My little rant about AMI

Please note, the following are my personal opinions and do not reflect those of any employer, past or present.

So today it was revealed that AMI still has no reinsurance cover available to them effective July 1st (New Zealand Herald). This means their insurance is invalid. The stupidity of this situation is that out government has enabled them to survive when their business model is invalid. Instead of the government allowing them to fail, and go away, while ensuring their clients were looked after; they instead propped them up and left them running. To qualify this, I aqm not in any way suggesting that AMI’s clients should have been left stranded – far from it – I am instead suggesting that the government should have let AMI go. The government has ended up in the insurance business by default, without it being managed best (in my opinion). AMI’s existing [inadequate] reinsurance and reserves could still have been used to restore the affected clients (they were still liable for losses at the time), with the government’s top-up assisting. Ongoing insurance should have then be dealt with by a “new” government insurer, possibly in conjunction with having clients move across to other existing insurers whenever possible. The other insurers had just perfectly demonstrated that they were acting as prudent insurers.

AMI spent years doing a dis-service to the insurance industry by rating and charging their premiums in a manner contrary to insurance best practice. They used their lower premiums to denigrate other providers as “money-grabbing”; yet when push came to shove, it was these money-grabbers who actually had the money available to look after their clients. These other providers also had proper reinsurance in place to be able to maintain an even keel (albeit on a slightly stormy sea) throughout the repeated earthquakes in the Christchurch region. The management of AMI have demonstrated that they were unable, or unwilling (which is worse: ignorance through stupidity, or ignorance through stubbornness?), to prudently and appropriately within the insurance industry, yet are now still being tasked with doing so (and with tax-payers money additionally!).

At this point we are stuck with a dead goose, but moving forward something needs to be done. A first step would be to make regulations around prudent insurance much tighter and adherence much more visible. This should not actually cause any problems for the remaining insurers in New Zealand, as they were already (of their own volition) adhering to a higher set of standards themselves. Regulations as to required reinsurance cover need to take into account where an insurers risk is located (80% of AMI’s business was in the Christchurch region, yet they based their reinsurance needs on an event in Wellington – coincidentally, this was cheaper….). This will work well hand-in-hand with the Financial Advisers Act 2008 and its enforcement of qualifications and liability for the advice given. As an insurance professional at the time of the Acts introduction, and during its initial roll-out, I had often been frustrated by the non-accountability of people giving advice. Often they would make erroneous, or outright lying, statements about my products or company which I was unable to refute due to standards imposed internally at my company (ie, we were not allowed to comment on other organisations directly, even when we knew the advisor had told the client an untruth about what their company provided in order to get the sale). Organisations and individuals who are performing well and in a prudent manner have absolutely nothing to worry about or to hide, but at the very least if they do make dangerous assumption (as AMI consistently did) it will be caught and nipped in the bud early.

I guess my point is, the New Zealand government bought into a dying horse and not only hasn’t managed to turn it into a cart horse, but is about to have to send it to the glue factory. Much better to have let the healthy cart horses bear a little extra load than to have kept flogging the dead one.

</rant>

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Christchurch – who’s going to pay? (#NZEQ #CHCH)

Where will all the money come from to rebuild Christchurch? The immediate answer from people is obviously going to be “insurance”. Not a bad answer really, even if we don’t worry about all the people who don’t bother with insurance. The Government, the EQC, and the insurance companies have asked people to delay making their claims until the aftermath has settled a bit, so that there can actually be a proper assessment of the losses, and so that the current focus can be on rescue and retrieval. There is an additional reason that they don’t want to raise with the public yet, WHAT WILL INSURANCE ACTUALLY COVER?

Back when the original Christchurch earthquake happened in September a lot of people had no insurance, and when they suddenly realised it could be a great idea they discovered that some insurance companies were no longer offering cover in the Canterbury region (I will not name any entities here, so I don’t get in trouble!!), while others were offering cover but excluding earthquake loss or damage. This exclusion was for a defined period from the date of cover in some cases (normally 3 months), or for a period (again normally 3 months) from the most recent aftershock of a certain magnitude. On top of this, before cover could be offered, there was a requirement for geotechnical reports, engineers’ reports, and other assessments as the circumstances warranted. These all took time, and that was if you started the following day.

Other people took a few weeks to get onto this, and still others have bought houses since then. Now, working backwards from February 22nd, 3 months prior is November 22nd, a mere 7 weeks post-September earthquake. If you did not have your insurance contract up and running prior to this date (assuming my 3 months is accurate), then you may well NOT be covered by your insurance policy. Complicating this further is the fact that some experts are now starting to say that the Feb 22 earthquake may have just been an aftershock (albeit a big one) of the September earthquake. This in turn complicates insurance (and EQC) payout limits as they are per event, in which case it could be deemed that there is both no 2nd payout, and also that insurances taken after the September event do not cover an already occuring event.

This is what all those in the know are concerned about, the desire for delay in the lodging of claims is valid for the reasons given, but is also due to the very real desire to not give the public unwelcome news at this time. The delay in announcing just what sort of assistance package will be available, and what it will cost, is simply because the government has absolutely no idea. They also know that the insurance industry may legally not be liable for much of the losses this time – oh, and it’s an election year.

This all said, I do not envy the government, the EQC, or the insurance industry; but, I am glad that the Prime Minister we do have is from the finance world and understands these things. In times like these, we need a leader who is not only calm and collected (PM John Key, and Mayor Bob Parker), but who is also able to have the vision to see the numbers involved and where they will need to come from. As New Zealand looks to progress forward from this horrific and painful event, there will be many sacrifices on the part of every member of this nation in order to rebuild.

[UPDATE: NZ Herald reports that insurers are no longer offering new insurance in the Canterbury region.]

My thoughts are with you Christchurch (#NZEQ #CHCH)