Travel - Destination unknown

A number of fundamental changes in the travel insurance sector are presenting insurers and brokers with a suitcase full of challenges and opportunities. Travel agency regulation is fast approaching and brokers need to have strategies in place to respond to the sea change that many believe will accompany the new regime. At the same time, these agencies must also continue to keep abreast of technological advances and the prospect of continued competition from channels such as aggregators.

The Financial Services Authority's decision to regulate travel agents is certainly one of the most significant issues for the sector in recent years. While the regime does not come into force until 1 January 2009, travel agents should already have started applying for authorisation - and they have a number of options. As the FSA explains in a press release on its website: "Travel firms will need to decide whether to be authorised by the FSA, be an appointed representative of another FSA-authorised firm, be an unregulated introducer (and only provide leaflets (and) information) or no longer offer CTI (connected travel insurance) products."

Positives

The benefits of the new regime as far as consumers are concerned have been well-documented. The FSA highlights the fact that firms offering these products will have the right resources and staff that are competent to undertake this business. The watchdog observes also that consumers will get clear, concise and consistent information about a firm's services and products and that, if things go wrong, customers will be able to obtain redress.

There is a view, however, that despite the good intentions, there may be some disadvantages for customers as well. Scott Roberts, manager of travel and special risks underwriting at Fortis, points out: "One fear is that this is going to reduce the options that consumers have in terms of access to travel insurance and may also lead to more people travelling uninsured."

According to the FSA, there are alternative routes for those travel agents that choose not to become regulated themselves. John Bibby, managing director at Acumus Insurance Solutions, observes that one of the better choices for travel agents may be to become an appointed representative through a broker. He explains: "A broker is authorised to sell the insurance in its own right but, in effect, sub-delegates responsibility to the agent but is ultimately responsible for any mistakes."

Some believe it is more likely to be the insurers that will scoop up the AR and introducer deals with travel agents. Perry Wilson, co-owner and founder of Insure and Go, observes: "I'm not sure that brokers will be able to make major in-roads with travel agents," and points out that those brokers offering AR services should be aware of the responsibility that this places on their shoulders.

While the provision of AR services would be advantageous for brokers in terms of additional revenue, there are certainly some inherent risks the broker must take into consideration. Bibby observes: "Unless we are generating substantial premium, is it worth the risk we would carry regarding, for example, an inexperienced sales representative that may make a mistake? We have to consider if we want the exposure on, for example, £5,000 of premium."

Those brokers looking to offer their services to travel agents from January next year should be putting plans in place now. Acumus, for example, has come up with an online training solution already that it can offer ARs that covers fundamental issues such as treating the customer fairly and product knowledge.

Upwardly mobile

While regulation is a major talking point for the sector, it is not the only issue having a significant impact. In particular, as technology continues to develop, brokers and insurers must keep pace with change; there is much consensus that mobile phone technology will become increasingly important. Opinion is divided over the concept of selling cover via text messaging, although many agree on the potential for sales via a mobile phone's internet connection.

Christian Young, chief executive officer at Drakefield Insurance Services, believes that mobile phone technology will grow in importance, particularly for customers up to 25 years old. Young adds, however: "Online and call centre will remain by far the dominant channels. We expect mobile will be used predominantly for research and simple transactions initially, though those born into the digital age will become more demanding."

As far back as July 2006, Fortis UK acquired a majority shareholding in Text2Insure, a mobile phone insurance specialist. Roberts comments: "The mobile phone is an absolutely key channel for the customer in part, rather than its entirety. It's important to provide an integrated offering across these channels. It is a fantastic tool to assist in a sale but I'm not sure it will ever take over the actual sales process itself."

Bibby points out that text-based sales of travel insurance face some pretty substantial challenges and, at the end of the process, the customer has to make a phone call in order to pay for the policy.

Bibby adds, however: "The technology can be really positive for product alerts, or sending key contact telephone numbers for emergency assistance abroad, claims and so on."

Many predict that the internet will continue to be at the forefront of innovation in sales and marketing. "We're still only in the infancy of the internet and beginning to see the prospects of its true potential. As it develops, so will the opportunities for selling," asserts Roberts.

In addition to new opportunities, brokers face continued competition from other channels also; when asked what has had the biggest impact on the travel sector in the last 12 months, many point to aggregators. While some brokers continue to tread with caution, there is increasing evidence that many are embracing the concept. Young observes the benefits: "Aggregators add choice for customers and to the mix of distribution channels available for all - insurance intermediaries and others. Additionally, it is an opportunity for small brands to get a higher profile without the significant marketing costs necessary for the usual retail approach." The fact that The British Insurance Brokers' Association welcomed Gocompare.com as a member in May this year is certainly a testament to the growing acceptance of comparison sites.

As far as wider economic issues are concerned, some travel insurance providers may be concerned that the predicted credit crunch in the UK will take its toll, with people potentially booking fewer holidays. There is a view that there may be a slowdown in the traditional holiday market but that this will be countered by an increase in long weekends and city-break opportunities. Roberts observes that travel patterns have been changing over the last five years anyway: "The concept of the two-week holiday in the summer and the two-week winter break has pretty much disappeared because of increased pressure in careers and family lives. We're seeing a lot more one-week holidays interspersed with long weekends."

Wilson believes it is unlikely that people will sacrifice their holidays, though they might, for example, downgrade from a four-star to a three-star hotel. "The one thing they will still do is insure their holiday because if they do have to cancel it, they will want to get their money back," Wilson asserts.

Prevailing conditions

Acumus says that it talks to the biggest travel operators routinely and is aware that people are more likely to take short breaks currently. Bibby explains: "As a result, we are hoping to sell an increased number of annual multi-trip policies. They generate an improved level of income but there is a potentially greater risk exposure as the customer is taking a greater number of individual trips.

"On the other hand, many of these journeys are UK based, which reduces the risk in comparison with overseas travel. We have to consider the swings and roundabouts."

Claims trends in the travel sector remain fairly static, with medical claims attracting the largest payouts. In its latest UK Travel Insurance report, Datamonitor found: "According to interviews with industry executives, direct medical costs comprise around 50% of all claims costs, with an additional 30% paid out for cancellations due to medical reasons. All other claims, for example, lost baggage, pet care or legal expenses, constitute approximately 20% of total costs. As a consequence, claims inflation is normally driven by medical costs inflation, which can be significant in countries such as the US."

Fraudulent claims continue to be problematic. The Datamonitor report found that fraud in travel insurance claims involves both professional supplier-side fraud - where hospitals and doctors overcharge for medical treatment - and opportunistic fraud - where a claimant overstates the value of lost baggage, for instance to make up for the policy excess. As medical costs account for such a large proportion of travel claims costs, it is medical fraud that concerns industry executives interviewed by Datamonitor the most.

Provision

Customer loyalty continues to be a very competitive endeavour, with industry experts maintaining that price is not the defining factor and that customer service remains vital. Wilson says that customers respond to good service and products; he reports that Insure and Go insures over two million people a year, its complaint ratio is just 0.01% and customers do return. Wilson adds: "Somewhere in the region of 50% of customers come back to renew their annual policies with us."

Roberts emphasises the same message: "Travel insurance has always been a very commoditised product, with insurers under great pressure to supply the cheapest rate no matter what. The real answer is to stop trying to stack 'em high and sell 'em cheap and focus on what is important to our customers: service."

This is not a time for travel insurance specialists to take a holiday. A proactive and flexible approach will be crucial in order to take advantage of potential new markets once the regulation of travel agents comes into force. Meanwhile, this remains a fiercely competitive sector and aggregators, changing travel patterns and technological developments will continue to keep insurers and brokers on their toes.

FACTS AND FIGURES

Research and analysis highlights from Datamonitor's UK Travel Insurance 2007 report.

- Travel insurance premium income grew by 1.4% in 2006. The increase in gross written premium was driven by a rise in the number of trips taken abroad. Conditions remained competitive, mainly as a result of the high number of distributors active in the travel insurance market, which put pressure on premium rates.

- The number of trips to North America fell in 2006 and this trend could benefit insurers as medical costs are notoriously high in the US. Less exposure to these risks, as a result of changing travel patterns, could therefore have a positive impact on claims inflation.

- The top 10 travel insurance advertisers experienced a significant turnover in 2006. Only the largest insurance providers have the marketing budget to rank consistently in the top 10 advertisers, whereas smaller providers tend to concentrate their efforts during one year only to ease back on their spending in the following year.

Source: Datamonitor.