AMI's $1.48 billion govt bailout - the real cost blowout from the quakes

The greater the grillings Gerry Brownlee and Sid Miller receive for EQC’s re-repairs cost blowout, the more evident the lack of scrutiny of former AMI directors becomes

25th Apr 18, 7:24am by Jenée Tibshraeny

By Jenée Tibshraeny

There has been much focus in the media recently on the extent of shoddy workmanship carried out by Earthquake Commission (EQC) contractors in the wake of the 2010/11 Canterbury earthquakes.

Stories have resurfaced about people’s properties plummeting in value, and in some cases becoming unliveable, due to inadequate repairs done by EQC via Fletcher Building.

While EQC has provided a vital lifeline to the vast majority of Cantabs, it has left some financially crippled.

This is a travesty.

It is on the face of it reassuring to see the new Minister Responsible for EQC, Megan Woods, conduct an inquiry into the organisation.

It is also good to see more eyes and ears exposed to stories from hard-hit Cantabs, as coverage of what they’re facing has again extended beyond The Press, and into prime time radio and TV slots, spearheaded by the likes of journalists John Campbell and Patrick Gower.

Yet as the media has shone a light on the $270 million EQC has spent on re-repairs, it is worth noting the Crown has to date allocated $1.48 billion towards bailing out the failed private insurer, AMI, in the wake of the Canterbury quakes.

I don’t want to diminish the strife represented by this $270 million, but the amount set aside for Southern Response - the agency formed to take over AMI’s quake claims - is five times larger.

And while part of the debacle around the EQC re-repairs issue is that the former Minister Responsible for EQC, Gerry Brownlee, in June 2016 estimated the overall cost of this to only be $60 million to $70 million, the cost blowout around Southern Response is even greater.

In March 2012, Treasury's "best estimate of the likely cost of the AMI support package over its life" was only $98 million. So the $1.48 billion bill taxpayers now face is 15 times larger than what was initially expected.

The most recent extension of funding for Southern Response was a hefty $230 million.

Buried in the 2017 Budget, news of this “blowout” hardly made national headlines.

The greater the grillings Brownlee and EQC CEO, Sid Miller, receive by media for EQC’s shortcoming, the more evident the lack of such scrutiny of AMI’s directors becomes.

The costs EQC faces stem from failings of a scheme we are lucky to have in New Zealand, which broadly succeeded in getting Canterbury back on its feet.

Yet the overblown costs taxpayers face for Southern Response is the result of a private insurer concentrating too much of its risk in Christchurch and not buying enough reinsurance.

Which is worse?

How unfair is it that AMI’s former board (consisting of John Balmforth, Kerry Nolan, Richard Flower, Brian Gargiulo, Trevor Kerr, Philip Shewell, and David Wolfenden) hasn’t received renewed scrutiny each time the Crown has dug further into its pockets to cover the cost of the bail out?

Sure, the EQC re-repairs situation is easier for people to relate to, thus is more palatable to the mainstream media, as it has been detrimental to a number of Canterbury households and is far from being resolved. Whereas the AMI bailout is just a set of numbers on a balance sheet for the general public.

Yet the severity of the bailout becomes a little easier to understand if you consider the opportunity cost of it. How far could $1.48 billion go towards improving roads in Christchurch, doing maintenance on Middlemore Hospital, or building more houses for example?

One could also call into question the level of due diligence the Government did before agreeing to the bail out, given its cost has by far exceeded expectations. There is a point here, however it's worth considering the fact all private insurers ended up forking out more for the quakes than initially expected.

The Government was also arguably left without much choice, but to sign what we have now come to learn was somewhat of a blank cheque.

Southern Response doesn’t expect its coffers will need further topping up at this stage.

But as much as I will be looking at how much funding is allocated towards EQC to tidy up its mess in this year’s Budget, I will be checking to see whether anything significant is allocated towards Southern Response.

I will also be thinking about the former AMI directors who are continuing on with their lives as the taxpayer wears the losses for their failings.

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31 Comments

by Pharos | 25th Apr 18, 9:17am 1524604675

Thanks Jenée, a timely article. There is no doubt that many, probably the majority, AMI claimants have been rescued by the bail out. It is uncertain as to exactly when the National government realised the vast potential of the liability they had incurred. But it is certain that early on they went into damage control. This was done by a concerted effort by EQC, more often than not with the relative insurer being complicit, to keep claims under the $115000.00 repair cap. That is what happened in our case, and it was based a scope/assessment that was quite frankly, pathetic. As has being revealed and still counting,there were thousands more of the same. This course of action was of course not limited to the old AMI claimants and in so doing it has created probably the biggest own goal of any NZ government, commercially

If EQC had instead gone forward with accurate and honest scoping of damage then automatically the majority of the claims that are now looming as a $1 billion re-repair for the government would have been pushed over the cap and into the hands of the insurers. That would have limited the non Southern Response claims, as far as the government was concerned, to only the cap. But that got complicated by the high court ruling that “ the cap” could be apportioned each time to individual EQ’s. Say $35K for Sept, $115K for Feb, $115K for June = total EQC pay out $265K. So even in those cases the mindset meant holding claims under a token cap was paramount.

The taxpayer is now likely to have to come to the party, hugely again for the Southern Response claims but also for other policy holders as those other insurers have virtually been let off the hook. For example if that claim that was kept incorrectly under cap and repaired as such by EQC had instead been accurately assessed, the cap would have been paid out and the remaining liability passed to the insurer. The government therefore would have been clear off them altogether! Now through the actions of the previous government, the tax payers own these emerging re-repairs because the insurer can quite legitimately claim they are not responsible for a property that has been on sold or for repairs that they have not conducted and that are insufficient, not code compliant, bad workmanship etc etc.

As said, the insurers did not fight at all hard to have their claimants lifted over cap. Quite the opposite it would seem. Was this an end game brilliantly executed by the Insuers? Who knows but it is all the more reason for the Royal Commission promised by the incoming government to convene and commence asap.

by middleman1 | 26th Apr 18, 9:48am 1524692932

'the insurers did not fight at all hard to have their claimants lifted over cap. Quite the opposite it would seem. Was this an end game brilliantly executed by the Insurers?'

I observed a variety of variety of approaches by insurers, including:

(1)waiting until the claim was confirmed as over cap by EQC before they would take any action.
(2)not waiting for EQC but scoping where the client reported likely over cap damage and then taking the claim over.
(3)proactive GIS model and construction type/age based identification of higher risk properties and scoping of them.

(1) had the advantage of not requiring so much assessing resource as claim lodgement would be smoothed over a longer period but a downside was the repair cost inflation that insurers were concerned about at the time and also that they remained in the dark about what their total bill for the event would look like.

But there were advantages to this, especially if there were concerns about whether there was enough money in the kitty if reinsurance was likely to be exhausted; profits from future trading could be used. It also left the door open to possible purchase of adverse development reinsurance cover, down the track.

by Pharos | 26th Apr 18, 1:03pm 1524704588

Under most policies it was quite legitimate, and understandable, that the insurer had no liability until EQC paid out the cap(s.) But we are aware of one insurer at least, who wrote to policy holders after both Sept & Feb events that they would undertake to negotiate with EQC, again as entitled under the policy, on the claimants behalf and particularly when they (the insurer) assessed the repair as being over cap. And in many cases they did exactly that. But that all changed after Feb but more so, June when the enormity of the liability really started to emerge and as you explain there were compelling reasons to play for time to elongate and keep financial pressures, cash flow if you like, at bay. However there was also I believe, some shrewd cynical thinking going on in that attrition might play a good part in proceedings. Some claims might never come out from cap, ie for example, those that are part of the EQC re-repair thingy that is going on right now. Some people might sell up, as is, move on. Some people might die. Some people were known to not have the resources or capacity to put up a fight for the integrity and preservation of the their home. So stamp the file closed and record another tick.Why not. Even if you are sued it will take years to get to court and you can always bail out at the last moment, and the courts anyway are not interested in making judgements on insurer misbehaviour or awarding damages.

by Kate | 25th Apr 18, 9:49am 1524606560

The other question I have is just how did these Fletcher Building repairs get sign off from Council building inspectors? It just isn't believable that such widespread shoddy jobs were not known to be shoddy by the professionals inspecting them at the time of sign off. Must have been some deliberate sort of 'turn a blind eye' type of collusion between the regulator and the regulated going on there.

by Pharos | 25th Apr 18, 10:40am 1524609621

Kate, we tried very hard to get the CCC involved to no avail. Our misconception was, that as they were the regulator to enforce the building act, they would do just that for their rate payers but it was just a hand washing performance instead.Completely unlike prior to the EQs when we did a very modest extension to our house, they were all over us, consent & inspections equaled $000’s.

We had so much EQ damage that we ended up a rebuild. When we eventually got out from under EQC our insurers insisted they could “repair” us without the necessity of a consent. The CCC just didn’t want to know, I have emails as such, quite rude some of them in fact. I may still have a CHCH Press clipping where a CCC spokesman stated that the insurers’ engineers after all knew what they were doing and more often than not knew more about it than the council building inspectors. Of course the tragedy in all of this is that under the building act the house owner is ultimately responsible for the building to be code compliant. But thousands of repairs have been undertaken with the house owner having no say whatsoever in the methodology employed or standard of workmanship. Now isn’t that a nice little nicety to shift responsibilty away from those who might have been caught out previously with the leaky house episode!

by Kate | 25th Apr 18, 11:46am 1524613574

So was the requirement for building consent for repair work waived under one of the EQ Acts? I think you are saying that council building inspectors had no part in reviewing/approving quake repairs that would otherwise require building consent?

If so, it was part of the central government intent for managing the rebuild. I recall there being a lot of criticism at the time about the use of urgency in the House (i.e., no Select Committee hearings process) for much of that EQ legislation.

We're all now paying for that lack of transparency/scrutiny.

by Foxglove. | 25th Apr 18, 2:40pm 1524624002

In truth the government was quite bold to take on board the liability of AMI’s failings. In that regard they gave policy holders some direction rather than a total loss situation, and in so doing stabilised somewhat what otherwise, would have been embarassing for NZ’s financial image. It has to be remembered too that they did likewise with South Canterbury Finance, and many other finance companies during the 2008 GFC. But the burning question that remains is how did AMI ever get itself into this hopelessly irremediable financial pickle? Where was the governance from the highly paid board and executive? Where was the oversight and disciplines that were entrusted to the RBNZ? Why were many of the AMI hierarchy given generous severance packages? And why was the government so hopelessly unaware of the financial consequences they were buying into? Perhaps they should not have sold off the “good” part of AMI and built on it to trade their way back, some way at least. On a vastly bigger playing field admittedly, that is what happened with AIG in the USA.

by Pharos | 25th Apr 18, 3:34pm 1524627295

In our case they tried to rely on section 112 of the building act. We checked this out with the council who appeared to take a rather lenient, and convenient in my opinion, view of what this allowed. Essentially if section 112 is brought into play, a “repair” might instead, be allowed to be considered as an “alteration,” just putting it all back together again and so forth. Believe the MBIE eqc repair guidelines that were introduced initially set up this pathway and this was enhanced by a subsequent softening of thfem. As a result countless repairs have been made to major structural elements, foundations in the most, without the scrutiny of the council even though they are entrusted with the authority for code compliance and ratepayers quite understandably thought that the council accordingly, was there to protect them in this regard. In short, EQC and/or insurers have simply been allowed to proceed on the basis of their own interpretation of the building act and undertaken repairs without consent, and likely in more cases than not, without the council having any knowledge at all about them.

by Kate | 25th Apr 18, 9:28pm 1524648506

Just read that section - very dodgy/crooked interpretation. No wonder the mess. The rebuild simply should never have been allowed to proceed on that basis.

by Pharos | 26th Apr 18, 9:39am 1524692382

Kate, with or without that section or anything else many were simply railroaded. They tried it with us. Many though were not equipped to defend themselves or their home. They had no expertise or resources. But under the act they are still the responsible party for code compliance. The act was put in place to protect people in these circumstances. In many many cases it has been used for the opposite.

ps. When legislation gives people responsibility but at the same time denies them the requisite authority, well there is a name for those people, scapegoats.

by dictator | 26th Apr 18, 3:18pm 1524712686

Any substantial replacement of a structural system is not exempt building work under Schedule 1, 1 (1) 3(b) of the Building Act. It sounds like there may be a substantial number of alterations to structure without consent. Unfortunately any enforcement action would be imposed on the owner of the house.

Everyone should thank Gerry Brownlee for creating this appalling situation.

by Max Fish | 27th Apr 18, 8:20pm 1524817230

The CCC were hi-jacked by the insurers and to a lesser extent, the guvmint.
"Regulatory Capture".
The Mayors and councillors seemed to be in as much shock as many homeowners and just seemed to let it happen.
It was a bit like how the MBIE Guidelines were cooked up, with no input or representation from the citizens that they were meant to be serving. And don't start me on the engineers.

by Bruce | 25th Apr 18, 12:19pm 1524615576

Well notwithstanding some focus on EQC issues in the article and comments to date the headline and the photo are clearly AMI. I declare my interest - I am an AMI policyholder. The article ends "I will also be thinking about the former AMI directors who are continuing on with their lives as the taxpayer wears the losses for their failings.". For their failings? Is this media speculation or facts? A few years ago I saw a Cabinet Paper setting out reasons why the government bailed out AMI's customers. It made sense. Now, can my insurer or any other insurer finically manage their business so the sort of catastrophe that killed all the dinosaurs will not wipe them out? Probably not. I'm told that in insurance circles in 2010 an insurer would financially manage itself to survive a 250-400 year event but that a mutual insurer than cannot go to its shareholders to raise more capital to stay afloat, as they don't have any, would sensibly protect itself against a longer term probability even a 1,000 year event which current legislation now requires. The rumours were that AMI might have done that. If so where are the failings. Perhaps there does need to be an enquiry to see if they did that but if they didn't how should "failings" be judged? What against? The Canterbury earthquake sequence was a one in 10,000+ years event.

by Tim Depositor | 25th Apr 18, 3:47pm 1524628066

John Campbell has his critics. But has been first rate in following the difficulties of Christchurch residents on this.

Current Affairs needs something in this country.... Mainstream media have been largely woeful.

Excellent article.

by redcows1 | 25th Apr 18, 5:11pm 1524633087

Foxgloves list of bailouts is long, sordid and exspensive.
What's the return on investment? I know someone will have worked this out as no one just gives out billions of dollars Willie nillie, do they?
So far a rough working would suggest the government has picked up the tab to the tune of $177,000 per claim, plus the EQC payment plus whatever AMI it's self put in (or did IAG nab any cash). Is there any checking on just where this money goes cause it doesn't seem to be getting the job done, we even have people on hunger strike. How much for accountants lawyers and Private investergators ?

by middleman1 | 26th Apr 18, 8:35am 1524688535

Jenèe.

'How unfair is it that AMI’s former board.... hasn’t received renewed scrutiny', is IMHO a vital issue that few seem interested in pursuing.

In the aftermath of the EQ, AMI CEO Balmforth continued for months to publicly present himself as a confident man for the troubled times, expertly helming the good ship AMI through a sea of troubles.

He knew AMI had only a paltry $600m reinsurance cover. This was not enough to cover even the September 2010 quake. But, apparently, the board wasn't aware until July 2011 - 10 months later - that there wouldn't be enough reinsurance..... for the relatively modest September EQ. A position that as an on the ground person down there at the time, I find astonishing.

But if we run with it as being a sincerely held but mistaken belief (that they might still have enough cover for Sept) and also accept there were good reasons for the board deciding to not increase cover between Sept and Feb (despite seismological evidence clearly warning of further significant aftershocks as part of the decay process), why did Balmforth not twig much earlier after Feb, that AMI was in deep trouble?

He was very familiar with Christchurch, his own street was heavily hit like so many others. The wide spread and devastating extent of the February catastrophe was quickly apparent to those of us on the ground down there. Everyone in the industry very quickly realised this was ,many, many times bigger than September. Everyone except, apparently, John Balmforth.

by Pharos | 25th Apr 18, 6:05pm 1524636311

MM. Bravo.

by pmb2 | 25th Apr 18, 10:03pm 1524650588

I often wondered how Balmforth et al escaped scrutiny; Costing NZ Inc $1.5bn sounds like criminal negligence to me - where’s the jail time? AMI is a classic study in a self perpetuating downward spiral. They didn’t buy enough reinsurance, leading to cheaper prices than competitors, leading to growth, leading to the need for more reinsurance. Rinse and repeat.

by middleman1 | 26th Apr 18, 8:51am 1524689475

pmb2. Balmforth would no doubt respond to your suggestion of criminal negligence with a rationale for AMIs decision along the lines of 'unprecedented scale; the extent couldn't have been foreseen, other insurers made similar reinsurance buying decisions and had to be bailed out by their parents' etc.

I'd be interested in knowing the detail of AMIs actuarially based maximum probable loss (MPL) event projections for CHCH were and the extent to which the company's reinsurance program matched its MPL - e.g. did it buy less than the MPL, taking the punt the big one wouldn't hit. I'd also like to know whether MPL assessments were independently carried out and peer reviewed. Presumably the RBA in its prudential governance capacity would have scrutinised the veracity of AMI's MPL calculations.

by Bruce | 28th Apr 18, 1:08pm 1524877685

As an AMI policyholder I'd be interested also in the protection they bought in those days compared to an MPL but it is really none of my business I suppose. However the MPL factors would have been derived by engineers and scientists being damage ratios of X percent for Y years i.e. probabilities for a one in one hundred year event, one in 250 year event and so on and management would have made a decision as to what probability to protect themselves against. The stories going around were that because AMI had no shareholders they did in fact protect their balance sheet for a larger event, one with a longer return period probability, than did most insurers. If so why make a fuss?

by printer8 | 26th Apr 18, 11:27am 1524698867

I still shake my head over the results of the whole Christchurch earthquake.
Napier had a parade for the the opening of the mostly completed new city in 1933 following the 1931 earthquake.
Here we are 7 years later and Christchurch is still looking like a half empty bombed out city.
Napier' rebuild has left a legacy which is an architectural heritage and was led by a committee of three.
And don't bother telling me that Christchurch rebuild is more difficult given supposedly more efficient building techniques and equipment.

by printer8 | 26th Apr 18, 11:31am 1524699095

And as an aside; in the 1931 Napier earthquake some insurance companies were unable to meet their liability. What have we learnt about monitoring insurance companies' ability to cover major disasters 87 years later?.

by Jenée Tibshraeny | 26th Apr 18, 11:39am 1524699547

Insurance companies have in recent years come under much greater scrutiny by the Reserve Bank. Yet Geof Mortlock - a former RBNZ and APRA senior official - wrote an exeptional piece for us in March on how this regulation needs to be improved. This is well worth a read:

https://www.interest.co.nz/opinion/92747/ex-rbnz-and-apra-official-geof…

by printer8 | 26th Apr 18, 1:31pm 1524706312

Thanks

by soothsayer | 26th Apr 18, 2:13pm 1524708813

The biggest elephant is the room with Southern Response, is what does the end game look like? AT some stage it needs to be wound up, and assets distributed to the creditors. At the moment being a government gravy train, it claimants have protection of the crown (Argueably their is a case that they have paid for that by crap service).

But at some stage Southern Response as an entity needs to not be.

by viking60 | 26th Apr 18, 2:29pm 1524709792

It has been said many many times, John Key left a sinking ship another example, inadequate directors on huge salaries pretending we know what we are doing.

by waymad | 26th Apr 18, 4:23pm 1524716611

A few additional points:

A lot of the policies quoted 'replacement', but in practice that proved difficult to establish monetarily, given the changes in building construction methods, overall standards, and of course costs. So the ultimate total liability was actually vague, because it relied on summing individual cases, and with good-to-perfect knowledge about each case.
CCC was dropped as a Building Consenting Authority for a substantial period during the earthquake sequences because of its inability to perform to standard. So it was essentially sidelined during a critical period of the rebuild.
SR was also left the 'long tail' of extremely difficult cases such as multi-unit residences where each had a different insurer, some had more extensive damage than others, where neighbours could or would not communicate except through Legal Eagles, and where some owners were absent, uncontactable, deceased/bankrupt/intestate or just plain no-talkies. This long tail is expensive....
There was a sequence of (depending on how counted) four to seven major quakes, all contributing damage, and making it almost impossible to apportion liability as between events, as policies require. More expense as the argy-bargy continued.
Time is munny, and construction cost inflation roars along at 7-10% per annum. So a rebuild estimated in 2011 at $500K will be $803K at the lower (7%) rate in 2018...
The external impression of 'quake-ravaged Christchurch' is way off the mark. 85% of the city of 160K properties is fine, with a few cracks in the Gib. 5-7% or around 11K properties is totalled. The balance has moderate but repairable damage.
The major economic damage was caused by two factors: the ill-judged, extensive lock-out for many CBD businesses, denied their inventory, plant and records for months on end, and secondly, the underground infrastructure damage compounded by under-insurance, less than optimally maintained pipes and lack of as-built plans (some drainage was 140 years old at the time of the first (2010) quake).

Whichever way one surveys the thing, it was always gonna be expensive, simply because so much of the cost related to hidden faults (pun intended)....

by middleman1 | 28th Apr 18, 10:43am 1524869022

waymand. Your statement ' SR was also left the 'long tail' of extremely difficult cases such as multi-unit residences', is not correct. Every major insurer took the lead reinstatement position on a share of these technically very difficult cases. SR had no more than its market position allocation, so cannot (and I've not heard is trying to) claim they had a disproportionate allocation of multi unit cases.

Having spent a lot of time in the CBD exclusion zone after Feb, I don't agree with your view that the lock out was 'ill judged'. It was an incredibly dangerous and unhealthy environment, no place for business owners to be, other than for short supervised extractions of key records. I still vividly recall badly damaged buildings groaning and shedding fresh debris as aftershocks hit. I do however think there were towards the end, power junkies who kept some areas closed for longer than they needed to be.

by holidayboy | 27th Apr 18, 10:19pm 1524824399

......"In truth the government was quite bold to take on board the liability of AMI’s failings."
While John Key claimed that the bail out was to protect property owners, it is likely that the Banking Industry had a lot to say to the politicians of NZ about the need to bail out the victims of the AMI failure (fraud?) in order to protect the Banking Industry's mortgage financial exposure.
Soemthing along the lines of "Lack of Govt regulation allowed AMI to operate with minimal re-insurance cover, so Banks can expect the Govt to fund the AMI bail out".
AMI was a Ponzi style insurance scheme and was able to operate on this basis due to the fact that there is no regulation of the Insurance Industry in NZ.They make their own rules and oversee industry compliance themselves.
The original stated number of written off AMI insured houses was 7,000.
For the AMI bail out to only be $1.48 billion indicates that the majority of home owners have settled for a very low ball offer.

....."Where was the governance from the highly paid board and executive?"
These are the same directors who, post quake, took their bonuses before they pulled the plug on the company.

This is an excellent tale (of fraud and corruption?) and is just begging for a good investigative journalist to present the full story to NZ and help make sure it never happens again.

Do you know how much re-insurance your insurer holds?

by Pharos | 28th Apr 18, 9:09am 1524863366

Yes, good points. And there has been too some hard pressed propping up of Tower along the way to avoid a repeat. How much of that does the tax payer now own?

by middleman1 | 28th Apr 18, 10:26am 1524867994

holidayboy. I'm no cheerleader for the insurance industry, particularly after having experienced their tactics in CHCH (which I think in some cases was/is outright corporate bullying). But your statement that 'there is no regulation of the Insurance Industry in NZ.They make their own rules and oversee industry compliance themselves', is wrong - in respect of the majority of the industry that now falls under APRA scrutiny as a result of Australian ownership. APRA applies a much closer level of supervision than the RBNZ.

I think you'd have been correct if your comment was about NZ owned insurers only.