Thursday, April 07, 2011

A bailout I can support

Last year, in a decision which is looking worse and worse by the day, the government bailed out South Canterbury Finance. Today, its opened the public chequebook to support another company: AMI insurance. AMI is one of the largest insurers in Canterbury, and its reserves had been practically wiped out by two successive quakes. There was real doubt whether it would be able to meet its claims. If it didn't, then thousands of Christchurch homeowners would find that they had lost everything, despite having taken appropriate precautions.

This is a bailout I can support. Where the SCF bailout protected greedy investors, most of whom should have known better and some of whom had invested precisely in the belief that the company would fail, this bailout protects customers. There's no suggestion of risky behaviour by AMI, it is simply a victim of appalling bad luck (like Christchurch as a whole). And no-one is going to be making a windfall profit out of it; there are no financial money-spinners with usurious fees who demand to be paid out (unlike SCF). This is about supporting the people of Christchurch, protecting people from the vicissitudes of fortune. And that is exactly what government is for.

If we are lucky, AMI will be able to meet the cost of its claims and raise capital elsewhere so that the government guarantee is unnecessary. If we are unlucky, we'll end up owning an insurance company. It doesn't seem to be fundamentally unprofitable, so that's not a terrible outcome either.

As for the longer term, it seems that regulations and reserves and reinsurance didn't contemplate two successive disasters of this magnitude. Maybe the government needs to look at that, to ensure that other insurance companies don't suffer the same fate.