time they were vulnerable and were operating with a aussie government guarantee

Vulnerable, you don't say! Oh, the poor darlings...

Shouldn't AMI have just been liquidated rather than getting bailed out. Perhaps the NZ government should get into the business of insurance "kiwiSure" or aluminium smelting. Moral hazard and a lack of accountability mean thst this will happen again and again. At least if the government owned an insurance company we'd be exposed to the profits as well as the losses.

It is claimed that AMI's "catastrophic reinsurance limit was in line with usual practice for NZ-based general insurers at the time.”
What percentage of their premiums did AMI spend on reinsurance, and what percentage did other insurance companies spend? If my memory is correct there was an article in the Sunday Star Times saying that AMI spent far less on reinsurance than other companies did.
I insured with AMI because their premiums were lower than those of other companies. Perhaps AMI achieved this by saving on re-insurance.

Fantastic journalism. Well done Jenée Tibshraeny and interest.co.nz

Not that this is the case specifically in relation to this article or interest.co.nz - but just generally regards MSM in New Zealand - it seems the fourth estate is holding the government to account in a more spiritied (i.e., traditional) manner these days.

Well, that is my perception anyway.

And more power to them.

How much of the CEO and Board of Directors pay has been paid back since the bailout for incompetence ?

Also the Commerce Commission CEO should be forced to pay back part of his salary for allowing AIG to buy out competitors and take 70% of the market. (assuming that is correct)

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You're joking, right?

Accountability, responsibility, nah, this is New Zealand. Just shuttup and pay your new improved premium!

Henry, you are a King! I got a good laugh. Ta!

South Canterbury Finance (SCF) got years and years of media interrogation. The Directors were dragged through the courts, lawyers and consultants had a field day. The SFO was in there, the Securities Commission up to their eyeballs trolling through reams and reams of records. What was the actual cost to the taxpayer - has Crown Finance ever actually published the total cost, including recoveries from subsequent sale or receivables, and bad debt recoveries?

AMI has been a basket case but swept under the carpet.

Why?

has the Government and the regulatory bodies conveniently ignored this debacle. And why?

Public money been lost - the company clearly understated liabilities. What about the Directors fiduciary duties here

Why the double standard?

Yeah, south island national supporters get bailed out by national government

it should be "no one going to jail...no bail out"... surely someone has to be accountable...

English responded: “The Reserve Bank investigated the level of reinsurance held by AMI. It concluded that the company’s catastrophic reinsurance limit was in line with usual practice for NZ-based general insurers at the time.”
Paving the road...? Can we expect more to turn turtle? Well, considering private banksters oversee the insurance industry, the tax payer is footing the bill, and... (Bill!) English confirming: “Directors have no legal liability for decisions made after they resign,” what can we expect?

What is insurance for again?
Hasn't it always been insurance companies putting "What if" type ads on the TV. They aim to first unsettle us so they can then claim to be able to sell us peace of mind. They warn us that it is irresponsible to be underinsured. What a great scam insurance is. The only reason I have any insurance is because the bank requires it to lend me money. I insure for the bare minimum because I have no faith in these businesses which are supposed to operate in utmost good faith.

English says...“Mr Balmforth was employed by AMI Insurance Limited, subsequently renamed Southern Response Earthquake Services Limited, until 5 April 2012. On 5 April his employment was transferred to AMI Operations Limited, a subsidiary of AMI Insurance Limited, which was sold to IAG. The Government has no responsibility for his employment status post 5 April 2012.”

So Balmforth is paid $1 million bucks by the company getting taxpayer support for his cock ups up until 5 April 2012, and then less than three weeks later he is paid another $2 million bucks to 'retire' by IAG (via 'AMI Insurance Operations Ltd):

http://www.nbr.co.nz/article/john-balmforth-vacates-ami-top-spot-iag-bed...

Does English honestly expect us to believe that Mr Balmforth additional $2 million buck golden handshake wouldn't have been built into the sale price IAG paid to the government only 3 weeks before?

'Complex transactions' like this to hide payouts for incompetence on the taxpayers back really grate.

We didn't come down in the last shower....

What specifically were Balmforths ‘cock ups’?
If you are referring to AMI using the alpine fault as their earthquake exposure modelling base line, every insurer and reinsurer did the same. Perhaps you think he should have known about the Darfield fault and predicted Feb 22?
Or perhaps his three piece suits and gunslinger moustache transgress your CEO dress code values?
Enlighten us

In answer:

1. I was referring the the $1.25 billion cock-up specifically ; and

2. Actually I admire a powerful tache - but I am concerned the taxpayer paid $3mln too much for his 3 piece suits

So your gripe with Balmforth is that he failed to organise enough reinsurance cover and therefore he should be put in the stocks. Meanwhile all the other Insurer CEO's whose companies were similarly under-insured escape your excoriating criticism. Balmforths remuneration seems to have been at the higher end compared to those other CEO's but the multiples of his package that were paid on severance aren't exceptional and no doubt contractually ordained. Your beef seems to be an unproven suspicion that taxpayers effectively funded his settlement because IAGs acquisition price was suppressed by the amount he received. That reasoning would have to assume other offers for AMI business that trumped IAGs bid by at least the amount of Balmforths settlement, were available. Word on the street is that other bids were under IAGs bid by some margin. If so the amount of the moustachioed ones settlement becomes immaterial.

Middleman - He was the Managing Director of a company that has cost the taxpayer $1.25 billion to date and climbing, yet he has not been asked one question.

Yes there was an unforeseen earthquake, but let me read you the policy he developed and sold in 2006:

"Your house is covered for any unforeseen and sudden physical loss or damage that is not excluded by this policy" (page 2)

While that policy was very profitable for him, here is what it should of read:

"Your house is covered for any unforeseen and sudden physical loss or damage that is not excluded by this policy, unless it is really big, in which case I will take a $3 million retirement, move to Queensland, and give the $1.25 billion shortfall to the taxpayer, note as an extra it will likely take 10 years for your claims to be settled"

Wouldn't you want to ask him just a couple of questions? But no questions? $1.25 billion? It's excoriating criticism because no one has bothered to scratch the surface....yet.

People buy insurance to protect themselves from catastrophe. They expect that the bad event won't happen. An insurance company takes their money and should be obliged to deliver that protection, because if they don't a lot of people can get really hurt.
If the company doesn't provide safety then in my mind the directors and executives should be charged with a criminal offence. Handcuffs then jail.
If for example the company cannot reinsure adequately within the business model it has, it should decide to close. Leaving it's customers vulnerable is not an option.

Every single insurance company in the world is vulnerable. If any life insurer had all the customers die, none of them would ever be able to pay out. There are some that take more risk than others but fundamentally none of them can pay. The maximum level of risk needs to be legislated but it can never cater for worst case scenario. It isn't how insurance works. It goes beyond insurance, every company is vulnerable to a particular scenario destroying their business. Some are far more at risk than others but you can't live in a no risk world.

I'll first of all expose some personal bias as I've been an AMI policyholder for years and years and I still am one.
The comments to date are a mixture of fact and fiction but I'll comment on just a couple of them.
My understanding is that the NZ Govt supported AMI after the earthquakes because the alternative of letting them fold would give the community even greater problems.
I recall reading some journalist or other reports along that line a few years back.

Some people often used to talk about the next big earthquake in Wellington the one in 100 probability.
Insurers customarily used to protect themselves by purchasing reinsurance for much bigger events, say a one in 250 year probability or even greater.
AMI was a type of mutual insurer in that unlike other insurers it had no shareholders to go to so it could raise more capital if it ran out and the same theoretical practice commented upon would have suggested AMI protected themselves against something bigger like a one in 1,000 year even and it seems as though they might have done that.
Estimates of scientists have speculated that the Canterbury event was even a one in 2,500 year probability and the Canterbury Sequence a one in 10,000 to one in 20,000 set of events.
How high do you want insurance premiums to go to always have enough money for that?
What about the dinosaurs? Do you want your insurance company to be able to guarantee they can pay out for the meteorite strike that killed the dinosuars? I don't want mine to I'll take the risk that it won't happen next year.

Fully agree, Bruce, and like you, I've been with AMI since the year dot.

The point the commentariat mostly miss is that the policies, being individual contracts between insurer and insured, did not contemplate the following emergent effects of the quake sequence:

  • Lock-outs of entire areas (the red zones, the Old CBD etc) which compounded the physical damage to buildings by allowing thieves, fire, weather and squatters to further damage assets
  • The sequence itself: e.g. a quick repair after the September 2010 event, undone and further damage incurred in the February 2011 event and so on through 5-6 major events right through to the Valentine's Day quake this last February. Policies were worded, in general, to contemplate single events only.
  • The extended quake sequence introduces massive construction cost inflation into the equation. Take 10-15% per annum inflation into account, while waiting for the ground to settle down, and then calculate the repair or replacement cost 3-5 years out.
  • The policy wordings like 'Full Replacement' and 'restore to the former condition' neglect the influence of environmental changes such as enhanced Building Code requirements, Elfin Safety, tightened permit and consent approval processes, and so on. Many of these wordings have now disappeared from policies (hence the rise of 'Agreed Value') but the old wordings are still in some cases trundling through the Courts (and by the passage of time, compounding the cost of whatever repair or replacement is gonna happen)
  • The long tail of cases still to settle are, as the article rightly points out, the most difficult legal cases. E.g. multiple units on a site, each insured by a different company, one in the middle uninsured, two with neighbours speaking only via lawyers, one with a deceased owner who died intestate, and one convinced that their unit is Just Fine and won't allow inspection or repair. SR is now, generally, heading up the dealings on such cases, because someone has to....
  • Finally, as Bruce so rightly points out, all risk is a trade-off between probability and cost. The Darfield quake was a 5-8000 year return event. The existence of the fault itself was completely unknown. This means it may have popped only 5 times since humans learned to speak.....

Finally, it's like 'Sustainability'. There's no such thing as 'Sustainability' unless one specifies 'at what level of comfort'. So 'Insurance' is meaningless unless accompanied by 'at what probability/cost trade-off'.

Period.

Wrong on almost all counts Waymad:

• Lock outs did not generally increase the cost of claims. A majority of destroyed buildings were under insured and policy cover exhausted by the Feb 22 event.
• Policy wordings do contemplate repeat events. Reinsurance policies are explicit on this and for obvious reasons retail policies need to be aligned.
• Yes, demand surge inflation is normally an issue in catastrophes but was by luck moderate in CHCH, well shy of what you cite.
• The cost of upgrading to meet current codes was always specifically included in policy wordings. And still is. This benefit has not ‘disappeared’ from wordings as you claim. Insurers understood they would be liable for these compliance costs. It is mainly an issue for commercial buildings and has little impact on AMI, apart from TC foundation systems.
• SR is not ‘heading up the dealings on multi-unit cases because someone has to‘. All insurers are leading resolution of a percentage of multi-unit sites where they have one or more units insured. The multi-unit process is not without its challenges but a standard industry wide process is in generally successful operation.

"My understanding is that the NZ Govt supported AMI after the earthquakes because the alternative of letting them fold would give the community even greater problems."
Often repeated opinion, never backed by any facts. The current government decided this would be the feel good way to go. Reality is low premiums gave dodgy cover but the rest of us have to pay.

Over exposure to the Christchurch market caught them out. The others took a beating also.

AMI got hit because they had a large share of the market in Christchurch. The only way to guarantee the insurer won't fall over is to reserve enough money to pay every single policy out to the maximum. Even reinsurance doesn't guarantee that as the reinsurer could fall over. At this point it isn't really insurance at all. insurance is effectively spreading the risk. This is completely different to finance companies losing peoples money as they took a higher risk with the hope of a higher return. All insurers can fall over if they get sufficient claims. The others had less exposer to Christchurch than AMI so they are in better shape. Even they did not have sufficient reinsurance to cover the claims so it is hard to say that the AMI failure is a result of people getting cheap policies and reckless management.

Incorrect to say other insurers had less exposure than AMI. The composite commercial and domestic insurers had hugely more. The market share you have in any one city is irrelevant provided you calculate your exposure correctly and organize the appropriate level of reinsurance.

. "All insurers can fall over if they get sufficient claims. " Ah, obviously not as government has now indicated it will gaureentee them if they big enough.
Insurance is about risk, to gaureentee full payout on every policy would require 100 % of the risk to fall on the insurers and as you say, impossible. Shirley therefore some of the risk is expected to be born by the policy holder. In this case it's now been born by the government and the policy holder had zero risk courtesy of the tax payer.

You ain't seen nothin' yet folks. The expensive 24% have yet to be settled. Of the 76% which have been so-called 'settled', a fair percentage of these will have to be revisited as homeowners become aware of inconsistencies adopted by SR during claim settlement. Dear Bill: put aside another billion or so!

You just guessing that the remaining 24% are the more expensive or do you have some data to support your assertion?

The AMI customers should have been made to take a haircut they chose cheap insurance over due diligence.

And people have the audacity to call this system capitalism!

The message is clear only ever use large corporates whom a Government is likely to bail-out! Forget about doing business with any small business......use the biggest bank, use the biggest insurance company, use the biggest building company.......State buyouts/bailouts......the highly fashionable state of tax payers guarantees!

How about we dock every politicians and bureaucrats salary $100 per week until these debts they keep running up are paid!?!

How does one do due diligence on an insurer? I'd suggest paying a consulting firm to validate their financial models and check solvency etc. That only costs about $1m+. Anyone considering insurance should do that.

It is about the risk spread and having 35% of a market in a small city like Christchurch is too high!! How many people actually ask their insurers any responsible questions?

That is true but was that information readily available to anyone buying a policy? My understanding is that you wouldn't get that level of detail without serious investigation or inside knowledge. The reality is if it was Wellington that got hit other insurers could have been in the same situation (they may have understood the risk Wellington poses better though). I would look at the credit rating of an insurer and use that as a guide. The other aspect is given they were over exposed to Christchurch they were under exposed to other regions and had less scope to recover losses via increased premiums. I think there is a good case for some legal requirements to cover geographic risk and some easy way to compare from a security point of view like credit ratings.

Credit ratings are based on insurers correctly modelling their catastrophe exposures. You are still left with the problem that no amount of expert opinion could have predicted what happened in CHCH. On geographic risk, have a crack at calculating the volcanic exposure in Auckland. Do you base your calculations on Rangitoto, a bit of ash from another Tarawera or a cataclysmic Taupo eruption, the same as happened 1800 years ago?. What level of reinsurance cover do you purchase

Correct. I'm not normally one to stick up for insurers but they are caught between a rock and a hard place as if they limit their exposure by policy wording then people complain they just don't want to pay. If they don't limit it then they may not be able to pay. People say they should reserve for worst case scenario but that isn't possible. A reasonable size life insurer in NZ would have exposure well over 1 trillion dollars. There is just no way it can work. As for the government footing the bill, it is what governments are supposed to do. Look after its people. It is hard to find fault in people that chose AMI as their insurer. If they had picked some other company they would be in this situation instead. It is far from corporate welfare.

Yes. Insurers are between a rock and a hard place. But it's the business they are in and if they can't make it work then they should close up and leave the business. They ertainly not take peoples money off them on a false basis.
Insurance is important and why we buy it. If it turns out useless at time of need it can destroy a families financial status forever.
When I buy something from the $2 shop and it turns out to be a bad decision it's not a serious matter. Buying insurance is a fundamentally different matter. It has to work.
People speak of volcanos in Auckland and quakes in Wellington. Unfortunately it's the reality in New Zealand. Every insurance company should have multi re-insurance, and the re-insurance companies should be spreading their risk as well. Yes that could be expensive, but if the insurance company cannot make that business model work, they should close up. It's just too important to phaff about with..

Your proposition of insurers providing for every possible scenario or close up shop, is simplistic. No-one could afford disaster insurance if the cost of buying enough reinsurance to cover mega scale disasters with a long return period was mandatory.
Love or hate EQC, it delivers disaster cover at much lower cost compared to other countries with similar exposures. The other reason affordable reinsurance is available in NZ is that we coat tail off Aussie programs which are among the largest in the world.

There is a haircut taking place as people accept settlements that are under their entitlement, to avoid being the last man standing. Something that Bill and Gerry need to talk about soon is the Southern Repose end game. How will the assets and (and more importantly) the liabilities be transferred and Southern Response wound up.

There will be and is litigation up the wazoo happening but Southern Response is a limited shelf life company and somehow it will need to stop being. It might be that some group of creditors play the receivership card, but at this stage they know that receivership would be worse than the very worse part of Southern Response.

Unfortunately this "end" game plays on the claims settlement decisions and customers will and do accept less than 100% of their entitlement. Bill and Gerry can talk about 100% percent of entitlement and bankrolling etc, but what is the end game?

This report shows us, surprise, that the National Government are either extremely incompetent or extremely dishonest in their reporting of these costs. I strongly suspect the latter. It is not difficult, especially given 5 years, to estimate building costs and liabilities accurately. Sorry about that Auckland tax payers, they are pulling the wool over your eyes. Meanwhile affected homeowners in Christchurch wait, and wait and wait for this company to settle claims and rebuild houses out of an unrealistic budget.