Photo: RNZ

The taxpayer has spent $1.48 billion to bail out AMI. Does anyone care?

Amid all the controversy over EQC re-repairs cost overruns, little attention has been paid to the huge amounts we’re paying to bail out Southern Response, the agency formed to take over private insurer AMI’s earthquake claims. 

This column first appeared on interest.co.nz

There has been much focus in the media recently on the extent of shoddy workmanship carried out by Earthquake Commission (EQC) contractors in the wake of the 2010/11 Canterbury earthquakes.

Stories have resurfaced about people’s properties plummeting in value, and in some cases becoming unliveable, due to inadequate repairs done by EQC via Fletcher Building.

While EQC has provided a vital lifeline to the vast majority of Cantabs, it has left some financially crippled. This is a travesty.

It is on the face of it reassuring to see the new Minister Responsible for EQC, Megan Woods, conduct an inquiry into the organisation.

It is also good to see more eyes and ears exposed to stories from hard-hit Cantabs, as coverage of what they’re facing has again extended beyond The Press and into prime time radio and TV, spearheaded by the likes of journalists John Campbell and Patrick Gower.

Yet as the media has shone a light on the $270 million EQC has spent on re-repairs, it is worth noting the Crown has to date allocated $1.48 billion towards bailing out the failed private insurer AMI in the wake of the Canterbury quakes.

I don’t want to diminish the strife represented by that $270 million, but the amount set aside for Southern Response – the agency formed to take over AMI’s quake claims – is five times larger.

And while part of the debacle around the EQC re-repairs issue is that former Minister Responsible for EQC Gerry Brownlee in June 2016 estimated the overall cost would be only $60-$70 million, the cost blowout around Southern Response is even greater.

In March 2012, Treasury’s “best estimate of the likely cost of the AMI support package over its life” was only $98 million. So the $1.48 billion bill taxpayers now face is 15 times larger than what was initially expected.

The most recent extension of funding for Southern Response was a hefty $230 million.

Buried in the 2017 Budget, news of this “blowout” hardly made national headlines. The greater the grillings Brownlee and EQC CEO Sid Miller receive in the media for EQC’s shortcoming, the more evident the lack of such scrutiny of AMI’s directors becomes.

The costs EQC faces stem from failings of a scheme we are lucky to have in New Zealand, which broadly succeeded in getting Canterbury back on its feet.

Yet the overblown costs taxpayers face for Southern Response is the result of a private insurer concentrating too much of its risk in Christchurch and not buying enough reinsurance.

Which is worse?

How unfair is it that AMI’s former board (consisting of John Balmforth, Kerry Nolan, Richard Flower, Brian Gargiulo, Trevor Kerr, Philip Shewell, and David Wolfenden) hasn’t received renewed scrutiny each time the Crown has dug further into its pockets to cover the cost of the bail out?

Sure, the EQC re-repairs situation is easier for people to relate to; it has affected a large number of Canterbury households and is far from being resolved. No wonder it gets more mainstream media attention than the AMI bailout, which to most people is just a set of numbers on a balance sheet.

Yet the severity of the bailout is easy to grasp when you consider the resulting opportunity cost. How far could $1.48 billion go towards improving roads in Christchurch, doing maintenance on Middlemore Hospital, or building more houses?

One could also call into question the government’s due diligence before agreeing to the bail out, given its cost has by far exceeded expectations. There’s a point here, but it’s worth remembering that all private insurers ended up forking out more for the quakes than initially expected.

The government was also arguably left without much choice but to sign what we know was somewhat of a blank cheque.

Southern Response doesn’t expect its coffers will need further topping up at this stage. But as much as I will be looking at how much funding is allocated towards EQC to tidy up its mess in this year’s Budget, I will also be checking whether anything significant is allocated towards Southern Response.

I will also be thinking about the former AMI directors who are continuing on with their lives as the taxpayer wears the losses for their failings.


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