Keep on moving
Is the steadily increasing price of travel insurance in the UK going to bring a corresponding increase in focus on the level of cover? David Craik spoke to those involved in the industry to find out their view
First published in ITIJ 121, February 2011
Is the steadily increasing price of travel insurance in the UK going to bring a corresponding increase in focus on the level of cover? David Craik spoke to those involved in the industry to find out their view
Just before Christmas, customers of the UK’s largest travel insurer, AXA, received the unwelcome delivery of a ‘double-digit’ increase in their insurance premiums. This pre-festive blow, which includes rises as high as 10 per cent on some schemes, was primarily driven, according to AXA Direct underwriting and pricing manager Roman Bryl, by soaring medical costs. “About three or four years ago, medical made up about 40 per cent of our overall claim costs. Today, that’s over 60 per cent,” he says. “Large losses resulting from claims over
£50,000 are on the rise.” Contributing factors to the increased costs include an ageing population, more expensive medical technology being used in patient treatment and the
popularity of new holiday destinations such as Egypt and Turkey. “We are seeing the problems there that we have seen in Spain, with private clinics popping up around the most popular tourist areas,” Bryl states. “Anecdotally they are preying on tourists with travel insurance policies and overcharging.”
The 2.5-per-cent hike in Insurance Premium Tax (IPT) to 20 per cent as of 4 January was another factor in AXA raising its premiums. “Unfortunately, there was no room to absorb these in our margins,” explains Bryl. AXA is not an isolated case.
Industry issue?
AA Travel Insurance is also hiking its premiums by around 10 per cent depending on product type. “We’ve seen some significant recent events such as the British Airways strike action, snow delays and the Icelandic volcanic ash cloud add to the cost of meeting claims,” explains a spokesperson. “Health and accident-related costs are also on the up.”
Mondial Assistance has hiked up the price of some of its policies by as much as 20 per cent over the course of the last few months. “The average travel insurance premium is much too low and most travel insurers aren’t making money,” says UK chief executive Mike Webb. “It’s a little bit crazy and it means insurers don’t have any choice but to raise premiums.” Webb says the amount of increase varies from scheme to scheme and is dependent on where customers are travelling to, their age and the type of holiday they are going on. “We are doing it to maintain our market competitiveness,” he explains. “You hope that individual factors that are affecting the costs will go away or be negated, but the problem is that so many
factors have hit our profitability. These costs are here for the long-term.”
Webb cites rising fraud and medical bills in the US, Egypt and Turkey as being the main cost drivers, but these problems are compounded by the pound's fluctuating exchange rate against the euro and the dollar. “Perhaps you take it on the chin for a year or a couple of years and hope the pound will come back, but you can’t continue to take it on the chin,”
he states. “Holidays are also more expensive now and more people are taking them. In the continental model, the [price of ] insurance is a percentage of the holiday cost. That is much more sensible and reasonable than here [the UK] where you pay the same insurance on a £5,000 holiday as you do on a £500 holiday. We don’t get that fairer balance between risk and price.”
the amount of increase varies from scheme to scheme and is dependent on where customers are travelling to, their age and the type of holiday they are going on
An exploration of comparison websites suggests that, on average, a premium increase of between 10 and 15 per cent is being imposed across the board by travel insurers. However, an industry source tells ITIJ of independent quarterly research, which revealed that in December 2010, the last month accounted for, premium increases were restricted to what the source describes as ‘non-travel insurance’ specialists. So those firms whose raison d’etre is providing travel insurance held their premiums rather than increasing them. Indeed, Martin Rothwell, managing partner of World First, says that apart from planning to pass on the IPT rise at the end of January, it will not raise premiums further this year. “Our insurers, the Professional Travel Insurance Company, have supported us,” he says.” We have fared well in the downturn, picking up new business as large general insurers consolidate and cut costs. Our business is sustainable. We price our product at a realistic level where other insurers may not have been so realistic.” He added: “A lot of insurers were keen to jump onto the aggregator sites as there was a lot of volume there. But these were cheap products and insurers were making a loss on them. They have realised that now and raised their
prices.”
Columbus Direct says it has already applied the IPT increase to premiums, but has held the prices on a number of ‘key and popular’ policies such as its annual individual to Europe option at £30. A spokesman says: “We understand that the ash cloud and strikes had a big impact on the industry last year. But we were well placed in that we offered an emergency travel upgrade of £20 which covered all this for our customers. We did okay last year and we don’t foresee a need to raise premiums this year. Our history is about offering the best value that we can.” Intermediary online travel insurance specialist Essential Travel is another holding its rates this year, apart again from the IPT rise. “Hospital bills abroad are rising. It is no longer £2,000 for a broken leg it’s £3,000. We saw claims from hazardous sports on holiday, such as bungee jumping, rise 4.5 per cent last year. Everything is going up except for the insurance premium itself, but as a specialist we are trying to keep the price down to retain customer loyalty and stay in line with our online competitors,” says head of sales Stuart Bensusan. He adds that a good year for the fi rm working off a ‘set margin and not working with the aggregators doing silly pricing just to get volumes’ has also enabled it to stem any rate rises. “We are not the cheapest product, but we are one of the mostcomprehensive,” he explains.
But it would be wrong to conclude that specialist insurer means ‘good’ and non-specialist insurer means ‘bad’ when it comes to higher premium rates. It is not that black and white.
Grey areas
Take the Royal Bank of Scotland, for instance, which says it has no plans to increase travel insurance rates at present and the Post Offi ce, which is freezing its prices on both annual and single trip policies until 27 March this year. Neither of those would be called a specialist. Some industry insiders describe an almost phoney war at present with travel insurers either declaring a rise, considering one or delaying the inevitable. No-one, they say, is free of rising claims costs and every insurer, even the specialists and especially the aggregators, will have to raise premiums in the end. “The market has bottomed out. It’s been too cheap and insurers are making losses,” says David Walton of broker Bromwall. “You can get travel insurance off the supermarket shelf now and it’s beginning to get a bad name. It needs to get back to a more realistic or sustainable level and insurers, especially the cheapest, will have to follow AXA’s rise or disappear.”
Peter Hayman, director of UK-based P J Hayman Travel Insurance Specialists, adds: “Scheme holders are being beaten over the head with rate rises and rightly so because the rates have been artifi cially too low for too long. Just do the maths. Claims costs have gone up whilst premiums have gone down. Insurers’ margins are too thin and sooner or later schemes which are losing money will have to be brought to heel. They all have to do it.”
So what effect will and are insurance premium rises having on customers? Will they still see travel insurance as a value for money product or will we see more travel abroad uninsured? The Association of British Insurers is concerned that a ‘climate’ will be created where travellers choose to ‘cut back and not take out cover’. A spokesman says: “It’s a false economy for people given the risk of serious injury overseas. Rising premiums will not incentivise people to take cover but we hope people recognise the value of travel insurance. It continues to be competitively priced.”
A lot of insurers were keen to jump onto the aggregator sites as there was a lot of volume there. But these were cheap products and insurers were making a loss on them. They have realised that now and raised their prices.”
Bensusan of Essential Travel says its IPT rise has had little effect on sales, up three per cent so far this year: “The rise added pennies not pounds to premiums. People have accepted it and got on with things. They are fed up with the weather and want to get away.” The AA agrees: “This is a very competitive market and the premium increases have been kept to a
minimum across the board. Many customers will see little or no increase,” a spokesperson says. Worries persist, however, that consumers may quickly turn to the ‘free’ policies frequently provided with a bank account or credit card, as a cheaper alternative to stand-alone cover. The concern being that the majority will not cover pre-existing medical conditions such as cancer. Hayman states: “Travellers will shop around more and increasingly go to the banks. They will take volume out of the sector and travel insurance companies will probably be fighting over themselves to write the bank business or lose their critical mass.”
Tom Bishop, head of travel at RBS Insurance, staunchly defends his product. “The monthly fee a customer pays for their packaged bank account is far less subject to price fluctuation than a single travel product might be,” he states. “We’ve seen a steady uptake in demand for these accounts. They provide comprehensive, fi ve-star travel insurance policies and
our repudiation rate in relation to previous medical history has dropped signifi cantly. It is a question of whether customers feel that the level of coverage is suffi cient for them.”
Cover is almost as dominant a theme as price on this issue. Rising prices, it seems, must be accompanied with improved cover. “Because of all the stories in the media last year about
travel problems, more people have become aware of the need for insurance and its value,” says Walton. “They will look more at cover rather than price in the future and ensure they get the right levels.”
Hayman is not so sure they will get it. “We will see a tightening up of wording, particularly on medical warranties, because the only way you can keep rates down without putting big excesses on is by limiting your exposure in terms of age and infi rmity.” Rothwell of World First is more optimistic. He believes higher premiums will put the onus on insurers to deliver to these newly educated insurance seekers, and of course existing customers with the ‘better product development’ they seek in areas such as medical costs and travel delays.
Rising prices, it seems, must be accompanied with improved cover
AXA also sees quality of cover as the key differential; and is confident demand will hold up. “The rises won’t affect the consumer that much. It is about quality and we beat the cheaper providers on that. Customers come to us because we provide the medical, sporting and baggage cover they want. Some cheaper providers exclude sunglasses from
their cover to cut costs by five per cent. I find that bizarre. It’s not the approach we take.” The travel industry may be entering a new cycle of rising cost, but it promises to remain as competitive as ever.