Can AMI survive?

PATTRICK SMELLIE

Last updated 11:29 07/04/2011

OPINION: Three years on from the global financial crisis, AMI Insurance has become the first major New Zealand financial institution in a generation deemed "too big to collapse".

The last time a Government stepped in like this was not Air New Zealand or the KiwiRail renationalisation, both of which were political decisions based on the unpopularity of commercial failures involving iconic businesses.

No, the last such interventions were for the DFC and Bank of New Zealand in the late 1980s and early 1990s, when the moral hazard of allowing a collapse was simply too great for the country to bear.

With any luck, the $500 million set aside already to help AMI through the ruinous level of likely claims from the Canterbury earthquakes will not be called upon in full. 

It may even be that once the dust settles, AMI will be able to pull through with no or only minimal taxpayer support.

From a taxpayer perspective, that has to be the hope, since it's hard to see why any other insurance company would pay a bean for AMI in its current state. 

While the country's second largest insurer has 400,000 policyholders outside Christchurch and may represent good business, a competitor would surely seek to sweep those customers up either for a song, or by targeting them when their insurance policies fall due for renewal.

Even though AMI is now effectively the only insurance company in the country with an explicit government guarantee, it's a stretch to imagine that their offices will be running hot as a result with would-be customers seeking new cover.

Finance Minister Bill English talks hopefully of the power of the AMI brand, but events like today's are disastrous for even the strongest brand.

AMI is tainted now and will struggle to retain, let alone grow, its customer base.

Meanwhile, there is scary potential for AMI's shortfalls to surpass $500 million and go as high as $1 billion. 

The fact that nobody knows for sure says two things: the full costs of the quake are still a long way from being fully understood, and the Government is almost certainly going to end up owning AMI - at least briefly.

There is no doubt, however, that this is the right and perhaps the only available call.

The chaos of an under-capitalised AMI failing to meet its claims would have nationwide impacts, as well as in Canterbury.

The country can ill-afford that.

At times like this, the Government's role is to act and hope to goodness it all comes out in the wash.