Another week, another massive corporate bailout as National reaches into our pockets to aid a company. He’s got the pot out and is saying ‘right, I need another $125 each from you, but keep your wallets out, it could be $250 in the end’.
Whatever happened to free-market ideology? Isn’t failure of bad businesses healthy? When did every financial sector company become ‘too big to fail’?
Yes, we’re protecting the policyholders – we can’t let all these people who have dutifully paid their premiums lose their coverage or not get their payouts. But remember, AMI is a mutual insurer. That is, the policyholders are also the owners.
In many cases of financial collapse, we look back and see years of owners creaming off huge dividends up to the point where disaster struck and the company had too little capital to see it through.
That happened with AMI too, except it didn’t pay its owners dividends, it offered cheap premiums instead, and the capital it was lacking was inadequate re-insurance. The policyholders effectively got a ‘dividend’ from under-capitalisation in the form of a lower bill for their insurance.
Now, on the one hand we might say ‘don’t blame the policyholders, they’re just people trying to get the best deal for their insurance, what do they know about capitalisation levels?’ but that logic is a lot like saying ‘don’t blame the finance company investors, they were just after the best rate’. Low premiums for insurance, like high interest on savings means greater risk that the money won’t be there when you need it.
Well, it used to. Now it means that when the business model collapses the rest of us pay out the people who have benefited from doing business with an under-capitalised company.
OK. Maybe it’s too harsh to put the cost on the individuals who just thought they were getting a good deal but we’re actually undermining New Zealand business with all these bailouts. The advantage of the capitalist free-market is supposed to be its Darwinistic survival of the fittest. It used to be that a company that had a shonky business model got wiped out when the times got tough and you were left with only the better business models standing. Now, good business models are effectively being punished and bad ones subsidised.
No wonder Vero and other insurance companies are fuming. They’ve seen AMI stealing their customers for years with too-low premiums and now that it can’t pay its bills the government is, whereas poor old Vero’s reward for being a better-run company is that it has to carry its own losses.
Hopefully, AMI will be able to raise the cash it needs (via de-mutualising and selling shares) and the government back-stop won’t be called upon. Ideally, the government back-stop would never have been needed in the first place and the government would just have worked to find a good insurance company to buy up AMI’s business so that coverage would continue while a bad business died. But we are were we are, all that can be said now is this situation must never to allowed to be repeated.
Just as finance companies need to be compelled to have better asset ratios to prevent SCF-style collapses, insurance company rules need to be tightened. It is scandalous that an insurance company in New Zealand can be allowed to operate with too little cover (particularly, re-insurance) to survive a large earthquake in a major city. It’s hardly an unprecedented event. Being under re-insured for a major earthquake is like saving costs by not buying a seatbelt for your car and then expecting the taxpayer to dive in between you and the steering wheel when you crash.
When Bill English is finished doling out our money to private risk takers once more, I hope he’ll get around to looking at those rules. Better yet, he could raise the disaster coverage limits for the EQC, which should be funded through rates, so that we’re not making such a large call on the reserves of private, under-capitalised companies when large-scale disaster strikes.