Failed Queenstown-based insurance company Western Pacific asked the Government for a $5 million guarantee on March 11, two days after AMI Insurance approached the Government with concerns, Treasury documents show.

The request was declined, and Western Pacific collapsed and cancelled its 7000 insurance policies. It had 155 claims as a result of the Christchurch earthquakes.

Treasury noted that stepping in to save it would have sent the wrong signal of a Government willing to help "weak insurance companies".

They were among three insurers which officials from the Treasury and Reserve Bank of New Zealand saw a 'high risk of failure' for in the wake of the February 22 earthquake.

Details of other insurers at risk were withheld under the Official Information Act.

The papers show the Treasury and RBNZ deemed there was a risk Western Pacific would have failed even before the February earthquake.

The Government last month stepped in to save AMI Insurance policy holders in case the company exhausted its reserves due to the financial hit caused by the Christchurch earthquakes.

There are an estimated 85,000 AMI policy holders in Christchurch.

AMI has paid the Government $15 million to secure the rescue package.

The Government will only step in if required, but the Crown's potential liability could top $1 billion.

If the package is required, the Government will become the owner of the company.

Around the same time as the AMI request, Western Pacific asked Finance Minister Bill English for a Government guarantee.

"Should Western Pacific not meet its financial obligations earthquake victims will be seriously impacted by uncertainty over whether their claims would be met and delays in the payment of their claims," the letter to Mr English said.

"Western Pacific needs urgent government support in order to meet cash flow requirements and keep reinsurance funds available to the people and businesses of Christchurch.

"Unfortunately we will need an indication of support from the government in the next few days if we are to continue to operate."

After its collapse, a Treasury document notes that it advised not helping Western Pacific because "its impact on the overall recovery in Christchurch is likely to be small" and its failure was "expected to have a very limited impact on insurance markets".

It added that the company did not have a "sound business model" without "reasonable prospects for the business to continue as an unsupported going concern in future".

Supporting it would have sent the signal that the Government was willing to save weak insurance companies.

"It is not the Government's role to intervene in normal commercial processes, including a business failure, unless there is a very compelling reason to do so (such as in the AMI case)."

It was placed in voluntary liquidation on April 1 and owes almost $6 million to creditors and unsettled insurance claims. It had about 7000 policies across the country, with about 50 per cent of its South Island business being Christchurch policies.

Its ability to pay claims of the Christchurch quake victims remains unknown until overseas reinsurers settle their payouts.

The documents also reveal that Treasury sent a "comfort letter" to AMI to help stave off a credit rating downgrade.

"At best it may provide a short period of time for AMI to further its discussions with the Treasury before AM Best takes possible action regarding AMI's rating," Treasury documents said.

In spite of the letter, AMI's credit rating was downgraded two notches from A+ to A- with a negative outlook.