Thursday, April 7, 2011

AMI Debacle

For some twenty years Adolf operated on the periphery of the fire and general insurance business so I claim no serious specialist knowledge.

When the word came out last week of AMI's difficulties, my immediate thought was "Why should anyone be surprised?"

You see, AMI had a reputation for being one of the 'cheapest' house contents and car insurers in the market. Now one finds out how they managed that. They tried to cheat the system.

Essentially, they took on too much risk themselves by taking a minimal reinsurance position, using the reinsurance cost savings to subsidise lower premiums . Further, they made the cardinal error of 'being too big in one market' namely, Christchurch.

Their management ought to be shot.

They took a huge actuarial gamble and they lost the bet big time.

I believe the gummint has acted correctly in giving policy holders some limited reassurance vis a vis current claims but if the company is unable to recapitalise itself in the short to medium term, it should be allowed to fold and its book to be sold to a more prudent insurer. (It remains to be seen how long it take Labour's fiscal genius Cunliffe to shout from the rooftops that the gummint should have let the policy holders carry the can. Cunliffe has demonstrated he knows nothing about buying and selling finance companies and as far as I'm aware, he knows less about insurance.)

I sincerely hope the directors have issued an instruction that for the time being, no new policies will be sold. There seems to be no public comment on this.


alex Masterley said...

I agree Adolf.

As I read Mr English's statement the Government is the lender of last resort so no actual cash will be spent, yet!

Sadly my car is insured with AMI so I will be watching with interest.

Anonymous said...

Directors out on a rolling resign, as govt appoints new/and preapres to sell, and executives repay any bonuses and forgo any. And hand in timed resignations....

Rick Prick said...

AMI looks as though it got something wrong. My guess is that as a principally residential player, it put too much weight on the EQC's first $100k + GST per claim on residential property and didn't anticipate the aggregation of, and reinsure for, more than two events with huge frequency of losses over $100k.

Contents and motor losses are probably only a minor contributor to its problems.

showmethetaxcut said...

Adolf, while I cannot stand Cunliffe, in fairness to him I do not believe he ever advocated that SCF should be allowed to fail. His argument (against which we only have Blenglish's word to judge) was that the Government missed an opportunity to sell the book and cap the loss to the taxpayer at around $500,000,000.

mawm said...

Too often the governement is stepping in to save Kiwis who have not done their home work.

It is always a gamble to go for the cheapest option. In this case it seems as if AMI have not spent the money on reinsuring their book and so were able to be cheap .... and that is why they will fail.

It is just the same with the Finance companies who offered unbelievable rates. Or even leaky homes where the purchaser was to cheap to pay for an inspection. It is a risk you take .......... and it should be yours alone. Not the tax payers.

pdm said...

In my 23 years in the industry my experience of clients who insured with AMI is that they were a difficult outfit to deal with. Unreasonable refusal to pay claims and trigger happy in cancelling policies often at very short notice.

Anonymous said...

Adolf is right.

As someone who has been around the industry for 30 years it was clear AMI was playing the tight game. They boosted about low R/I costs and no shareholders to feed.

In the insurance industry you will get caught out at sometime.

Reminds me of HIH who was the cheapest on the market for certain lines of business and the last I heard their CEO was in doing porridge.

AMI were paying around 4% for R/I when the rest of the industry were between 10-18% depending on their risk profile.

They could have brought a few layers of catastophe cover above their R/I cover for bugger all but they were to tight arsed and thought they knew it all.

It gives me know pleasure in saying I told you so.

Blue Coast

Anonymous said...

It just goes to show what happens when you take someone out of the banking industry to run an insurance company. No idea what they are doing and only understand 'cheap'.

I wonder how gods gift to the insurance industry is feeling today? Certainly what he is saying publicly is bullshit. The 22 feb earthquake is not "unprecendented" and is in no way a "worst case scenario" that insurers still need to prepare for.

Spot on Blue Coast.


Anonymous said...

The post is fair enough but no-one is mentioning Western Pacific at all.

If their customers leave in droves that will only make things worse as it will stuff their cash flows when liabilities are looming large. I suggest no-one panic as the govt bail out is there if required. If cash gets handed over, which AMI cannot repay with interest, then the govt gets to sell AMI but it may not get to that.

Anonymous said...

Western Pacific is a completly different case. there have been rumours about their inability to meet claims for at least 12 months. They were a second teir insurer that underwrote the worse risks that the main insurers didn't want. Brokers had stopped using them a while ago or only used them with client sign off on the lack of a rating.


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