Confidence about the industry would have faltered with the announcement by Finance Minister Bill English the Government would provide a backup financial package for AMI insurance to give policyholders certainty and to ensure an orderly rebuilding of Christchurch after its two earthquakes.
If called on, the package would mean the Government investing up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if it needed to, Mr English said.
Christchurch-based AMI is New Zealand's second-largest residential insurer, with 485,000 policyholders and 1.2 million policies across the country.
In Christchurch alone, it has more than 85,000 policyholders with 225,000 policies, or about 35% of the residential insurance market in the city.
Financial markets were yesterday abuzz with rumours other insurance companies were at risk of needing Government help to survive.
Mr Taylor, the principal of Peter J. Taylor and Associates, told the Otago Daily Times the announcement would cause policyholders to question whether AMI had the ability to pay out on claims, regardless of the level.
"It will be no surprise to me if a number of AMI clients look elsewhere. The problem for those people is a reality check of what the real costs are in terms [of] insurance levels that are sustainable. Prices will go up."
AMI had targeted the "mum and dad" insurance market and its premiums were among the lowest in the market, he said.
Brokers had been concerned about the premium levels.
"The AMI model is all well and good when you don't have catastrophic events back to back. When those events do occur, confidence in insurers takes a knock."
The model would have been sustainable if two catastrophic events had not occurred, Mr Taylor said.
AMI had few options. It could either merge with another insurer, sell to another insurer or ask its policyholders for a "massive" recapitalisation, as it was a mutual society.
The biggest problem AMI had was that "utmost good faith" was the mainstay of the insurance industry.
In recent years, when one finance company had told the market it had problems, others faced the same scrutiny. That could happen with insurance companies, he said.
"As brokers, we spend a lot of time educating clients about the reality of the market. You can't sell this type of product solely on price. Price doesn't always translate to sufficient capital to satisfy a claim," Mr Taylor said.
AMI was issuing the Government with convertible preference shares but the Crown had not yet paid for them. AMI said if payment was required, it might not need to happen for two years.
Payment of the $500 million would only happen if AMI's own resources were depleted or if the Crown decided it was in the public interest to make a payment.
In exchange, the Crown could take ownership of AMI and have control of the board.
Mr Taylor believed the moment was ideal for the Government to take control of the company and merge it with the Earthquake Commission, to give the commission the public face for which earthquake victims in Christchurch had been asking.
So far, victims had been only able to contact the commission through 0800 phone numbers and email.
Having AMI as the public face - or commercial shopfront - of the commission would also help return confidence to the insurance industry, he said.
Retail banks would also be looking hard at the AMI situation with regard to mortgageholders' having adequate coverage in case of claims unrelated to the Christchurch situation.
If AMI continued to trade, there would be no reason for banks not to accept insurance policies issued by AMI.
If there was a doubt about AMI, or any other company, banks would start thinking about ending up out of pocket if a claim was not fully paid, Mr Taylor said.
"This is a small window to tidy up the sector. The insurers have created the situation we are now dealing with. They have the opportunity to get the market back to a level of confidence to move it forward. This issue affects every insurer."
