First published in ITIJ 94, November 2008
Stewart Farr recaps on the latest financial market turmoil, and asks what effect it could have on travel and travel insurers around the world
In retrospect, mid-October 2008 could turn out to be the watershed forever enshrined in future monetary treatises and economic textbooks; the time when governments around the world acted in tandem to shore up ailing banks and solve lending crises as well as guaranteeing, at various levels, investments and saving deposits. Global fiscal meltdown looked to be averted but recessions of varying severity were consequently predicted for many countries caught up in the credit crisis.
This may or may not be the case because, at the time of writing, world share prices are still yo-yoing (with a greater tendency to plunge rather than soar) and financial headlines seesaw daily from optimism to abject gloom. Nobody, it seems, is certain that the Great Bank Bailout will actually work and recession appears much more a probability than a possibility. We may be spared a repeat of 1933's Great Depression, but the ramifications of a recession are worrying enough. If corporates are not doing business, their executives don't travel; if consumers lack spending power or become unemployed they don't do holidays. In both cases travel insurance becomes a casualty.
Earlier this year, in March, research on travel and tourism from Tourism Satellite Accounting (TSA), provided by the World Travel & Tourism Council (WTTC), anticipated a slowdown in the industry during 2008 but concluded that prospects were bright for the next 10 years. This year tourism and travel was expected to generate almost $8 trillion with a level of $15 trillion expected by 2018.
This, in essence, meant a slowdown in 2008's annual growth rate to three per cent (compared to 3.9 per cent in 2007), reverting to mature but steady growth from 2009 and averaging out at 4.4 per cent per annum, supporting 297 million jobs and 10.5 per cent of global gross domestic product by 2018. WTTC President Jean-Claude Baumgarten noted that ‘challenges come from the US slowdown and the weak dollar, higher fuel costs and concerns about climate change’ but that continued strong expansion in emerging countries meant that the industry's prospects remained bright into the medium term.
The growth rate in the mature markets of the Americas (2.1 per cent) and Europe (2.3 per cent) was considered by TSA to be falling below the world average whilst the regions of Africa (5.9 per cent), Asia Pacific (5.7 per cent) and the Middle East (5.2 per cent) were exceeding it. “In particular, China, India and other emerging markets are still growing rapidly, which will increase both business and leisure travel, while many countries in the Middle East are undertaking massive tourism-related investment programmes,” explained John Walker, Chairman of Oxford Economics.
Although the US continued to maintain its pole position as the largest travel and tourism economy (total demand accounting for more than $1,747 billion per annum), TSA research noted: ‘In 2008, the credit crunch is leading to a marked slowdown in US economic growth and is likely to restrict the business travel of those working in financial markets.”
Some six months later, that comment at best holds true, or at worst could be a massive understatement of what financial calamities might now face the travel and insurance sectors. Since March, an awful lot has rocked the world's financial boat, which is now listing very close to the waterline. There's been the US Treasury's bailout of Freddie Mac and Fannie Mae, the non-bailout and subsequent collapse of Lehman Bros, the Federal loan – to avoid bankruptcy – to world-leading insurer AIG, the crashing of several smaller US banks and the seizure of a much larger one, Washington Mutual, by the regulators.
We may see the importance of snowbirds in the UK travel insurance market rise to rival the Canadian and North American experience
In Europe, there's been the UK's financial debacle of RBS, HBOS and Lloyds TSB; the country's banking system is reportedly being thrown a £500 billion lifeline (courtesy of the taxpayer), which compares favourably with the $700 billion earmarked by the US Treasury to rescue Wall Street. The Dutch-Belgian Bank Fortis NV has also succumbed to losses on credit derivatives, causing China's Ping An insurance company to record a $2.3-billion loss on its stake in the bank; this was a setback for one of the most ambitious foreign acquisitions to date by China's state-owned banks and insurance companies. Another Asian victim of the worldwide financial turmoil, Japan's Yamato Life Insurance, went bust with debts of $2.7 billion.
By the end of the first week in October, panic had swept through the world financial markets, wiping $2,500 billion from share values. The Dow Jones index dipped below the 10,000 mark for the first time in four years, while the FTSE 100's fall of eight per cent was the biggest since Black Monday in October 1987. The Icelandic banking system appeared to implode and banks across Europe cast aside strategic planning as they sought to ward off possible bankruptcy. The BRIC stockmarkets (Brazil, Russia, India and China – representing many of the emerging markets for travel and tourism) crumbled as investors suffered their worst one day losses in history.
The International Monetary Fund (IMF) stepped forward to announce that the world economy was in the grip of a severe downturn and may soon sink into recession because of the credit crisis and increasing fiscal chaos. The price of oil continued its downward trend and metal prices – an indicator of manufacturing resilience – also fell significantly.
Governments step in
Governments provided a swift response. President Bush issued a direct plea to Americans to hold their nerve as shares crashed further while Prime Minister Brown called for concerted global action. French President Sarkozy and German Chancellor Merkel agreed a joint pledge with the 13 other leaders of the eurozone to recapitalise banks and guarantee lending between them. RBS was taken under state control by the UK government at a cost of £20 billion and there seemed every likelihood of a nationalised HBOS and Lloyds TSB. By 14 October, the sunshine had broken through; markets soared at the perceived world action to rescue banks. Global shares made their biggest one-day advance for 19 years; the Dow rose by 11 per cent and the FTSE 100 closed up more than eight per cent.
Two days later, normal service, i.e. maximum economic gloom, was resumed. Shares crashed again amid fears that a co-ordinated bank bailout would fail to avert a global slump. Ben Bernanke, Chairman of the US Federal Reserve, stirred it up by telling Americans there would be no quick fix for their ailing economy. In the US, retail sales were reported to have suffered their worst fall since 1992, dropping at twice the rate analysts had expected.
An eight-per-cent share fall was recorded on Wall Street, and London and Paris both suffered seven-per-cent falls. The Dax in Frankfurt lost more than six per cent and Tokyo's Nikkei was set to tumble by 11 per cent. Companies that underpin the global economy – industrial groups, manufacturers, oil producers (the oil price fell to below $75 a barrel) and mining corporations – featured heavily among the market casualties. Near-certain global recession, bringing the Far East into its maw, was forecast by Rio Tinto's warnings of a fall-off in demand for metal from China's mills and factories. Fears of rising unemployment spread across Europe; in Britain it surged at its fastest rate for 17 years. In the words of one market commentator ‘the banking rescue act is a year late’.
The following day saw the $60-billion bailout of UBS by the Swiss government, and a further slump in the FTSE 100 revealed British insurers amongst the hardest hit. Prudential shares fell by almost 20 per cent and Aviva's by almost 10 per cent. Ratings agency Fitch reported that the sector may be the next casualty of the crisis with a ‘noteworthy ramp-up in losses to be reported by many insurers’.
Days count: the world's economic future, or at least headline predictions of its fate, could have worsened by the time you read this. However, even if confidence wins through, markets pull away from the brink and unemployment is contained, the travel insurance industry has to be realistic about future growth. Until the momentum intensified in September/October, insurance companies had managed, by and large, to steer clear of the credit crisis carnage. Now the spectre of mass unemployment could leave a big dent in the take up of holiday and travel plans (albeit that a long-term fall in oil prices would work through to reduced airline costs and charges).
Linda McGee, president of MEDEX, a US provider of insurance and assistance services, agrees there is a chance that an economic downturn may result in fewer leisure travellers and thus fewer travel insurance policies. “The potential decrease in international travel is different than what we experienced post 9/11, when people didn't travel due to a fear for their safety – this time, people might choose not to travel because they can't afford to.”
In general, the company feels that many Americans still do not know what risks may await them overseas. To many of them 'travel insurance' means trip cancellations and baggage protection, and they often neglect to protect and prepare for medical or security needs. “With Americans focused on financial matters, the high-dollar risk involved in not having medical coverage and the affordability of most travel medical programmes may actually convince travellers who previously did not purchase a programme to do so. The opportunity to create smarter travellers, who are more prepared before they go, is something that will benefit the industry in the long run,” said McGee. “With our corporate business, we do not believe this financial crisis will have a long-term adverse affect on – nor does it eliminate the need for – business travel in a global economy,” added Mike Roban, vice-president of sales for MEDEX. He commented that mid-size companies may have to cut back on international travel, but believes that corporate travel departments may be more concerned about gas prices than the financial crisis as it relates to travel budgets.
With Americans focused on financial matters, the high-dollar risk involved in not having medical coverage, and the affordability of most travel medical programmes may actually convince travellers who previously did not purchase a programme to do so
Fiona McDonald, head of underwriting for Europ Assistance in the UK, also sees a couple of tiny rays of sunshine for the travel and travel insurance industries between all the gloom. “There is an ancient Chinese curse that says ‘may you live in interesting times’. I think that pretty much sums up the times we are now living in,” she says. Between stock market tumbles, banks being bailed out by governments and tour operators/airlines going out of business, the last several weeks have been very interesting indeed, muses McDonald. But the British travelling public are apparently reluctant to give up their summer holidays. Even when money is tight, she says, many families still seem to manage to save up their pennies and pounds and get away in the summer. Reductions in capacity for 2009 mean that remaining tour operators in the market are maintaining a healthy level of bookings. Air lines are also being helped by the recent drop in the price of oil, the rise in which pushed some over the brink earlier in the year.
“So, for travel insurance, the prospects for the next year may not be as bad as some may think,” says McDonald. “We may see some decline in the sales of annual policies as people give up their weekends away and winter holidays, but this may be compensated for to some extent by a rise in the sale of single-trip policies.” And the market for older customers may continue to rise in importance. Those people who have been fortunate enough to retire on index-linked pensions may be the only ones who can still afford to travel regularly. This is particularly true in the winter, when it may be cheaper for such pensioners to fly south, saving money on fuel bills (which have risen dramatically this year) and making the prospect of a long period in the sun financially attractive. “We may see the importance of snowbirds in the UK travel insurance market rise to rival the Canadian and North American experience,” says McDonald, “If that’s the case, underwriters will need to get their pricing right.”