Are ‘building block’ travel insurance policies the way of the future? Robin Gauldie investigates
In a consumer society that offers consumers great flexibility when buying air travel, mobile device contracts, car rental or white goods, what is deterring the travel insurance sector from offering similar flexibility? Mobile phone users can pick and mix price plans that reflect their widely varying talk time and data needs. Within the travel industry, consumers have become accustomed to flying with ‘no frills’ airlines that charge separately for services such as checked luggage, onboard drinks and snacks that airlines traditionally bundled into the fare, whether the passenger needed them or not. That pricing model is trickling through into the accommodation sector: the new Tune Hotels chain is expanding worldwide with rooms that offer the basics of bed and bathroom, but offer a wide menu of additional services, such as high-speed WiFi, each for an additional charge. The car rental industry has increasingly adapted to offer its users flexibility when selecting liability insurance and collision damage cover, recognising that renters may already be covered against some eventualities by other travel insurance or home insurance policies.
Are travel insurance providers lagging behind other sectors of the travel industry when it comes to offering clients the ability to build a policy that suits their needs? Just like conventional airlines, most travel insurance policies bundle in elements that the client may neither want nor need, but cannot opt out of.
Some insurers have experimented with ‘building block’ policies that allow buyers to select the cover they need from a menu of options. When
UK-based M&S Money launched its customisable travel insurance policy in October 2011, director Crawford Prentice said the new policy would enable customers to tailor their insurance to their holiday, paying only for the cover they need. “One size doesn’t fit all when it comes to holidays, and the same applies to travel insurance,” Prentice said. The M&S policy replaced its Premier and Standard options for single and multi-trip policies with a single product that offers flexible cover options, including varying levels of excess, cancellation and curtailment cover, baggage and trip limits, and optional winter sports and travel disruption cover. The product has proven popular with customers, M&S Money says. In New Zealand, the online travel company House of Travel offers a ‘mix and match’ policy provided by Allianz Australia. It allows clients to customise the level of cover they need – from nil to a maximum figure for luggage and personal effects and additional expenses, or for key elements such as cancellation, overseas medical care and repatriation, an unlimited sum. They can also buy an ancillary benefits pack and set the level of excess they wish to pay in the event of a claim. Australian insurer Worldcare Travel Insurance, Columbus and All-Travel are other companies offering ‘build your own’ policies.
Why don’t more companies latch on to what could be an effective way of empowering consumers? Key stumbling blocks include pricing, administrative complexity, and responsibility, according to some industry representatives. Others point out that they already offer a level of flexibility within their conventional policies that meet the demands of customers, without compromising on the essentials. It is conceivable that offering custom-made policies alongside ‘bundled’ cover could leave insurers with higher-risk travellers in its ‘bundled’ risk pool, thus pushing up the cost of premiums for these traditionally low-cost products. Insurers, though, say this is unlikely. It could also be argued that by making customers read the small print in advance, rather than after the event, custom-made travel insurance policies might make them more aware of what cover they have – or have not – purchased. It might make them more aware of the importance of adequate medical cover, as well as cover for cancellation due to extreme weather or political events. And it might make travellers more inclined to insure for holiday activities in which they choose to take part on the spur of the moment, but for which an ‘off the peg’ policy may not provide cover. With an ever-growing menu of holiday activities on offer at holiday destinations worldwide – from bungee-jumping to diving with sharks – covering such spontaneous decisions is, insurers acknowledge, a growing headache for the industry, as David Vincent of AXA noted at a recent ITIC panel discussion.
He also suggested that the travel insurance sector as a whole needs to place more marketing emphasis on benefits. “The market is too price-focused and needs to be more benefit focused,” Vincent said. Could policies that let the client choose the policy elements that are important help to educate customers about the fact that it shouldn’t be all about price, and shift the sales emphasis away from the bottom line?
Custom-made policies may add to an insurer’s costs and also be intimidating to less confident consumers, who may feel that they are not best equipped to decide on the level of cover they really need. Julie Constable, technical underwriting manager at LV= travel insurance, argues that clients do not necessarily know what they want in terms of cover, so claims on a ‘pick and mix’ policy that go to arbitration may raise the issue of where responsibility lies when customers have chosen their own level of cover, rather than taking advice from the insurer via a call centre.
Arguably, though, such policies might make it easier for insurers to defend their claims decision in front of an ombudsman by showing that clients insured under ‘do it yourself’ policies have chosen their own cover options. “The potential advantages are that the customer has to think more carefully about whether they want the cover,” said Julie Constable. “They have to make an active decision and as a result of that, it is probably easier for the insurer to decline a claim if the customer doesn’t take out the cover, particularly if the cover is sold online.”
But that could cut both ways. “If the customer is simply asked if they want the cover in a call, and the customer says ‘no’, it is easy for the customer to argue at the point of claim that they didn’t take it out because they didn’t understand what the cover was for, and had that been explained, they would have taken the cover,” she added.
Where this occurs, Constable says, an arbitrator such as the UK’s Financial Ombudsman Service (FOS) might find against the insurer on grounds of careless misrepresentation, if it could be shown that cover would have been provided for an additional premium. “Even if the policy is sold online, the FOS takes the view that the information must be easily available to the customer and insurers can’t rely on the customer clicking help icons to find out what the cover is about.” In time, she says, this could result in customers opting not to take the cover, then adding it retrospectively, which would cause even more headaches: “This would cause insurers issues with pricing and customers taking the cover out at the policy inception could end up being disadvantaged by higher premiums for that cover.”
Enabling customers to make an informed decision on what cover to take could mean much lengthier calls to call centres, she points out, so an online operating model lends itself more to this sort of process than a contact centre channel, where the cost of administering the calls would impact premiums.
Mark Allsopp of AIG is, in principle, attracted by policies that can be built around individual needs. However, like Constable, he warns that customers and insurers can struggle with the complexity of the process, and says that it will be up to the industry to educate consumers if such policies become more widespread. The process of educating customers, and helping them to decide what options to choose, could itself be overly time-consuming and costly for insurers, adding to costs. And it could deter some clients from choosing ‘DIY’ travel insurance. Many clients may simply prefer to buy a less complicated conventional, off-the-peg policy rather than the tailor-made option.
Already out there
Insurers also point out that many existing travel policies already allow customers significant flexibility in terms of choosing their required levels of cover, and give them considerable leeway to opt out of cover they may not need, or select additional cover, for example for activities such as quad-biking or scuba diving. Mark Allsopp cited the Bronze and Platinum brands offered by his company.
“Many providers already offer cover deletion options for cancellation and/or baggage sections and excess waiver options,” says Linda Norman, group client relationship manager at claims and assistance provider One Group. “Given how cheap travel insurance generally is already, and given also that the vast majority of the risk relates to medical expenses, which should never be excluded, I’m not sure deleting other sections would bring the price down by a significant enough amount to be particularly attractive to the public.”
Julie Constable, too, says that there may be little significant price advantage for customers who opt not to take cover for ‘non-core’ policy elements. Furthermore, what about insurers’ legal obligations? “There is an obligation for insurers to make sure the cover meets the customer’s needs, and the cover should be explained at the point of sale, regardless of whether that is online or via a call centre, and regardless of the type of policy,” she points out. “I’m not sure how having a selection for ‘medical cover’ would make someone more likely to understand what the medical cover is about, and I doubt customers would read the information online if it was a selection any more than if it was embedded cover.”
It’s not just customers clicking ‘yes’ when they haven’t read the policy conditions online, either, Constable added: “Similarly, whether customers are actively listening while on the phone is difficult to ascertain and having this as a selection could result in travellers inadvertently not selecting a very important part of the cover,” she warns.
“For some covers that are not ‘core’ to a travel insurance policy, it may be that it makes sense to have the cover as an add on, as not all travellers will need the cover because of the type of trip they are going on. However, where the cost of providing the cover is low, insurers will often just provide it as it is more cost effective for them to do this and ultimately all their customers then have the reassurance of the cover,” Constable says.
For many travel insurance companies, then, it appears that the obstacles to offering ‘building-block’ policies – primarily the cost and complexity of administering them and the risk of clients failing to choose the right levels of cover – outweigh the potential advantages for clients and insurers, especially in an economic climate in which price, rather than benefits, remains the deciding factor for many buyers. It may be that ‘do it yourself’ travel insurance is an idea whose time is yet to come – but it seems unlikely to take the industry by storm any time soon.