Covid-19 pandemic sees more insurers exit financial failure insurance

As a result of the Covid-19 pandemic, financial failure insurance (FFI) has seen more insurers exiting the market, making it harder for travel agents to get the financial protection they need to operate.

FFI is a pay-as-you-go scheme, which allows travel organisers to fulfil their obligations to cover customers’ payments under the Package Travel Regulations.

These regulations, which were effective from 2018, provide financial and legal protection to those who have purchased package holidays, enabling them to access refunds or compensation, for example, if their holiday is mis-sold, or if there is a problem.

As of January 2021, policyholders may struggle to renew their FFI cover.

Jacqui Cleaver, head of communications and business development at Protected Trust Services (PTS), said: ”We’re getting an unprecedented number of agents calling us who are highly concerned as they cannot renew their insurance. If they don’t renew, they can’t trade.”

As FFI is compulsory in order for travel organisers and agents to trade, what options do they have now? And how can brokers help?

‘Known event’

Garry Nelson, head of marketing at AllClear Travel Insurance, told Insurance Times: “As a direct consequence of the Covid-19 pandemic becoming a ‘known event’, AllClear no longer includes financial failure cover in its offering.

“A large number of airlines and independent hotels did go under and the risk of providing ongoing cover for new policies proved too great for it to be an acceptable risk for the proportion of premium generated.”

For AllClear Travel Insurance, FFI ”represented only a small part of the premium generated” as it was typically used to ”cover unexpected events where an airline or hotel chain goes under in circumstances which could not have been anticipated.”

Pre-Covid-19, ”AllClear Gold, Gold Plus and Platinum policies included financial failure, also known as end supplier failure [or] scheduled airline failure, as standard cover”, Nelson added. 

This meant that AllClear Travel Insurance customers were not required to pay an additional premium for FFI.

Moving forward, however, Nelson believes ”providers are more likely to offer financial failure insurance as an optional add-on rather than integrated into policies”, as and when travel restrictions are lifted.

Broker advice

Despite the bleak outlook for holidaymakers and travel firms last year, Cleaver thinks “a strong recovery” is on the cards.

She said: “There has been a huge fall in travel bookings during 2020 due to Covid and the travel restrictions. But we are looking at a strong recovery and there is most definitely a positive upturn with the vaccine rollout and increased testing.”

Meanwhile, when asked what brokers could do to support their travel sector customers, Cleaver said: “Brokers could advise their travel industry clients to look into their FFI renewal earlier, so that they can understand whether it is possible to renew, or not. At least the travel companies have time to find alternatives then.

“FFI may be difficult or impossible to obtain, but travel businesses do have alternative financial protection methods they can adopt.”

Tip of the iceberg

However insurance firm International Passenger Protection (IPP) has not pulled out of this line of business - it said it still underwrites these products and has done so for more than 30 years.

Paul Mclean, managing director of IPP, told Insurance Times that the firm was responsible for pioneering different types of FFI.

Mclean explained that while some insurance providers have pulled out of the FFI market due to Covid-19, the issue actually started with the demise of Thomas Cook, which had “far and large reaching consequences”.

He continued: “Since then, there has been an increasing loss pattern; Covid-19 was the tip of the iceberg in this trend. There are always new companies with limited experience entering into this specialist field - effectively this is credit insurance, but [it] is not traditional credit.

“Companies tend to struggle to understand fully the risks at hand and the sheer aggregation volume, [so] only last as long as their first large claim. Without substantial insurance and reinsurance backing, you cannot last in this market.”

IPP was founded in May 1990 by chairman and chief executive Brian Mclean, who has 25 years of experience in the travel industry.

Alternative options

According to independent consumer awareness initiative Travel Insurance Explained, most insurance policies will not cover financial failure as standard.

Companies offering trust solutions have reported a higher number of enquiries due to the troubles obtaining FFI. For example, in the past two months, PTS has received applications from 42 firms wanting to trade with financial protection.

For travel agents using a trust model solution, consumers’ money is put into ‘trust’ and the travel agent pays all the suppliers. The travel agent, therefore, cannot release their profit until all the suppliers are paid. 

With FFI, when a customer books with a travel agent, customers’ money sits with that travel agent and they would pay according to the deal with their broker, per customer, so that if the agency does go bust, the insurance would cover it.

The difference with FFI is that there is no mechanism behind it, unlike a trust solution. 

Cleaver is concerned that some firms may have left renewal to the last minute as well as being unaware of the other available options.