AMI – Nationalisation is not a Dirty Word

It comes as no surprise that private insurance firms might be feeling the pitch in the light of the recent earthquakes in Christchurch. So it should not have come as a shock when people were greeted with the news this morning that AMI (Allied Mutual Insurance) is facing a financial crisis as a consequence of the Christchurch Earthquakes.  TVNZ reported that,

“Christchurch-based AMI Insurance is New Zealand’s second-largest residential insurer with 485,000 policyholders and 1.2 million policies across the country. In Christchurch alone it has more than 85,000 policyholders with 225,000 policies – or about 35 per cent of the residential insurance market in the city”  

AMI has stated that although it feels it can meet its existing responsibilities to policy holders who have suffered as a consequence of the recent quakes, it might struggle to meet any future responsibilities. 

 This issue has arisen also after another, considerably smaller, insurance company, Western Pacific which is (was) based in Queenstown was placed into liquidation after the February Quake.  It could not meet its obligations to its 7000 policy holders. 

Apparently, AMI informed the Government of its potentially damaging situation in early March. The Government response has been to bail out the insurance company, a move which it announced this morning.  The Company will pay the Government $15million and the Government will extend AMI $500 Million to cover its claims and to allow it to keep functioning, if it is asked to do so by the Company and only once it has exhausted its own reserves.  Bill English also announced this morning that the real total cost to the taxpayer could be more than $1 Billion dollars.  

In the same manner that private banks had to be bailed out by Government (socialism for the rich), Government could now be asked to bail out the private insurance industry (AMI), this means that the taxpayers yet again pick up the tab for private concerns. 

Of course, to be fair, the situation is completely different. The Banks were largely responsible for their own troubles. In this case AMI and its policy holders were not responsible for theirs.  But, questions needs to be asked.  Questions such as, that in the light of these two insurance companies having problems how many others might be in the same situation? And, whether it is a good idea to have private insurance companies carry the sole responsibility for claims? And, lastly, if the taxpayer is going to guarantee insurance payouts for homeowners etc then should not the state play a more active role in the insurance area?

In 1869 the Government was faced with similar issues in relation to the insurance industry. The area was under-capitalised and those private insurance firms which were involved did so under certain conditions and only covered certain people.  The Government’s solution was to establish a state owned insurance company, Government Life.  In later years, the state came to be more and more involved in insurance and ensuring that the needs of the wider community were met.  They met those needs through the establishment in 1898 of the Government Accident Insurance Office and later of the State Fire Insurance.  All of which were effective and successful in what they did.  Prompting rebel Labour MP John A Lee to note in his 1938 book, ‘Socialism in New Zealand,’  

“Undoubtedly judged on state capitalistic lines the State Insurance Department has been a glittering success.  It has been generous to policy holders, its security has been undoubted, it has effected Liberal improvements in policies … Next to the State Advances Office, the Government life is one of the cheapest lenders in the country…”   

Government Life was renamed and sold off in the 1980s, by that ‘far sighted’ visionary, Roger Douglas.  It eventually became Tower Insurance and is one of New Zealand’s leading insurance agencies.  At the time, Douglas queried the logic of the state wanting to own an insurance company.  Why, indeed? The answer to that question is found in the pages of New Zealand’s political history and economics (never Roger’s strong points) and in the current chaos of the Christchurch streets.

There are two options in this situation.  The first is simply having the Government prop up AMI (and possibly other insurance providers) through a capital injection (in this case $500 million) and then allowing it to run as normal (which I suspect is the Government’s preferred option).  The Government’s current option does allow for Government control and ownership if AMI calls upon the cash injection, but only if it needs to. I suspect also that such ownership would only be for a short period of time.

Another option would be for the nationalisation of the company.  Such a policy would allow the Government to directly meet claims, thereby providing policy holders with long term financial security. It allows the Government a direct stake into an industry, which it should never have been removed from in the first instance. AMI has no shareholders due to it being a mutual company – this means that it is directly owned by its policy holders.  There would be no buying out of shares, merely a taking over of policy responsibilities.

Given the circumstances and the need to provide people with secure guarantees, I would go with the latter.  The Government should be a permanent player in the insurance field.

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