The Government is providing AMI Insurance with a back-up financial support package of up to $500 million in case the company does not have enough money to cover all the Christchurch earthquake claims.
Finance Minister Bill English said the package will only be called upon as a last resort, and once AMI's own resources have been exhausted.
Mr English said AMI approached the Government on 9 March, but is still looking for its own commercial solution.
It has been reported that most, if not all, of AMI's capital and reinsurance cover will be wiped out by the quakes on 4 September last year and 22 February.
However, Mr English said there is still a lot of uncertainty about how much the claims from the February earthquake might cost beyond the cover AMI is able to provide.
He says the estimates range from zero to $1 billion, so it is possible the Government might have to pay out more than $500 million.
"Ministers have decided to act now," he said. "This provides a financial backstop for policyholders so the rebuilding of Christchurch is not jeopardised by potential solvency or liquidity issues and so confidence is maintained in the insurance sector."
The support package would be called on only as a last resort if the insurer's own reserves have been exhausted - unless the Crown believes it is in the public interest to take control sooner.
If the package is called on, it would involve the Government investing up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if it needs to.
Insurance company Tower says it is very interested in becoming the sole owner of AMI. Chief executive Rob Flannagan says it possibly has the means to provide that capital injection, and has already held discussions with AMI.
Second-largest insurer
Christchurch-based AMI Insurance is New Zealand's second-largest residential insurer with 485,000 policyholders and 1.2 million policies throughout the country.
The mutually-owned nationwide company covers one third of all home, contents and car insurance in Christchurch.
In that city alone it has more than 85,000 policyholders with 225,000 policies, or about 35% of the residential insurance market in Christchurch, Mr English said.
The package will cover all AMI customers, not just those in Christchurch.
Mr English said the Government was reluctant to get involved, but could not jeopardise the recovery effort in Christchurch.
He said AMI has $350 million in cash, $600 million of re-insurance funds and enough money to meet the claims of 400,000 policyholders outside Christchurch.
Mr English said the Government wanted to provide certainty for AMI policyholders in the aftermath of the two earthquakes and to ensure "the rebuilding of Christchurch and the insurance claims process proceeds in an orderly manner".
The Government rescue package means policy holders can be assured that their claims will be paid, he said.
Listen to Bill English on Nine to Noon
AMI robust, says chief executive
AMI chief executive John Balmforth says the company may not have to take up the Government's handout and will seek new capital, including via the option of selling part of its operation.
Mr Balmforth says the company is robust and does not see any long-term risk to its business and customers.
However, AMI says it will be at least two months before it knows whether it needs more capital to cover all claims resulting from the February quake.
Mr Balmforth says the business outside Christchurch is still bringing in money and at present it can cover new claims throughout the country.
However, he said it will be some time before AMI knows how much claims from the 22 February quake will cost and whether it has the capital to cover it.
AMI has $600 million in reinsurance cover for February's quake, a further $1 billion to meet a third event and back-up cover to meet a fourth event, should such events occur before the end of June.
"The contracts currently expire on 30 June, we're obviously in regular discussion with our reinsurers, we've seen very good support from them in recent months," Mr Balmforth said.
"It would appear there is capacity in the market, the question (is) price, and that's something that will affect the whole industry."
Listen to Checkpoint interview with John Balmforth
Listen to John Balmforth on Nine to Noon
Insurance Council says members comply
The Insurance Council of New Zealand says all its members have had their ability to pay present and future claims assessed by one of three approved international rating agencies.
In March, AMI was downgraded by the Hong Kong office of A M Best.
The council says all its members comply with minimum government requirements to operate as an insurance company.
It says insurers and reinsurers are committed to supporting customers and the past six months will place exceptional strain on the industry.
The support package
- The Crown provides a support arrangement of up to $500 million
- Payment will happen only if AMI's own resources are depleted below the level prudent for an insurance business, or if the Crown decides it is in the public interest to make a payment
- In exchange, the Crown could take ownership of AMI and have control of the board
- AMI pays the Crown a $15 million non-refundable establishment fee
- If the arrangement is called on by AMI, it can later exit the support arrangement by repaying the Crown, along with dividends owing