First published in ITIJ 122, March 2011
Distribution channels for travel insurance have varied in their prominence depending on the country or region in the world where cover is sought. Although a combination of advanced technology allied with good training and (in some cases) competitive pricing has allowed traditional purveyors – travel agents and tour operators – to maintain their superiority in dispensing travel insurance in some areas, there is no doubt that the future ultimately lies online, whether direct from the insurance company or from the airline selling insurance cover along with the flight ticket.
Social, economic and historical reasons all play a part in the development of distribution trends. Taking Europe as an example, there is a multiplicity of distribution within some countries, while others are still dominated by a key distribution route, usually the travel trade. However, generally there have been marked changes in distribution patterns in the last 20 years as European consumers become more financially aware, mainly aided by government regulation, and new travel booking methods with new technology have emerged. Yet cultural buying habits and product type are still key drivers in the sale process.
Where distribution is concerned, the UK travel insurance market can be considered ‘either the most developed or one of the most developed markets in Europe (and globally)’, says Simon Powell, managing director of Travel Insurance Consulting Ltd. He continues: “Broadly speaking, every other country across Europe (and the world) is at some point on the same road map that the UK has already travelled.”
cultural buying habits and product type are still key drivers in the sale process
The road started back in the 1960s with the burgeoning interest in foreign travel and the advent across Europe of package holidays. Travel agents and tour operators were the primary distribution channel for package holidays and thus proved excellent distribution partners for travel insurance. This trend, certainly in the UK, remained the case for the next 30 years; in 1998 the UK travel trade controlled up to 85 per cent of all travel insurance sales. That year, the Office of Fair Trading intervened; the ‘bundling’ of travel insurance into the cost of a package holiday was disallowed and agents became legally bound to display the price of insurance separately from the cost of a holiday. “In the UK, 1998 represented the ‘high water mark’ for the travel trade as the core distribution channel,” says Powell. “From this point forward, its share of the market decreased to around the sub-30 per cent it holds today.”
But the market place had already begun to change anyway. The mid-1980s saw the appearance of insurance providers such as Direct Line with its strong marketing message of ‘cutting out the middleman’. Also banks moved into the market, pricing the product (by simply taking a lower level of commission) to undercut the travel trade. For a while, Insurance Premium Tax gave a preferential rate to policies purchased via insurers (5 per cent) than those bought from travel agents (17.5 per cent). And annual policies (in existence since the 1970s) gained in popularity with the more frequent traveller.
“By the turn of the century, Internet distribution was starting to become more important ... and it was the establishment of two businesses, InsureandGo and Money Supermarket, that went on to shape the market for the first decade of this century,” notes Powell. “It is this adoption of the Internet by countries (or broadband penetration) that continues to shape the distribution channel for travel insurance for the rest of Europe as well, despite some local country idiosyncrasies.”
One such country is France, where standard credit card holders – basically everyone – benefit from included coverage for medical assistance (repatriation plus emergency medical expenses up to €10,000). Holders of premium cards such as Gold Mastercard and Visa Premier can tap the insurer for such benefits as trip cancellation, lost luggage, etc., as well as much higher coverage of medical expenses (€150,000). There are some 4.5 million premium cards in circulation in France; the price paid is about 10 times higher than that for an ordinary card.
It could be argued that the French are ‘over covered’, in that medical assistance is a feature of motor insurance and much home insurance, as well as credit cards and the insurance bought at trip point of sale from travel agents. There are historical reasons for including travel insurance/assistance in credit cards. To promote the move away from cash and cheques to the less costly cards, banks first focused on high income earners; travel protection was viewed as a way to attract this segment. Medical assistance cover as part of general insurance policies stems from French assistance companies being subsidiaries of insurance groups and the need to provide each company with sufficient volume of underwriting cover.
Kazakhstan country law renders an ‘electronic’ policy as not judicially legal
Commissions of between 40 to 80 per cent are the norm for policies sold by travel agents or websites in France. Olivier Domange of Mutuaide believes that as public awareness improves, there’s not much future for such products. “Specialised brokers are spending more and more in training travel agents’ staff to better sell insurance, with the emphasis on how to deal with clients knowing about their other coverage. Surprisingly, there’s no thinking from the travel industry about the fact that reduced commissions may lead to better sales, thus keeping the level of income whilst reducing the price of coverage for clients.”
In central Asia, high commissions are a cause for concern to Dimitrey Nadirov of Interteach. “In Kazakhstan, the main volume of travel insurance is sold via travel agents and operators, at commissions of 50 to 55 per cent. As in other post-Soviet countries, ‘insurance culture’ is still in development and the main distribution channels are the points of sale where a traveller ‘must’ have insurance.” These points of sale are: embassies where travel insurance is a requirement for an entry visa; travel agents and operators who include insurance as part of the package; and organisations arranging education abroad (most foreign universities request students be provided with travel insurance).
The growing recognition of travel insurance’s importance for business trips has resulted in an increased take-up of cover direct from insurance companies, reports Nadirov. Also, businesses providing health benefit schemes for their employees will often include travel cover in the menu. As yet, only one bank in Kazakhstan offers travel insurance as part of credit card facilities and Internet distribution is not widely used. Consumers are reluctant to pay via the Internet, but country law also renders an ‘electronic’ policy as not judicially legal; the only option is to order a policy online and then pay upon delivery of the hard copy.
Is it lack of consumer confidence and/or inertia that still allows for the existence of the third-party distributor? The advantage to the insurance company is that it is able to secure a potentially large source of income with a relatively low outlay as the partner, be it travel agent, bank or supermarket, is distributing the product. And there is no arguing against the customer convenience factor. The downside, apart from the high commissions (ultimately and often unwittingly) met by the consumer, is that the insurer may not receive sufficient customer data to make an accurate underwriting decision at the outset. The insurer may be bound by its distribution partner to quote within the constrictions of an existing product, price or quote process.
“Traditionally underwriting and pricing strategies for travel insurance have stemmed from the historical association with the travel trade, in that many products are still underwritten on the basis of age of traveller, trip destination and trip duration,” says Powell. “Whilst this pricing methodology is simple, it has in more developed markets contributed to the commoditisation of the travel insurance product, both within the industry and the wider consumer environment.”
The products ‘travel insurance’ and ‘medical assistance’ have been completely commoditised, with the ‘brand’ being the card issuer or the main insurance group and not the assistance company or travel insurer, believes Olivier Domange. “The French general public has no idea of the value of cover since it is ‘included’ in the price of the credit card. A plus or minus (depending whose side you’re on) is the important cross-subsidisation between low risk classes (the one third who never travel) and the high risk. With the inclusion system, someone never leaving his home town will pay the same price for travel insurance/medical assistance as an 80-year-old spending half the year travelling the US.”
selling the product directly to the consumer puts the insurer in control
Trying to improve the underwriting result by imposing more exclusions in policies will only lead to more complaints from customers, bad press and – at the end of the day – the insurer spending more, maintains Domange: “If underwriting was done as in other personal lines (motor, home), that is with a price strongly sensitive to the individual, some clients could never buy travel insurance and thus would either not travel or travel uninsured.”
Selling the product directly to the consumer puts the insurer in control – of the product, pricing and customer relationship – and there’s no need to pay a distribution partner. The big disadvantage is that a significant spend may be required for marketing and operational centres to develop the business. The most cost-effective way to enter this arena has now been found in the Internet; the largest travel insurance company in New Zealand, for instance, sells direct to the public, primarily via its website. Clicking choices on screen can result in better knowledge of the client and more appropriate travel insurance cover. One of the advantages of moving to a direct-to-consumer distribution model is that different pricing algorithms can be explored to improve competitiveness; one such is age band narrowing to recognise the different risk posed by customer age type.
The future will see greater dependence on the Internet as payment problems and associated issues are ironed out. But it may well not be a frontrunner in travel insurance provision. This role is likely to be claimed by smart phone distribution; early adopters of this core technology of the next decade will be in a dominant market position. But whether travel insurance will completely go ‘direct’ from the insurer to the consumer either by call centre, Internet or cell phone, is not so certain.
in the future, the Internet may well not be a frontrunner in travel insurance provision
The steady increase in direct booking by travellers could mean that the airline will become the distribution partner of choice for insurance. A little over 10 years ago, British Airways was the first airline to introduce travel insurance ‘in path’ on its own direct booking website. In the last five years, this has become a standard amenity for most airlines’ direct ticketing process and lower cost carriers such as Ryanair and EasyJet have implemented sales strategies that have travel insurance prominently featured in the ticket booking process. Last year, Latvian company airBaltic signed a global agreement with ERV, part of the Munich Re group to distribute travel insurance as part of its flight booking process. This trend has spread to local air carriers in North America (where Mondial USA has captured a lot of the market) and elsewhere.