Playing fair?

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ITIJ 164, September 2014

In light of reports that question whether or not older travellers are paying a fair price for their travel insurance, Tony Brown looks in detail at the current status quo, using data from the UK’s Travel Insurance Facilities Group, and refutes the argument that travellers of a certain age are paying over the odds for their cover (first appeared in ITIJ 164, September 2014)

Age is an integral part of pricing all areas of travel insurance, and understanding the claims value and frequency of claims is of vital importance when rating each product. In addition to this, prices have to be set to compete within the overall market, whilst ensuring a book of business runs profitably. Most companies’ pricing strategy also involves the consideration that prices increase with age as smoothly as possible, so customers do not incur sudden large changes in price when moving into a new age bracket.Figure 1

The approach to rating travel insurance has become much more statistical over the last 10 years, as a result of changing distribution channels and better data capture. Historically,  in the UK, travel insurance was sold in large brackets of age, often 18 to 65, 66 to 74 and 75 and over. The shift from the majority of sales being handled by travel agents and tour operators to a more direct approach to consumers has increased the opportunity to have a wider range of age brackets and to differentiate the one-size-fits-all travel insurance product to multiple types of travel insurance, including cruise, long stay, activity and impaired. It is important, therefore, to not just look at the entire book of business, but also to identify how different product types perform and the relative impact of these on the overall book of business.Figure 2

In order to allow this, the following data has been split into different product ranges. For the purpose of this piece of work, these include single trips, annual multi trips and cruise policies. We have not included long stay and activity as these products are biased towards the younger age profile.

Single trips

Our single trip data does indicate a decrease in the claims cost per policy in products purchased by 66 to 80-year-olds when compared to 56 to 65-year-olds. However, it is also clear that there is a decrease in the average policy price for customers in this age range. This is clearly different from the data provided in the article published in The Telegraph newspaper (see ITIJ 163, Age – is it just a number?). The cause of this premium decrease is mainly linked to the restriction of trip durations for customers in this age bracket (see figure 2), with most products limited to a maximum duration of between 31 and 45 days. It is clear from Figure 1 that there is strong correlation between the average policy price and claims cost per policy, however.


Annual multi-trips

Our annual data does not support the theory that these policies are more profitable in the older age groups due to annual policies being taken out for convenience (see ABI spokesman quote in ITIJ 163). Our data shows that the claims cost per policy increases significantly in the 61 to 75 age group, particularly when compared to the average premium (See figure 3).

Cruise tripsFigure 3

Finally, our cruise product data does not show this same correlation of decreased cost per policy in the 66 to 80-year-old age range. Generally, between the age of 46 and 90, a relatively uniform increase in claims cost per policy is seen and this increase is reflected in the increasing premiums (See figure 4). This is further evidence that placing limits on the maximum trip duration is the reasoning for the decreased cost per policy on single trips, as this restriction is not reflected on cruise products.

Combined dataFigure 4

When all the data is pulled together, the pattern displayed does show a decreased cost per policy in the 66 to 80-year-old age range compared to the 56 to 65-year-old age range, as also identified by ABI research. However, when looking at our data, this decrease is matched by a decrease in premium within these age groups. The data supplied by the ABI and our own data contradicts the article published by The Telegraph, which suggests that 81 to 85-year-olds have a lower claims cost per policy than those aged 66 to 80.

Summary

The data makes it clear that as much product differentiation as possible is the key to ensuring that pricing is fair to the consumer and sustainable within the increasingly competitive marketplace. Despite the decreased claims cost in 66 to 80-year-olds, we continue to feel that these age brackets are a higher risk to insurers; however, our data shows a decrease in the cost per policy, due to protection put in place in terms of the maximum durations and appropriate medical screening measures. As the population increases in age, greater health risks naturally occur. Having a screening tool that can produce results specific to the customer’s risk profile, and that is not generalised by broad parameters of data, enables us to make the product as tailored from a pricing and terms point of view as possible.

Our experience leads us to agree with the ABI’s view that the distribution in cost is much higher for older customers, which has a knock-on effect on the overall average premiums but, by adopting this individualistic approach to our risk assessment, we can offer the correct product with the most appropriate cover and rates to the widest range of customers.