Birds of a feather

ITIJ 197, June 2017

Profit margins in the travel insurance sector are squeezed pretty much as tight as they will go, but one way in which profits can be boosted is through partnerships – whether it is a trade union, an airline or a credit card provider – increasing market share without necessarily re-designing the product. Just how powerful are these partnerships?

According to global research organisation Finaccord, globally, stand-alone travel insurance was worth close to US$16 billion in gross written premiums in 2015. The company's research also indicates that airlines may hold a distribution share of upwards of 10 per cent of this market, therefore representing an important distribution channel for providers of travel cover. Alan Leach, director of Finaccord, told ITIJ: “We counted 135 in our most recent worldwide analysis of the subject out of a total of 220 airline brands investigated (i.e. 61.4 per cent of airline brands have an arrangement [with a travel insurer]).” He estimated that the revenue from such deals would be ‘between US$1.2 billion and $1.5 billion in premiums annually’.
Credit cards, too, are an important source of revenue for travel insurers – Leach said that there are ‘tens of thousands’ of payment card products that carry some kind of travel cover. “There are probably between 1,000 and 1,500 partnerships between card issuers and travel insurance providers,” he added.
In 2016, WalletHub, a website based in the US offering credit scores, reports and credit improvement services, analysed 57 personal and 23 business credit cards from the 10 largest issuers to see what kind of travel protection was on offer. Among the analysis of personal credit cards, it found that 92.98 per cent of cards offered travel accident insurance, providing an average of US$325,000 in coverage; 42 per cent offered lost luggage insurance, with an average of $2,500 in cover; and 33 per cent of cards offered trip cancellation insurance. Business travel cards were broadly similar: 82.61 per cent of cards offer travel accident insurance, providing an average of $313,000 in coverage, while 47.83 per cent of cards offer lost luggage insurance, with an average of $2,500 in coverage; however, only one out of 23 business credit cards offered trip cancellation insurance.
Affinity group clients tend to be very loyal to their current provider and underwriter, as their membership tends to be more stable
Jeff Rutledge, CEO of AIG Travel in the US, told ITIJ that around the world, the ‘overwhelming majority’ of travel insurance policy sales are done through an affinity partner of some sort, as opposed to a direct sales channel. He went on to explain: “The most common among these affinity relationships are travel industry distributors such as airlines, tour operators, travel agencies, corporate travel providers and online travel sites. There is a great deal of efficiency in creating a relevant travel insurance offer that can accompany the primary travel purchase it is covering – and thus encourage policy activation at the time of initial travel purchase.”
Benefit-rich opportunity
Travel insurers in most countries know only too well that penetration rates can be low – hardly a month goes by without ITIJ printing some new research that leads to lamentation of the number of travellers who go on holiday without the necessary cover in place. While penetration rates can be as low as one per cent – such as in the UAE (according to a recent estimate from Nexus Group) – there is little doubt that the chance for travel insurers to tap the potential pool of customers booking their holiday can only serve to increase market penetration and thus volume of sales.
stand-alone travel insurance was worth close to US$16 billion in gross written premiums in 2015 … airlines may hold a distribution share of upwards of 10 per cent of this market
“Affinity distribution relationships,” said Rutledge, “provide the optimal mix of transactional volume and beneficial purchase motivation. Travel insurance becomes relevant only upon a travel purchase that can be protected.” How travel insurers interact with their customers begins at the point at which the holiday is bought, and Rutledge explained that ‘by positioning insurance within the same purchase path as the primary travel transaction, it is not simply the concentrated volumes that drive premiums, but the organic buying patterns that result when the customer has the ability to activate the relevant insurance product at the time of purchase’. This ability to place travel insurance in front of the customer at the right time means the relevance and value of the product can be best marketed.
Affinity deals certainly present a ‘significant opportunity’ to travel insurers seeking to augment their book of business, said Carl Carter, deputy managing director of UK-based Voyager Insurance Services. The company provides travel cover through affinity deals with employee benefit groups, police federations, fire officer associations and teachers’ unions, specialist membership organisations and clubs, as well as consumer brands. Such deals present great market opportunities, Carter said, but they also present a number of hurdles that need to be overcome: “There are a number of product, pricing and compliance challenges depending upon the type of affinity travel insurance that is being provided, and the distribution methods, as to whether it is a mandatory travel insurance product for all members of an affinity group such as an employee federation or union membership benefit, or a white-label affinity group that is serviced on behalf of an affinity brand.”
Underwriting policies for groups with a wide spread of age profiles can be particularly difficult for insurers, and this problem is made more serious when the organisation for whom the policy is being written is dominated by retired or elderly people. The challenge here, according to Carter, is to offer a spread of value to the range of employed members, versus maintaining cover that is affordable for the older members. “It is often the case that there is both commercial and internal pressure from the organisation to provide savings for the elderly customers (who often tend to be on the membership executive committee), and the primary route for doing this is to subsidise the rate from the employed members,” he noted.
Affinity distribution relationships provide the optimal mix of transactional volume and beneficial purchase motivation
Additional challenges with affinity group travel insurance schemes include: ensuring that all members are fully conversant with the policy terms; needing to provide varying degrees of coverage for pre-existing medical conditions; and pricing and underwriting where memberships may be paid on a monthly basis or the product is offered as part of a bundle of benefits purchased by the group on a master policy basis.

While there isn’t always a need to re-design a standard travel insurance policy to meet the needs of a particular group or organisation, this depends completely on what that organisation is for. The GB Ski Club, for instance, will need to offer tailored cover to its members, as will a mountaineering association. “Whereas typical retail travel insurance policies can absorb a wide range of high-risk activities due to the spread of risk, it can be challenging to provide a niche specialist high-risk policy at a competitive rate compared to a spread of risk generic activity policy," said Carter. "However, the benefit with niche affinity travel insurance products is that the product design can offer tailor-made sections of cover and options that are closely aligned with the group’s core interests and activities; this also helps differentiate the affinity group product from a standard retail travel insurance policy.”
On the other hand
So, there is no doubt that there are plenty of good reasons for a travel insurer to enter into an affinity deal, but what about the risks, whether financial or reputational? Jeff Rutledge of AIG noted that while there are a variety of risks worthy of consideration before an insurer enters into such a deal, there are ways in which these can be mitigated: “There are regulatory risks in specific markets, which need to be contemplated from the outset of any affinity relationship. There can be reputational risks if insurers do not perform their due diligence and choose to associate their brand or products with a distributor brand that doesn’t deliver a quality customer experience.” Regarding the financial risk, he pointed out that the most common is that which is linked to large-scale affinity deals, simply by means of concentration of large volumes of transactions and/or premiums.
There has to be a high level of trust and understanding between the insurer and the credit card partner, where the credit card provider can be relied upon to fully disclose any limits on benefits at the point of sale
As previously mentioned, there are a huge number of credit cards that offer travel protection as one of their added value benefits, so the temptation for insurers to tap into this market of people who hold a credit card is tempting. However, by adding it on as a benefit that comes at a relatively low price, the product is often a lot more limited than a stand-alone policy would be; and in some cases, the holder has to purchase the holiday with the card in order to activate the benefits. Now, readers of ITIJ know full well that when it comes to reading the small print of contracts about insurance benefits, the general public is remarkably lazy. Providing a policy with lower-than-expected benefits can backfire when it comes time for the client to rely on the coverage, and they can approach the media about the fact that the ‘evil insurer’ has refused a claim, thus putting the insurer at serious risk of reputational damage. There has to be a high level of trust and understanding between the insurer and the credit card partner, where the credit card provider can be relied upon to fully disclose any limits on benefits at the point of sale, so the customer is fully aware that the travel insurance they are buying may not be as comprehensive as they originally thought.
For an insurer seeking to boost its book of business through an affinity deal, they should be wary of the high expectations that come with such deals from their partner. Pressure to pay a claim that shouldn’t be covered can be a problem, according to Carter: “There can be increased commercial pressures to provide extended cover or terms for senior or influential individuals or in some instances to offer ex-gratia coverage facilities for some members based on commercial pressure.” Furthermore, he pointed out that insurers also need to consider longer-term market pressures when pricing these affinity deals, as some will need to last for two years. “This,” he said, “can impact underwriting and pricing, especially in volatile climates and where an underwriting allowance needs to take into account macro-environmental factors such as currency fluctuation and medical inflation.”
The number of affinity deals around the world continues to rise, according to Leach of Finaccord, because distribution channels for travel insurance are tending to become more diverse, ‘especially in markets in which travel agents and tour operators were previously dominant’.
While designing products for the affinity market may not be everyone’s cup of tea due to the added costs and complexities of underwriting and potentially covering a wider range of risks, the fact that it is more difficult means fewer competitors fighting over the small pond of business. ITIJ readers know that customer churn is always an issue in the retail travel insurance world, but for those who choose to go down the affinity route, loyalty also seems to be less of an issue.
“Affinity group clients tend to be very loyal to their current provider and underwriter," Carter told ITIJ, "as their membership tends to be more stable with an aversion to changing product terms and coverage. This means there is an inertia and barrier for these groups to change provider, allowing closer working partnerships to be developed between the affinity group and travel insurance provider.