Analysing market dynamics can be tricky. There are so many variables to take into account, and with geopolitical, financial and travel markets all in flux at the moment, it’s no wonder that there are some wobbles in the insurance marketplace.
For example, in the UK, there are numerous factors that can make it a more difficult market in which to operate. These include:
- Low prices
- High competition
- Distribution channels focus on pushing down prices
- Covid cancellation claims
- A harsh regulatory environment
Combine all the above and more, and you can reasonably assume that there is increasingly limited underwriting capacity, more competition for customers, and potentially, industry consolidation.
According to research from Acumen Research and Consulting conducted in March 2021, the global travel insurance market is projected to experience significant double-digit growth over the next six years. The increasing number of travellers is the primary factor supporting the demand for travel insurance in the global market. The travel insurance market is also gaining growth due to companies that are selling travel packages along with travel insurance.
Hooray, the industry is saved! Or is it? Recent moves by reinsurance organisations and underwriters to shift away from the travel market could have a detrimental effect on availability of cover, and that of insurers to renew or write new business.
Case in point is the recent move by noteworthy German insurer URV to halt new business and renewals for the UK market, citing Brexit as its main reason. This has affected several travel insurance brands in the UK at a time when more people are interested in the protection it provides. This could offer opportunities for other companies out there to scoop up customers that might have previously chosen those brands – add Covid to Brexit, and you’ve basically got a perfect storm of market pressures.
In the UK, there has been plenty of consolidation in the insurtech market, with startups being bought by large insurance groups, keeping the number of new firms bidding for insurers’ business to a relatively low number. In the travel insurance sphere specifically, Staysure invested in the purchase of ROCK Insurance Group.
But do market changes and this kind of consolidation make a difference, and if so, in what way? Chris Price, former Head of EMEA for Zurich, spoke to ITIJ about the current state of the UK market and pointed out the numerous challenges raising copious questions.
First of all, Brexit and the change from European Health Insurance Card to Global Health Insurance Card for British tourists and long-term visitors like students and expatriates. Will everyone switch from the EHIC to the GHIC, or might the industry benefit from an increasing number of people purchasing travel insurance policies?
It isn’t possible to clearly identify which of Brexit or Covid will have the deepest or longest-lasting effects on the travel insurance market, but in combination their effects have been far reaching, to say the least. Tom Bishop, Head of Travel Insurance for Direct Line Group, said: “Before the Brexit deal was concluded with the EU, the common consensus was that its primary impact on the market would be the possible removal of the EHIC reciprocal health agreement, which would have materially increased medical claims costs and impacted premiums, particularly amongst the providers most reliant on public healthcare provision for the treatment of their customers. That issue evaporated with the announcement of the almost identical GHIC reciprocal agreement, but Brexit could yet contribute to a slower than necessary recovery of the travel sector due to potential issues with passport controls, different entry requirements being imposed on UK nationals and the future requirement to have the ETIAS visa for longer stays in Europe.”
The need to work through regulatory framework changes is causing some insurance firms to evaluate their options for the future, with the possibility that some will permanently depart the UK market – a far bigger issue which has far eclipsed any initial concerns around increasing indemnity costs.
“Another consideration,” said Price, “is Covid. What are we going to cover as standard versus optional extras, and will we, as an industry, gravitate towards a degree of standardisation in terms of pan/epidemic cover and wordings?” He then pointed out: “We experienced this with the 2010 Ash Cloud crisis as well. It’s certainly in the best interest of customers to see standardisation, or at least consistency, but the natural inclination of providers is to differentiate, which may lead to some confusion about what different policies do and don’t cover.”
Will it be the same old same old going forward, or has the consumer view of what they need fundamentally changed and/or become more enlightened?
What will the UK market look like post-Covid? It’s been the same for a long time, with small blips here and there such as removing cover for gadgets as none of the insurers could afford to continue replacing ‘lost’ iPhones every time a new model emerged, and a revised view of natural catastrophe cover following the 2010 Ash Cloud event. Price asked: “Will it be the same old same old going forward, or has the consumer view of what they need fundamentally changed and/or become more enlightened?” Enlightened about the challenges insurers are facing in terms of stiff competition, no income, and massive cancellation claims that they are expected to honour even if their terms and conditions state that they shouldn’t have to pay out? Not really. But it seems likely that travellers will be more enlightened about the importance of travel insurance, particularly if the message is reinforced by Government.
Are there enough insurers in the market to meet the needs of these new enlightened customers? Bishop said: “At the moment, there are still a large number of providers of scale in the UK market. If there are fewer products to choose from then most customers won’t be significantly disadvantaged, although those with more niche requirements may find their choice of providers somewhat less extensive.”
Price said: “[URV pulling out of the UK market] may be one of the larger wobbles, but it almost certainly won’t be the last. Many were counting on a full-ish summer – this is completely trashed now, and some believe a return to normality could be as far away as summer 2024. Some distributor consolidation is therefore inevitable, but the wider question some are asking is whether capacity will shrink, and does that matter? Personally, I think this will prove a bit of a non-issue. Sure, some insurers will duck out for a while, but others will pick up the slack. Indeed, I suspect some insurers will relish the thought of less competition in the short term.”
Bishop pointed out: “Capacity will always depend on insurers’ ability to make sustainable returns and whether the capital employed could achieve better returns elsewhere. Economists would suggest that as supply falls, and assuming demand is approximately constant, then prices will rise and that, in the longer term, leads to potential new providers or re-entrants to the market.” Direct Line underwrites its own policies, so is not affected by the challenges facing other providers right now.
As Bishop said, the Covid-19 outbreak arose before the ramifications of Brexit truly impacted UK travellers going to the EU, and the resulting huge spike in cancellation claims followed by the inability of the sector to trade through the peak periods in two consecutive years has had substantial repercussions for insurance providers. “The speed and extent of the recovery of international travel is now critical,” Bishop told ITIJ. “It will largely depend on UK travellers’ appetite and confidence returning (largely governed by ease of entry to and exit from destinations) but many are likely to face a somewhat different set of choices when next looking to purchase travel insurance cover.”
North American experience in travel insurance
Jeremy Murchland, President of Seven Corners, spoke to ITIJ about his view of the market. In contrast with the beginning of the pandemic, he noted, there is now a much wider range of information and data available regarding health risks and potential threats to travel.
“Customers can now stay more informed on how travel plans may be affected by these threats, as can insurers (and their underwriters) seeking to offer solutions to them,” he pointed out. “The challenge today for insurers is not so much finding underwriters willing to take additional risks, as much as finding underwriters willing to take the exact risk.”
For example, an insurer may want to offer US$500,000 in Covid medical coverage, but underwriters may only want to offer $250,000. Underwriters may also have other exclusions (i.e. government travel warnings) that they may require that limit the benefit in some way. Murchland continued: “While coverage for Covid and cancel for any reason (CFAR) policies are more available now than at the beginning of the pandemic, there may still be some limitations that require more time to shop around the product to other underwriters or the need to be flexible with what is being offered to the end-consumer.”
Quite a few carriers did not have a pandemic exclusion, thus CFAR became somewhat of a lightning rod and bellwether hence their reaction
Peter Evans, President and CEO of InsureMyTrip, agreed that it has been challenging operating times for travel insurers in North America. With Canada still fairly shut down due to Covid, he focused on the US market: “In the beginning, as Covid spread, many carriers either suspended or reduced their CFAR coverage to lessen their overall exposure. Quite a few carriers did not have a pandemic exclusion, thus CFAR became somewhat of a lightning rod and bellwether hence their reaction.”
Covid yielded other issues as well for the industry though, mostly concerning travel warnings from governments, with their obvious impact on cancellations, and quarantine definitions – not something that many underwriters had previously considered. “As the US emerges from their slumber, quite a few carriers have reinstated CFAR and are looking at ways to better define and clarify quarantine and better deal with travel warnings,” said Evans. “A number of carriers have liberalised their coverage to include Covid as any other illness and have bolstered their travel delay benefits to meet new country entry requirements."
The US is not dissimilar to the UK market in terms of evidence of consolidation among general insurers. “The insurance industry as a whole has experienced a large amount of M&A activity over the last 12 months,” said Murchland, “especially between brokers and agents.”
The travel insurance industry itself has not experienced as much merger and acquisition activity, which could likely be attributed to the pandemic’s negative impact on travel, and by extension the impact on financial performance of players in this market. “There is an assumption,” he added, “that the decline of the travel industry has made consolidation in the travel insurance market less desirable than it has been in other areas. The market could, however, see a pick-up in merger and acquisition activity as travel continues to recover, triggering stronger financial performance and a desire for buyers to take advantage of growth opportunities.”
Evans agreed with Murchland that the travel insurance sector has so far seemed relatively immune to moves in the wider insurance world with regards to M&A activity.
However, massive mergers in the US health insurance market have caught the interest of President Joe Biden’s administration. An executive order issued by President Joe Biden in July aims to crack down on hospital and health insurance consolidations – and other actions – which, it said, decrease competition and drive prices. The four areas of healthcare targeted are: prescription drugs, hospital consolidation, health insurance consolidations and hearing aids.
The recent decision by Aon and Willis Towers Watson to end their attempt at a merger, following pushback from the US Department of Justice, is further evidence that the Biden administration will not stand for consolidation where it sees it resulting in detriment to customers.
The good news is that the pandemic has brought a new-found customer respect for travel insurance and its benefits. Companies need to recognise that for many consumers, price is now secondary to quality of cover. Providers that enhance their coverage and add on benefits related to trip cancellation or interruption related to Covid could see a significant boost in sales.
Seven Corners confirms that customers are more focused on finding benefits that meet their travel needs versus purchasing the cheapest coverage available. “We very rarely have customers call that are narrowly focused on the lowest cost product available – they are more concerned about protecting themselves and their investment in their trips,” noted Murchland. “It is more important in today’s market that insurers have the right coverage that meets the various consumer needs in the market even if it does not come at the lowest price. In addition, customers are willing to pay for high quality service that provides them quick response times, emergency assistance, and efficient claims processing. Cost becomes secondary when considering the value of attentive customer service and satisfactory benefits.”
Evans agrees: “We have not seen any price abatement or coverage compromises so far. On the contrary, we have seen a number of carriers liberalise certain coverage and add select benefits.”