Financial failure – who should pay?
Graeme Trudgill, BIBA‘s technical and corporate affairs executive, is looking to insurers to close the protection gap
First published in ITIJ 109, February 2010
Graeme Trudgill, BIBA‘s technical and corporate affairs executive, is looking to insurers to close the protection gap
Members of the British Insurance Brokers’ Association (BIBA) are at the sharp end, both selling travel insurance policies to customers before their trip and then helping to pick up the pieces if there is a claim. One area of travel insurance that is becoming increasingly talked about is financial failure cover, protecting independent travellers against the financial risk of airlines and end suppliers going in to liquidation. The recent demise of Globespan has only heightened concern, and Defaqto, a financial research company, believes that only one in six policies cover financial failure, leaving customers open to potential losses and no solution.
So who should pay?
The travel industry or the insurance industry? An interesting dilemma and one we will look at now. In a global recession there are inevitable failures, so what are the current remedies for the consumer?
If they have booked through an Air Travel Organisers’ Licensing (ATOL) bonded travel organisation for an air ticket plus another element of the holiday then they should be protected, they will receive an ATOL confirmation invoice or receipt which gives the name of the firm and the ATOL number. This can be checked on the ATOL register. The ATOL also protects against the liquidation of the ATOL holding firm. However, it is estimated that at least 50 per cent of trips from the UK fall outside of the Government’s ATOL arrangement and this is increasing as people book their trips directly over the Internet.
Defaqto, a financial research company, believes that only one in six policies cover financial failure
If they paid by credit card they should be able to claim the cost of the lost tickets from the credit card provider under section 75 of the Consumer Protection Act. However purchases usually need to be in excess of £100 and additional costs to return home are not covered. Some travel insurance policies will cover it.
What has BIBA done and what do we want to see?
BIBA, in partnership with Tokio Marine Europe Insurance Ltd and International Passenger Protection (IPP), believes it is important to include this protection for the unsuspecting customer and introduced it in 2009 to our flagship ‘BIBA Protect’ policy; this now covers independent travellers against the financial risk of airlines and end suppliers going into liquidation. The policy provides protection for travellers who are not protected by the Government’s ATOL arrangement, which is funded through a £2.50 levy for those who have booked their travel arrangements through an ATOL travel organisation.
Purchasing habits have changed with numerous airlines, hotels and other travel companies encouraging people to buy directly from their websites and with the growth in popularity of social media websites dedicated to independent travel (e.g tripadvisor), the ‘protection issue’ looks set to escalate. Is it an issue though – since the recession struck and demand dropped, we have seen more than 60 airlines collapses from the start of the economic downturn including SkyEurope, XL, Globespan, Zoom, etc.
BIBA would like to see ALL travellers protected and is encouraging insurers to introduce financial failure cover as it did with its terrorism cover campaign a few years ago. Just because a customer has constructed and paid for their holiday separately should not mean they are not entitled to compensation.
Close the gap
As travel insurance covers so many different perils, the customer sometimes thinks they can claim for just about anything that goes wrong on their holiday. This is why BIBA wants to see insurers closing this gap here as many of them have done with terrorism. We now believe about two thirds of insurers cover claims from acts of terror, whereas back in 2007 a BIBA survey showed 78 per cent had a terrorism exclusion of some kind with 49 per cent having a total terrorism exclusion. This shows how the market can adapt to a changing world and we would like to see a similar response with financial failure.
In this day and age, it is unacceptable for a consumer to be stranded abroad with an increased cost to return home or have their trip cancelled before it even started. It is not just airlines BIBA is concerned about, what if the hotel is bankrupt? We would like to see bankruptcy cover for all of the various components which make up a holiday. The BIBA policy does not stop at airline protection, it extends to cover the financial failing of all end suppliers of the trips including hotels, car hire companies, villa owners, excursion providers and theme parks. It therefore gives travellers real peace of mind.
BIBA would like to see ALL travellers protected and is encouraging insurers to introduce financial failure cover as it did with its terrorism cover campaign
It has been suggested by some that the ATOL fund could be extended across all travel bookings, making the extra duty payable on areas currently outside of the existing arrangements – including booked flights. Thereby the travel community takes care of their own. Certainly, the entire insurance community has to pay a levy to the Financial Services Compensation Scheme, so surely it is only fair that the whole travel sector pay their contribution to an appropriate travel industry fund?
But what would be the unintended consequences of this? There is a concern that with an industry already struggling, the effects of a new levy would be a knockout punch for some organisations. This is a worldwide industry, so it would be difficult – particularly during a worldwide recession – to predict how much to budget with so many global failures. This is evident from looking at the ATOL deficit of £46.5 million after its first year in operation.
BIBA believes the best solution in this changing market is for the insurance industry to do their part and include financial failure cover, as some insurance brokers have done for many years. We need to move away from the bare bones ‘skeletal’ economy cover that bites the consumer when it comes to claiming and make sure that we are there to help when we are called upon to do so.
Comparison websites can be a further complication, their very nature drives the premiums down, meaning insurers strip out cover to a bare minimum to ensure they are top of the search results page, also there is no ‘advice’ (a suitable recommendation) given to the consumer over the Internet. Travel insurance is one of the most complicated personal lines insurance policies available with many different heads of cover, specified perils (and many not specified) and exclusions. Unless financial failure cover (or lack of) is brought to the client’s attention at point of sale it is unlikely they will think to ask. Therefore there is a responsibility on the insurance seller to clearly highlight if this cover is or is not included. As the Financial Services Authority (FSA) say – giving sufficient information to the customer to make an informed decision. Knowledge of what is, and what is not, government protected is also at best sketchy even within the travel community, let alone among consumers. It should not be necessary to read a rule book when purchasing a ticket to work out what the protection is in place, it should be clear at the point of sale.
Aim high
BIBA wants to see better information for customers and greater coverage among travel insurance providers. That way the principles of insurance and risk transfer works best, with the costs spread over the wider community keeping the price low and competitive, removing the larger financial risk from the innocent victims and giving peace of mind to all. Insurance is a constantly evolving process, we know many insurers would be concerned at taking on this risk, especially in these difficult times, but there are specialist providers who understand the exposures and can offer the insurance community a solution. Bearing in mind the fact that travel insurance premiums are so low we do not believe any increase in the premium to accommodate this should have a negative impact on sales and it is certainly a good ‘peace of mind’ selling point for the customer.
This problem is not going away and insurance brokers always push the boundaries, we would love to set down a challenge to our peers at the Association of British Insurers to encourage greater take up of financial failure cover from their members.