What is acceptable cover? Part I

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First published in ITIJ 94, November 2008

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Today’s traveller carries with them all manner of items that need to be included under their travel policy. Alan Berry asks what constitutes acceptable cover in our changing marketplace

The definition of ‘acceptable cover’ depends on what we are actually asking, and what we are looking to achieve. Irrespective of geographical boundaries and culture, the primary function of an insurance policy is to place a customer in the same financial position as they were prior to the loss; it is not designed to benefit either the customer or the insurer. If the insurance policy delivers the above, then surely it must be deemed acceptable.

Not so simple

If the above is not the requirement, then what criteria are we defining as acceptable? Is it the level of ‘sum insured’, ‘service’, ‘value for money’ or ‘cover’? The topic actually raises more questions than answers. If the above is true, then acceptable travel insurance cover in the UK differs from that in Germany, France, the Nordic countries such as Denmark, and elsewhere.

There are many driving factors that determine what is and is not acceptable, but essentially insurance needs to meet the needs, expectations and demands of its local market in terms of product, service and price. If it achieves these aims, it provides the very essence of the reason why insurance evolved. Density of population can be a huge driving factor in how a market evolves. In the Nordic countries, Denmark has a population of around five million. Furthermore, if as an organisation an insurer provides an exceptional product, but fails on service, the product becomes useless. Therefore it is essential that acceptable travel cover be accompanied by excellent service.

Travel insurance is essentially a temporary form of financial protection intended for a short period of time. It is not meant as a replacement for private medical insurance or a home contents insurance policy. But in an ideal world, a travel insurance policy would cater for every individual and would cover every eventuality. Practically, however, this cannot happen: a travel insurance policy cannot cater for every eventuality that may befall a policyholder as the cost to do so would be prohibitive.

"the primary function of an insurance policy is to place a customer in the same financial position as they were prior to the loss"

Acceptability, therefore, is purely a subjective matter. For example, if you surveyed 10 members of the public as to what would be acceptable cover, you could receive 10 different responses. This is due to the fact that we are all individuals with fundamentality different sets of circumstances. Is acceptable travel cover one that provides financial protection against loss, theft, damage, delay, missed departure, personal accident, liability, cancellation, or curtailment for the majority, or should it mean the provision of financial protection for everyone, irrespective of financial situation, gender, health, disability, age or nationality? And is it acceptable to ask a travel insurance provider to provide this?

Unique markets

Let us take the UK’s £760-million travel insurance market. What drives this vast market place? Is it quality of service, quality of product, choice or price? For a start, various market forces determine the framework of products on offer. Competition in the UK in terms of distribution channels and suppliers is huge, as there is a high density of population, a constant quest for market share and elevated customer expectations. Thus, product choice is vast. However, travel insurance is not compulsory in the UK, and it is generally perceived in a negative manner. It is often deemed non-important cover in a country where insurance consumers are predominantly driven by price. The most frequently asked question is not ‘what does it cover?’, but ‘how much will it cost?’, and to this end travel insurance provided in the UK is loaded with fixed-benefit cover, at a very low price. Ultimately, therefore, to the UK consumer, ‘acceptable’ cover is determined by price.

A simple quotation request on a UK aggregator comparison site can return some 450 different products from over 40 suppliers. In reality, 80 per cent of the quotations probably could be questioned as to whether they are providing ‘acceptable’ travel insurance cover in the true sense. In the UK marketplace, the actual product seems to play a small part in the equation due to the public emphasis on cost rather than protection. This is why in the UK you see loaded ‘multi-risk package’ or ‘all-risk insurance', with providers striving to find another ancillary cover to bolt into the product without adding to the overall price.

If we look at the terms and conditions under the personal possessions section of a standard policy, we see that cover is provided for specific events, such as theft, damage, loss and destruction to personal baggage. Inner limits then apply to valuables and single articles. Money cover is also provided. This coverage is based on market needs and expectations as well as commercial risk exposure, but the customer’s understanding of what the personal possession section of a travel insurance policy is designed for is worlds apart from the insurer’s definition. The consumer expects 100 per cent of the claim to be covered and at purchase price. Maybe we come back to whether this is an education issue on the industry’s part? At the end of the day, the insurance company's responsibility is to provide cover for a specific period of time for personal effects up to a designated sum insured with inner limits and an overall maximum limit.

airportwindowHigher expectations

The problems arising in the past five years are due to the fact that, as we are constantly being reminded, the world is a small place. In less than one day, you can literally be on the other side of the world.  Meanwhile, our greater disposable income has meant that our travel plans have diversified away from the typical one-week vacation in a beach resort, and we now travel much further, for longer and more often. We also take many more gadgets with us on holiday than we used to, which begs the question: is it reasonable to expect the personal possessions section of a travel insurance policy to cover all the electronic gadgets, mobile phones, iPods, PDAs, MP3s, MP4s, portable DVD players, portable LCD televisions, sat phones, Blackberries, laptops, camcorders, digital cameras and all the accessories that accompany these items? Add on designer clothes, shoes and bags. The consumer would say: "Yes, this is exactly what the insurance company should cover!"

"if, as an organisation, an insurer provides an exceptional product, but fails on service, the product becomes useless"

The problem is the consumer doesn’t differentiate against insurance company and travel insurance company; they just see ‘insurance company’. However, travel insurance should not be the primary insurance for high-value electronic devices. If travel insurers were to include these items then the cost of a policy would be prohibitive. Having said this, in the UK it is documented that one in 10 households do not have household insurance, meaning the disappointing reality is that the majority of consumers are prepared to leave their belongings uninsured all year. It is not acceptable to expect insurance companies to provide cover for specialist items for a short-period holiday if there is no cover in place for these items for the remainder of the calendar year.

I believe that the level of cover currently offered in the UK market is acceptable. It is not meant as a replacement for home contents cover, nor should it be considered a replacement for any specialist insurance policy.

In respect of cancellation cover, the UK model is based on a fixed benefit ranging from £1,000 up to £10,000. There are exceptions to this with very low cover of £300 up to unlimited, but the majority of products provide cover within these parameters.

Furthermore, the construction of cover under UK wording is acceptable. Standard cover is provided against cancellation due to death, disability, illness, redundancy, burglary, jury service and HM Forces leave cancellation, which in turn is in line with the socio-economic requirements of the UK marketplace. UK policies do not cover cancellation for any reason as do some markets; the reason being that the UK is driven by fierce pricing. If the UK adopted a cancellation product providing cancellation cover for any reason, it would cost more than the multi-risk packages currently available.

However, as I stated earlier, we travel further and to more exotic locations and for longer periods, so is the current format of fixed-benefit cover ‘acceptable’? Again, this model caters for the majority but not for all. It is not uncommon these days for holidays to cost in excess of £10,000 per person.

If we take a look at the local market in Germany and the Netherlands, the system utilised is based around the total trip cost, irrespective of the value of the holiday. It could be €50 or €50,000. This system, known as ‘tariff-based’, provides a solution that works for these local markets, and provides a true risk value to the cover being provided. Could it work in the UK? Yes, it could. Would it succeed? Probably not. The market would likely not understand the concept nor deem it value for money.

"to the UK consumer, ‘acceptable’ cover is determined by price"

Overall, I believe the cover generally made available within the personal possessions section of a policy is acceptable for the premiums produced, provided the intention is that the consumer is placed in the same financial position that they were in prior to a loss, and provided the consumer understands that the insurer, whilst they could cover every eventuality that may befall a traveller, would not sell such a policy as the cost of the product to the consumer would be unacceptable. There will always be argument for a wider cover to be provided, but whilst market expectations are price driven, cover will be the casualty.