Is travel insurance itself on a journey? And, if so, then where is it heading? Finaccord’s consultant Simon Tottman takes a look at this $12-billion market to see where much of the growth is occurring, how distribution trends vary between regions, and what future developments may lie in store
The global market for stand-alone travel insurance and assistance is forecast to increase (in terms of gross written premiums) from US$11.9 billion in 2012 to around $14.7 billion in 2016, by which time there are likely to be more than 240 million policies sold every year. These large numbers reflect the scale of the opportunities that exist for those insurance and assistance providers that manage to position themselves in the best possible way to take advantage of this sector’s growth. But this will not be an easy task. Several of the largest and most established markets are either stalling or declining. Many of the best opportunities for strong and sustained growth are now to be found in developing countries, where consumer awareness is low and the competitive landscape is fierce. Similarly, in some parts of the world, traditional distribution channels such as the travel trade and banks – both valued for their loyalty as affinity distribution partners – are being overtaken by direct online sales, web aggregators and other emerging channels.
The two main drivers of the growth (or decline) of a country’s travel insurance market are the underlying volume of foreign travel and the willingness of those travellers to acquire cover. The latter factor typically changes only very slowly: in most countries, insurance uptake rises gradually over time, as consumers become more aware and as the insurance market itself becomes more developed. The number of foreign trips, on the other hand, can change dramatically in a short space of time, and this is causing several of the world’s travel insurance markets to experience rapid growth. Traditionally, the largest outbound travel sector has been that of Germany – with an estimated 87 million foreign trips lasting one night or more in 2012 – followed by the US (71 million) and the UK (54 million). However, these and other Western markets have stalled in recent years, partly as a consequence of already being well-developed, but mainly as the result of prolonged economic crises at both the global and European levels. Between 2008 and 2012, the number of foreign trips undertaken by residents of Germany and the US grew at only 0.3 per cent and 0.1 per cent per year respectively. During the same period, the number of trips by UK residents actually declined by around 6.1 per cent annually. Other European markets to post substantial negative growth by this measure included Ireland, Italy and Portugal.
some of the travel insurance markets of the Asia-Pacific region are in the ascendancy, whereas many of the more developed Western markets are experiencing troubled times
On the other hand, the outbound travel sectors of many Asia-Pacific countries – both developed and emerging ones – are doing considerably better than their Western counterparts. The most rapid growth is occurring in China, where the number of foreign trips has soared from 46 million in 2008 to an estimated 78 million in 2012, equivalent to a compound annual growth rate of 14.2 per cent. Furthermore, in relation to holiday trips specifically,annual growth was sometimes as high as 22 per cent during this period. China’s dynamic expansion is due to a combination of factors, including the continued deregulation of foreign travel, the increase in the number of countries with Approved Destination Status, the rise of China’s middle classes, and a growing international awareness among its population.
India’s foreign travel sector is also expanding quickly (at around 10.2 per cent per year between 2008 and 2012) and now generates approximately 16 million trips annually. It should of course be remembered that, for the vast majority of people living in China and India, international travel (especially by air) will remain an unaffordable luxury for many years to come. However, the sheer scale of these countries’ populations means that even a relatively small increase in the more wealthy segments of the population can generate a huge number of new international travellers.
The sustained growth among Asia-Pacific travel sectors is not confined to the major emerging economies. For example, outbound travel by Australians has been growing at around nine per cent per year, in spite of the fact that the market is already well-developed and that, given its geographical isolation, the number of trips per capita is very high by international standards. In absolute terms, the number of trips (estimated to be 8.3 million in 2012) is not enormous although, due to the necessity of air travel and a far longer than average trip duration, uptake of insurance is high among Australian travellers, as are premiums. These factors combine to produce a valuable and growing travel insurance market, estimated to be worth more than $800 million in 2012, which is more than the Chinese and Indian markets put together.
In the above analysis, it is relatively simple to illustrate that some of the travel insurance markets of the Asia-Pacific region are in the ascendancy, whereas many of the more developed Western markets are experiencing troubled times. However, when it comes to the mechanics of actually selling travel policies – be that in a growing or declining market – the cocktail of distribution channels in use presents a far more complex and evolving picture, and one that is full of both local and regional variation. In many corners of the world, there are examples of insurance and assistance providers who either distribute exclusively through travel agents, or for whom direct online sales represents 100 per cent of their business. However, the vast majority of successful competitors in this industry rely on a mixture of several channels, and this blend is typically adapted to fit the prevailing consumer behaviour in each country.
the distribution picture across the Asia-Pacific region is far more homogenous than that observed within Europe
Even within Europe, where consumers display relatively similar travel habits, there is significant variation in how travellers go about purchasing stand-alone travel policies. The UK is Europe’s most fragmented market in this sense. According to Finaccord’s recent Travel Metrics research, the travel trade only accounts for around 20 per cent of stand-alone policy sales in the UK, with 30 per cent of insured travellers acquiring their cover directly from an insurer, 25 per cent using an online aggregator, eight per cent buying from a bank or similar organisation, and four per cent making use of an insurance broker. The remaining 13 per cent acquire policies via other active minority channels, including automotive clubs, charities, the Post Office and mainstream retailers. In Germany, on the other hand, the picture is very different. The travel trade accounts for around 65 per cent of sales, with a further 10 per cent coming from traditional insurance brokers. Direct sales, aggregators and banks play only a minor role in the sale of stand-alone policies in Germany. A presentation of equivalent statistics for other European countries would reveal a similarly diverse set of results. Interestingly, the distribution picture across the Asia-Pacific region is far more homogenous than that observed within Europe. For example, Australia, India, China, Japan and South Korea all conform to the pattern of having the travel trade as the most significant distribution channel, with banks and direct sales also playing strong supporting roles. There are still local variations, of course, such as the relative popularity of online aggregators in Australia.
In some cases, the distribution channels used for acquiring travel insurance are largely dictated by the structure of the travel industry itself. For example, the vast majority of outbound tourism by residents of China still takes the form of escorted group tours; fully independent travel is difficult to arrange and not generally permitted for leisure travellers. It is unsurprising, therefore, that travel agents and tour operators account for the vast majority of stand-alone policy sales in China.
In terms of policy distribution, the travel trade remains important in almost every country. This is reflected in the fact that, in most countries, travel cover is available from the overwhelming majority of travel agents. However, the nature and strength of the relationships between insurance providers and their travel trade distributors varies considerably between countries. It is sometimes possible to form national distribution agreements with large travel agency groups or franchises, which local branches are then required to honour, either in exclusivity or otherwise. This is still commonly the case in many European and global markets, including the UK and New Zealand. In some markets, on the other hand, it is common to find travel agents selling policies on behalf of several providers, often with little or no formal distribution agreement in place. This practice is widespread in markets such as Brazil, China, India and Russia. Furthermore, local agents of large travel groups (such as CTS and CITS in China) will typically act independently of any agreement forged at head office level. This can create a very challenging competitive environment for insurance providers to work in, and some have responded by focussing on particular travel suppliers in large, affluent cities, rather than pursuing group contracts at the national level. Similarly, in certain markets, these same problems of non-exclusivity can affect the distribution agreements forged between insurance providers and banks.
In general, countries that embrace bancassurance usually begin the process with life insurance products (as these are more akin to the regular savings products offered by banks) before branching out to non-life products, usually spearheaded by household insurance. As discussed above, banks have now become a significant and fixed feature of travel insurance distribution in many countries, including the rapidly expanding markets of China and India. Banks can sell travel cover either as stand-alone policies or as insurance embedded within other banking products (i.e. payment cards and packaged accounts). In many countries, there is evidence of banks seeking to concentrate on just one of these activities at the expense of the other: in India, for example, stand-alone travel policies are available from more than 60 per cent of banking organisations, whereas only 4.6 per cent of banking products feature comprehensive travel insurance. In Japan, on the other hand, banks actively pursue both tactics: stand-alone policies are available from nearly 45 per cent of banks, and 63 per cent of payment card products feature comprehensive cover. More than half of China’s banks – including the so-called ‘big four’ – offer stand-alone travel policies to their customers, and the situation in Australia is very similar.
banks have now become a significant and fixed feature of travel insurance distribution in many countries, including the rapidly expanding markets of China and India
Of course, the range of distribution channels used to sell travel cover often evolves in line with changes in consumers’ travel booking habits and travel frequency. For example, an increase in the proportion of people arranging their travel independently (rather than via travel agents) will obviously lead to a reduction in policies sold through the travel trade, and also usually generate an increase in direct sales, especially those conducted online. Similarly, as trip frequency rises, the role of travel agents usually diminishes, as they are far better suited to selling singletrip policies than distributing annual cover. Such changes have been observed in many of the more developed travel markets, and it is logical to expect some of the emerging markets to follow suit and, in time, require a more diverse range of distribution channels.
Does mobile matter?
One of the newest distribution channels to enter this picture is mobile telecoms. Mobile operator brands often boast tens of millions of customers and can make attractive distribution partners for financial services companies. Whilst such initiatives have hitherto been most common in mobile payments and banking, plus the obvious ‘affinity product’ of mobile phone insurance, it is clear that partnerships for other types of insurance are becoming increasingly widespread. Finaccord’s recent study of 255 mobile brands across 70 countries found that 9.4 per cent of brands offered travel cover to their customers, although the availability of these schemes varies hugely between different parts of the world. In Latin America, policies were available from 37 per cent of mobile operators, with the equivalent figures for Europe and the Asia-Pacific region being 6.3 per cent and 11.6 per cent respectively. However, no such initiatives were identified in Africa and the Middle East, or in North America.
distribution tie-ups with mobile operators could offer similarly lucrative possibilities
Unlike banks, only a tiny proportion of mobile groups have established captive insurance companies, and so the vast majority choose to partner (at either a national or multinational level) with external underwriters. Banks have, for many years, been viewed as a key distribution channel for insurance and assistance products. As an increasing proportion of consumers use their mobile phones to interact with financial services, it is natural to assume that distribution tie-ups with mobile operators could offer similarly lucrative possibilities. Furthermore, rapid growth in the global market for mobile payments means that possibilities are beginning to emerge for combining insurance and assistance products with these virtual forms of payment, just as they have traditionally been associated with physical payment instruments such as credit cards. For more information about mobile opportunities for travel insurers, please see ITIJ 140, August 2012, Thinksmart.