AMI Insurance would have gone into receivership if the government did not give it support for its credit rating, Prime Minister John Key says.

The government stepped in last week to guarantee AMI policy holders if the insurance company had exhausted its own reserves due to the financial hit caused by the two Christchurch earthquakes on September 4 and February 22.

AMI approached the government on March 9 about a possible shortfall in its reserves, after which the government gave AMI a letter of support to take to credit rating agency AM Best two weeks later.

AM Best downgraded AMI by two notches from A+ to A-, making no mention of the government support.

"If we didn't stand behind that company then it would have gone into receivership, and the reason for that is it wouldn't have got its credit rating, and so it would have gone into receivership," Key said this morning on TV1's Breakfast programme.

"Now if it goes into receivership - unless it could raise capital very quickly, and that's unlikely - if it went into receivership, 85,000 policy holders in Christchurch would be left in the lurch," Key said.

"The second thing is the rebuild of Christchurch wouldn't happen any time quickly. So I actually agree (with those with 'bailout fatigue'), we don't want to buy insurance companies, but we don't want to leave 85,000 Christchurch people in the lurch either," he said.

Meanwhile, asked on Radio Live whether the government would replace the board and management of AMI, including CEO John Balmforth, Key said it was too early to make those kind of comments.

"At the moment the situation is we're putting a board member on [AMI's board]," Key said.

Government also had advisors working with the company while AMI was "actively seeking a capital injection from somebody else".

"Now it (AMI) is a mutual, so (it is) very difficult to raise money from its own people. If there's a call option ultimately on the government, then those questions that you raise are very relevant ones," Key said.

"But at the moment the preferred option to the government is they find someone else to take over their liabilities. Whether that will happen or not is a different issue," he said.

Asked whether Balmforth would then continue at AMI in the meantime, Key replied, "in the short-term, yeah".

Meanwhile, Key was asked on Radio Live where the insurance industry regulator was through the build up to the AMI problem, seeing as AMI was a mutual company, lacked a strong parent, and had a large concentration of risk in Christchurch?

"You ask a really good question. That's actually the question that's been dogging the financial services sector in New Zealand in my view - there's been poor regulation," Key said.

"Look, we come from a political party that wants less regulation as a general rule, but when it comes to the finance sector, you have to have proper and appropriate regulation," he said.

"Back in 2005, the then Labour government started working on legislation to improve regulation in the insurance sector. We passed that legislation, when we became the government, last year. Now, frankly, we need better regulation in that area because as we can see, when there is a problem, often it affects a lot of people. And we've seen the same thing in the finance company sector, and that's one of reasons why banks are so heavily regulated."

There had been a deficieny of appropriate regulation for the financial services sector.

"That's now been fixed. Prudential supervision and oversight is now moving to the Reserve Bank, as a result of that legislation," Key said.

Asked whether the Reserve Bank would have had time to look into AMI, Key said one piece of advice government had from the Reserve Bank, which he had only heard orally, was that "contrary to what other people are saying, they're (the Reserve Bank) actually saying that they [AMI] had quite high levels of reinsurance".

"Now a cynic would say 'well clearly not enough' because they're in a hole, potentially, and the answer there is, 'well is there are two catastrophic events in Christchurch, that have had a very high concentration of risk in Christchurch' - that might be one of the faults," Key said.

"I'm not pertaining to understand whether they followed every rule or how it's [regulation] been set up properly, or whether the new legislation would have stopped something like this. Eventually if you have a big enough event, it will affect every finance company and bank and insurance company," he said.

- INTEREST.CO.NZ