AMI rescue package Q&A: What you need to know

The Christchurch suburb of Bexley flooded by liquifaction following the earthquake. AMI is the biggest insurer of Christchurch homes. Photo / Mark Mitchell

AMI support package Q & A - from Government press release:

1. Why has the Government taken this step?
The Government's support package for AMI policyholders is designed to ensure that policyholders' claims are all paid in full, and that the rebuilding of Christchurch is not jeopardised by worries about potential solvency or liquidity issues.

The Government will continue to closely monitor AMI's performance to ensure these objectives are being met. The Government's focus will continue to be the rebuilding of Christchurch, ensuring the claims process proceeds in an orderly manner and that confidence in New Zealand's insurance sector is maintained.

2. How much will this cost the Government?
AMI has agreed to pay $15 million to the Crown for this support arrangement. The Crown will invest up to $500 million if it has to pay for the shares AMI has issued, which would provide the company with a platform from which to explore further recapitalisation options.

The full extent of the claims AMI faces will remain unclear for several months - it depends on the final cost of damage in Christchurch, which is still highly uncertain.

It is certainly possible that the company could face losses in excess of $500 million - or indeed, they could be less. If losses were to be greater than $500 million, the Crown would stand behind the claims.

3. How will the Government pay for this?
Ministers have agreed to a $500 million appropriation so the shares can be paid for, if necessary.

4. What influence will the Government have over the company in return for this support package?
We will appoint a director and an observer to the company, who have the right to attend meetings, and a legal contract has been put in place requiring AMI to meet industry service standards. At any time, with the payment of $100 million, the Government can elect to take control of the company.

5. What does this mean for AMI policyholders - in both Christchurch and the rest of New Zealand?
For AMI policyholders in Christchurch and throughout New Zealand, it means that they can be sure that their insurance claims will be processed and paid in the normal manner. This will allow them to get on with the task of repairing or replacing their insured homes, cars and goods, and rebuilding their lives. For AMI policyholders who don't currently need to make claims, it means they can be assured that their insurance will still be there if they need to claim on it.

6. How did this situation arise?
This is the result of the two Canterbury earthquakes. As far as officials are aware, AMI has complied with statutory requirements.

7. How long has the Government known about AMI's problems?
AMI initially approached the Government on 9 March 2011 with concerns that it may not be able to meet all its obligations from its reinsurance and reserves. Since then, officials have been working closely with the company to gather information about what are complex issues and to consider the best option for taxpayers and AMI's policyholders.

8. If AMI arranges new capital from elsewhere, is there likely to be any cost to the Crown?
AMI will seek to raise the capital it needs elsewhere. If AMI arranges other appropriate sources of capital, it will redeem the shares it has issued to the Crown, and if the shares have been paid for, AMI will also repay the Crown along with any dividends owing, and then redeem the shares.

9. Given all the uncertainty, what is the best case/worst case scenario?
The best case is that AMI can meet all claims from its reserves and reinsurance while remaining within prudent capital limits, or another private-sector solution can be found. The policyholder support package has been put in place because there is some uncertainty about the likely level of claims.

If the support package is called on, the Crown will invest up to $500 million in AMI, which would provide the company with a platform from which to explore further recapitalisation options.

The full extent of the claims AMI faces will remain unclear for several months - it depends on the final cost of damage in Christchurch, which is still highly uncertain.

10. When does the Government expect to know whether AMI will need money from the Crown?
This is currently not known. However, it could take up to 18 months before we have clarity about whether support funding is needed.

11. What is the state of the wider New Zealand insurance industry?
The Reserve Bank's assessment so far is that the bulk of the mainstream insurance sector is sound and functioning well. Policyholders can be confident that New Zealand's insurance industry has sufficient reinsurance and reserves to cover households insured in the retail insurance market.

- NZ Herald staff