A case in point

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First published in ITIJ 89, June 2008

ticketBaggage handling systems have a poor reputation around the world, and travel insurers are starting to notice the effects on their claims ratios. David Craik steps into the fray

People checking in for flights – whether to holiday destinations or to all-important business meetings – have a range of thoughts in their head. Perhaps some are nervous of flying and are hoping that the flight will not be too bumpy, others will already be dreaming of their first exotic cocktail in the pool bar. But, now, a new thought is emerging, and people are giving more consideration to their suitcases full of clothes, books and other valuables that are being carried away on the conveyor belt to who knows where.

Airline passengers, hit by press headline after headline in the last 12 months bemoaning the number of unclaimed bags and suitcases piling up at Heathrow and Gatwick airports, are asking ‘When will I see my baggage again?’ But the problem is universal. In February, the Air Transport Users Council, the UK’s consumer watchdog for the aviation industry, announced the results of an annual survey which revealed that 16.6 bags per 1,000 passengers were delayed on flights operated by major European airlines in 2007. This was up from 15.7 per 1,000 the year before.

The worst performing airline was TAP Air Portugal with 27.8 bags per 1,000 passengers being delayed. British Airways was second with 26.5, while the best performers were Turkish Airlines and Air Malta with 4.5 each. In total, over six million bags were delayed or lost by European airlines last year, with airlines operating connecting flights out of hub airports faring the worst.

In the US, the problem doesn’t seem to be as bad, but it still exists: there, the Bureau of Transportation statistics recently revealed that the nation’s 20 largest carriers posted a mishandled baggage rate of 7.25 reports per 1,000 passengers for the first nine months of 2007. This figure is, however, up by almost 20 per cent from the previous year. SITA, a provider of IT solutions to the air transport industry, gives us another figure. It states that 204,000 bags are lost or stolen annually out of the three billion bags transported worldwide. But what has all this trouble meant for travel insurers? How has it affected them and their customers and claims?

Call to task

According to UK insurance company InsureandGo, 10 per cent of the country’s adults, or 4.75 million people, have had luggage lost or misplaced at airports within the last two years. Unsurprisingly, given these figures, 31 per cent distrust baggage handlers at UK airports. In the US, the maths equate to nearly 3.5 million bags delayed, lost or damaged for domestic airlines alone, says Brad Finkle, president of the US Travel Insurance Association. “If you are travelling to Athens, Greece, and your bag arrives in Athens, Georgia, you have a problem,” he stated.

Managing director of InsureandGo Perry Wilson says that holidaymakers are becoming so concerned about having their luggage lost or stolen that over 30 per cent have, on occasion, packed less belongings so that they can keep their luggage with them throughout the flight. The insurer has seen an increase in claims in the last year excluding the last quarter. The average lost luggage claim was £81.70, but over one in five lost luggage claims was for more than £250. The company paid out nearly £1 million for these claims.

Wilson says the UK policy restricting passengers to one piece of hand baggage on security grounds, which was introduced last year after a foiled terrorist attack, has had a large impact on the number of claims being submitted. “Passengers during the past 18 months have put more luggage into the holds of planes than they usually would, increasing the chances of it being lost or even stolen,” he says. “We welcome the lifting of the restrictions because we believe it will reduce the amount of problems and thus save insurers from hundreds of thousands of pounds in claims.”

"over six million bags were delayed or lost by European airlines last year, with airlines operating connecting flights out of hub airports faring the worst."

Wilson, however, realises that the problems of baggage handling are not just confined to new security rules. He recalls a recent trip to Heathrow, where 170 bags were stacked up near his carousel. “I went and chatted to an official who told me they were unclaimed bags from flights. The man was trying to make light of the situation saying another BA flight had come in and they had found some more bags. I was flabbergasted.” With carousels loaded with bags from two or three flights, it’s not surprising confusion occurs. And this was before the recent baggage handling ‘crisis’ at the airport’s new Terminal 5. Upon opening at the end of March, there were high hopes for the terminal’s new state-of-the art baggage system, which promised to clear 12,000 bags per hour. But, as was reported in last month’s ITIJ, within three days of opening these hopes were shattered as up to 28,000 bags were ‘lost’ as a result of software problems.

Wilson, thus, calls on the travel insurance industry to ‘take these people to task’. They have a contract to deliver a bag from A to B and they are breaking that contract: “Someone should do something about it, be it the general public taking airports to a small claims court or companies such as ourselves making airports do something rather than just sitting on their hands.” The real problem for insurers, though, is the rise in the number of travel claims, the result of which will be a rise in premiums for consumers. “We haven’t got the total run off yet,” says Wilson, “There are a lot of people out there with annual and long-term policies so until that book burns out you may be talking 18 months until we know what the rises will be. Someone is going to take the hit. That could be the insurers but I doubt it.” Many travel insurers have brought travel insurance down to a price where people can really afford it, but the problems of baggage handling have arisen since then, so premiums will again have to rise.

Mixed messages

Premium increases are often needed to cover the cost of extra staff being brought in to cope with the volume of additional claims received, so insurers usually do not make any money from a premium increase. With the rise in the number of claims also comes a more engrained claims culture, where people jump on the claims bandwagon, often exaggerating the value of items lost or stolen, or indeed inventing the loss altogether. As a result, there are now more claims investigations – another cost to insurers. Other insurers have no time to investigate claims properly, so pay out more readily, and as a result are targeted by fraudsters.

It’s not just claims that have been effected by the baggage handling ‘crisis’, however. The nature of travel insurance purchasing has adapted to allay the fears of the travelling public, with more people now taking out policies with baggage cover. “A few years ago we would sell policies just with medical cover because people trusted the airline, but now they don’t trust them,” explained Wilson.

travellersSuzi Fenn, travel product manager at Norwich Union, has a different take on the effect on the travel insurance sector, however. “We are aware of the problems with baggage handling but we have not really seen a significant increase in claims in the first half of the year,” she said, “It’s only two per cent up on the previous year.” The company says its average cost per claim is £240, and the frequency of claims has been static for the last few years. Fenn agrees that more people are beginning to take baggage cover as part of their travel insurance but ‘not in significant numbers’ and not specifically because of the problems related to baggage handling at airports. There is thus no intention at the company to increase premiums.

Fenn says the biggest problem insurers face regarding baggage claims is the time and the administration of liaising with the airlines: “Customers do not report their baggage problems straight away to the airlines, and sometimes that can cause us problems with the airlines as they give us tight time scales to work in.” she states. Resultantly, the company would like to work more closely with the airlines to improve this.

"the biggest problem insurers face regarding baggage claims is the time and the administration of liaising with the airlines"

A spokesperson for Direct Line Travel also states that the company has ‘not seen an increase in personal possession claims’ as a result of the baggage handling problems, so is InsureandGo the only insurer seeing problems?

Paul Birkhead, senior pricing and underwriting manager at Halifax General Insurance, says no. “Since 2005, we have seen a gradual increase in claims concerning lost or delayed baggage. The cost of these claims has increased at even a faster rate,” he says. “This indicates that despite recent press reports of passengers’ luggage going awry, travellers continue to take more and more expensive items on holiday.” Birkhead states that conversely there has been a decrease in personal baggage claims, suggesting that baggage kept with the traveller is safer than being left with the airlines. Again, the company has no plans to raise the cost of premiums for travellers in the light of baggage handling problems, and points out that airports and airline are currently taking some positive steps to reduce baggage problems.

Wanting to retain their customers, then, insurers, in the main, are fighting off any urge to pass on additional costs to customers. Christian Young of AA Travel Insurance agrees that premiums will not rise as a result of poor baggage handling: “It is such a competitive marketplace that I can’t see it happening.” He adds that although media reports do ‘raise customer concerns about baggage insurance, it is difficult to determine whether more people taking policies because of this or because of the more competitive prices being offered by insurers’. Young concedes that there ‘probably has been a general increase’ in the number of claims because of the problems related to baggage handling, but that it is difficult to say. This is despite admitting taking on more staff since the problems arose.

Problem solved

There is certainly a host of mixed messages and uncertainty coming from insurers about the impact on claims and customers caused by baggage handling problems. But where they are all agreed is in the urgent need for airlines and airports to vastly improve their baggage handling abilities. The compensation paid by airlines under the Montreal or Warsaw Convention, or the specific rules governing US airlines, goes some way to allaying the stress of passengers whose luggage has been lost or delayed, but it is the travel insurers that pick up the tab in filling the gaps left by the varying levels of cover offered by the different airlines.

"Airlines and their baggage handling agents should take every possible step to reduce the number of incidences that are putting travellers through a great deal of anxiety and inconvenience"

Birkhead of Halifax General Insurance says: “Airlines and their baggage handling agents should take every possible step to reduce the number of incidences that are putting travellers through a great deal of anxiety and inconvenience.” He is encouraged by February’s launch of a six-month trial between BAA and Emirates airline at Heathrow’s Terminal 3: a Radio Frequency Identification (RFID) luggage tracking trial will tag bags and allow staff to track them at every stage of the handling process. BAA hopes this will improve efficiency and SITA hopes that, as a result, 45 per cent of all airports will have installed this system by 2009.

“It is encouraging to see that BAA is taking proactive steps by investing in new technologies to address this issue,” says Birkhead. “It is hoped that after the trial they will have an idea on possible solutions.” Wilson of InsureandGo is less optimistic: “It’s a good move forward but if this isn’t done globally it’s never going to work. It’s a good waste of money and they should invest it instead in getting better staff.”

Young agrees: “Every initiative has its value but this needs to be done on a global basis to have an effect. This summer will again be a challenging one.”