thechristchurchfiasco

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Understanding what happened to AMI…

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AMI Insurance (AMI) had 1.2055 million policies as of June 30, 2011,  representing NZD 25.4 million (investment income) in profit and assets of  NZD 2.3 billion (2011).  (See SAM_1664http://www.ami.co.nz/Documents/Annual%20Report/2011/AMI%202011%20Year%20in%20Review-v21.pdf).

AMI was the second biggest residential insurer in New Zealand until recently, and was New Zealand owned. It had 485,000 policy holders with 1.2 million policies including 51,000 in Christchurch. AMI had more than 30 per cent market share of the fire and general insurance market in Canterbury. Because of AMI’s much higher market share in Christchurch it was exposed to much larger losses than had the event occurred in Wellington.  It was initially downgraded by credit rating agency AM Best Co. from ‘A plus’ to ‘A minus’ due to the possibility that it might require additional capital to cover the quantum of claims from the February  22, 2011 quake.  It is said to have had NZD 600 million reinsurance cover for the 22 February, 2011 Christchurch earthquake event and also NZD 350 million of reserves. AMI was a mutual i.e. owned by its policy holders with no shareholders or parent company, before its sale to IAG. After the Canterbury earthquakes it was in need of a ‘bail-out’ by Government in the form of a guarantee which came in the form of a Crown support deed, to the tune of NZD 500 million. (See http://www.stuff.co.nz/business/money/4856873/Quake-hit-AMI-insurance-bailout-could-cost-1-billion).

AMI subsequently reported a NZD 705 million annual loss and breached its Crown support deed arrangement through a NZD 76 million shortfall of its NZD 198.6 million regulatory capital requirement. (See http://www.interest.co.nz/news/57305/iag-taking-out-mutual-competitor-ami-would-create-near-duopoly-merrill-lynch-analysts-say).

It has been suggested that because it was a ‘mutual’ it had no one to call on in its time of need and hence found itself in financial difficulty.  AMI was also restricted to collecting premiums in New Zealand and consequently required more reinsurance than some of the other insurers.   Had the Government not bailed AMI out there would have been chaos within the insurance industry sparking massive confusion and even further delays in the Christchurch rebuild. AMI was expected to complete 2000-2500 rebuilds and repair projects related to the Canterbury earthquakes.

The question arises: how is it that AMI was able to run a level of reinsurance that was well below the level that most New   Zealand insurance companies would deem prudent and good business practice? On 16 December 2011 Insurance Australia Group (IAG) purchased AMI, which was said to ‘strengthen the Canterbury insurance market and reduce the Crown’s liability‘, according to the Finance Minister, Hon. Bill English. This sparked serious questions around AMI and its responsibilities toward policyholders. Whether it strengthens the Canterbury insurance market is highly debateable.

AMI directors failed to inform its policyholders of its intention to sell the company,  stating that it had set up a holding company and in so doing skirted around its legal obligations toward its policyholders to inform them of its business decisions to sell the business. (See http://www.stuff.co.nz/the-press/business/6164983/AMI-sale-done-without-consulting-members).

Clearly there is a regulatory loop here that requires filling.

AMI was a mutual insurance company. This means that it had no independent shareholders but was owned entirely by its policyholders. The rights of policyholders include voting for the board of directors and other major business decisions that affect the company’s future direction or structure, such as a proposal to demutualize or sell the company. Given that the directors had a duty of fidelity and an obligation to inform, in my opinion, the events that have taken place are dubious at best, particularly the arguably ‘covert’ establishment of a ‘holding company’. The AMI board faced angry policyholders at its annual meeting with one calling the prospective purchaser,  IAG, “the worst insurer in Australia“. (See Board gets flak over IAG deal, Marta Steeman, The Christchurch Press, December 21, 2011.)

Tower also placed a bid for AMI which was to fail. (See http://www.stuff.co.nz/business/industries/6386436/Tower-explains-failed-AMI-bid).   The Crown has now taken over ownership of AMI’s Canterbury earthquake related claims along with its reinsurance and it will be retained as a new Crown company which will continue to manage AMI’s customers’ earthquake claims. (See http://tvnz.co.nz/business-news/ami-sold-govt-takes-all-quake-claims-4651837).

The Government went on to create a new Crown entity- Southern Response Earthquake Services Ltd which is the renamed residual parts of AMI Insurance that are to remain in Government ownership once the sale of AMI Insurance’s non-Christchurch earthquake related business is finalized. The Government announced Ross Butler as chairman in 2011.

IAG  paid NZD 380 million for AMI’s brand and branch network and nationwide insurance business of almost 500,000 customers holding some 1.2 million insurance policies, mainly on houses, contents and cars. IAG will continue to offer insurance to AMI’s customers, as well as all of its existing customers, on renewal and transfers in Canterbury and throughout New Zealand. IAG consequently currently covers 60 per cent of the Canterbury market, which raises serious questions for the Commerce Commission. The Commerce Commission published its Statement of Preliminary Issues regarding the IAG / AMI purchase on 25 January 2012. (See http://www.interest.co.nz/sites/default/files/Statement-of-Preliminary-Issues-IAG-AMI-25-January-2012.pdf)

The Commerce Commission has said,

We will give clearance to a proposed merger only if we are satisfied that the merger is unlikely to have the effect of substantially lessening competition in a market.”

This involved determining what the relevant market was, including a determination of where the banks fit into the picture, in terms of existing competition, potential competition, the countervailing market power of buyers and coordinated behaviour, – that is, whether the acquisition would enhance the ‘ability of market participants to collude whether tacitly or explicitly’. (See http://www.interest.co.nz/news/57602/commerce-commission-mull-banks-role-insurance-part-decision-whether-clear-iags-nz380-mln– ).   IAG’s purchase was ultimately subject to the Commission’s regulatory approval. The claims liability of AMI of NZD 1.8 billion is offset by about NZD 1.3 billion in reinsurance and further reduced by the NZD 380 million purchase price agreed by IAG. As a result Treasury estimated that the Crown’s liability would drop from NZD 335 million, in the last published set of full-year Crown accounts, to about NZD 120 million. (See http://www.beehive.govt.nz/release/crown-manage-ami039s-earthquake-claims).

AMIs  outstanding claims workload has been taken over and managed by the Government-owned company Southern Response, which has about 160 ex-AMI staff. Southern Response is based in Christchurch and is backed by the Crown Support Deed to settle earthquake claims. (See http://www.stuff.co.nz/the-press/news/christchurch-earthquake-2011/6700101/IAG-takes-over-AMIs-500-000-customers).

Do you think that IAG should have been permitted to purchase the assets of AMI ? Who really picked up the tab- the tax payers??

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Author: Sarah Miles

Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". https://thechristchurchfiasco.wordpress.com/

3 thoughts on “Understanding what happened to AMI…

  1. In simple terms, the answer is yes, however, since this
    is not considered an arm’s length transaction, the transfer for this small
    amount could be subjected to gift tax rules. Tax Assessor
    – The first place that you should start your search is at the tax assessors office.
    By its very nature, commercial real estate has the
    advantage of lower vacancy risk, because it always involves two or more units.

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  2. Steve – Just t get some facts right. Before the 1993 changes, EQC pays the “Indemnity value” of the property and the private Insurers pay the difference between the replacement value and indemnity value. After 1993, EQC pays the first $100,000 of the replacement value of a house and $20,000 for contents. (NOTE REPLACEMENT VALUE NOT INDEMNITY VALUE).
    Also in 1993, it was decided that EQC would no longer insure commercial properties and assets and gradually pulled out over a period of 4 years, withdrawing 25% each year and completely pulling out by 1997. EQC has charged 0.05 cents premium for every $100 sum insured since time memorial (regardless the location of the risk) or as long as I have been involved in the insurance industry (20 years). This effectively means that there is a lot of cross subsidisation from the lower risk regions to the higher ones like Wellington. Imagine if the 1993 changes have not been brought in when the Canterbury earthquake happened……………..it would be the tax payer footing the bill. All the insurance premiums paid to the private Insurers between the 1993 to February 2011 will not cover the losses and that si what insurance is all about. NZ on the whole pays very low premiums over the years as the global reinsurers have always treated NZ as a benign risk until 4/09/2010. NZ insurance policies provide the widest cover in the global market. Where else in the world can you find an insurance policy insuring a house for square metres on open ended sum insured? Well after 2013, NZ will have to join the world and you will find that every house will need to have a sum insured. Welcome to the real world!

    There are a lot of horror stories about consumers getting a raw deal from Insurers and I don;t deny that. But there are also a lot who have achieved satisafctory outcomes and some have received payouts more than what their houses were worth pre earthquake but this nice stories don’t make the front pages because it does not sell newspapers.

    You also mentioned that AMI reinsurance were above recognised level…. well if all the insurers had adopted AMI’s reinsurance model, they too would have failed but they didn’t so that must tell you something. Western Pacific failed but received no tax payer money.

    IAG did not force the Crown to sell AMI to them. If AMI was not sold then the Crown becomes an Insurer by default and this will ultimately be a cost to the tax payer.

    For your information, I don’t work for an insurance company but i work in the insurance industry.

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  3. Dear Sarah You have put yourself forward as an authoratuive commentator on these matters so it is most unfortunate that your analysis above ignores the role that the governments neglect of EQCs role in domestic insurance in NZ and the effect and causative role that neglect most surely had on the demise of AMI. I am surprised you ignore these factors.
    In 1993 the national government revised the EQC Act to fix building damage liability at NZ$100000/event. Private insurers were for the first time now liable for damage above NZ$100000. At the time the ‘cap’ was set deliberately at a level that still covered 95% of NZ homes. Remember EQC was set up initially because the private sector insurers would not cover natural disaster risk. So from 1993 private insurers were initially exposed to a low level of natural disaster risk for building damage, a level which initially would only affect the very top 5% of high value homes. But over time the cost of housing in NZ escalated and more and more risk was transferred onto the private insurers. In the 2000s ‘bubble’ an increase of 108% in housing costs occured between 2004-2008 ie a doubling of housing costs. This increase much more than doubled the risk exposure faced by private insurers from around 20% to over 50%.
    In 2008 EQC board advised the incoming minister of finance that this situation needed to be corrected urgently.
    The EQC board advised at least doubling the EQC building cap to NZ$200000. Why? Because to not do so would leave a massive potential risk on the private sector to which they had never agreed…in fact the basis of domestic insurance in NZ had always been that EQC cover the bulk of the risk.
    But the minister of Finance, the minister responsible for EQC ignored that advice.
    When the quakes hit private insurers were hit with a liabiliity they had never consented to. They had advised EQC of the imbalance and EQC had advised the government but the only party able to restore the functional balance and long establish principle that EQC cover the bulk of natural disaster risk was the NZ government and they failed to act. At the time an increase in EQCs anual homeowner levy was also requested by EQC to cover the increased provision that would have been needed to cover the cap being raised. As EQC board advised the fact that the ;evy (and cap) had remained unchanged since 1993 meant that in effect lower value home owners were subsidising higher value property owners. The government did not act to restore the balance.
    The result is that AMI and the other insurers were hit with claims far greater than they otherweise would have been exposed to.
    The reinsurers behind the private insurers expressed dissatisfation with this scenario.
    AMIs reserves and reinsurance were above the industry recognised levels, but AMI were in effect given to IAG, removing effective competition and assuaging the reinsurers who back the large private insurers.
    This government sold out AMI to cover up their failure to heed the advice of the EQC board and its consequences when the February 2011 quake exposed the gamble they had taken.

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