Direct travel insurers could lose much of their market share to travel agents over the next few years, as the recession and the effects of the World Trade Centre attacks impact on travel trends.

A new report from market analysts Datamonitor said the whole of the UK travel insurance market was likely to see its growth shrink, as people travelled less.

But direct players will be the most prone to revenue drops, as their key markets of independent and exotic travel and annual policies fall.

And, according to the report, the average annual growth in the travel sector was 7.2% between 1994 and 2000. Datamonitor expects this to fall to 1% between 2000 and 2005.

The report's author Richard O'Donogue said: "A pessimistic scenario for the travel insurance market could ensue if the tragic events in the US continue to have an impact on airline travel, as flight restrictions and fears of terrorist attacks cause people to be less inclined to travel abroad."

The World Travel and Tourism Council said there had been a 30% decrease in worldwide demand for travel and tourism.

O'Donoghue added annual travel insurance policies were likely to become less popular over the next few years, striking a severe blow to direct providers who have seen the growth of their annual policies exceed that of the travel agents.

"Also, the rise of the independent traveller to more exotic locations may slow if people view trips to Europe as safer," he said.

"This would lead to package holidays becoming increasingly popular and therefore reaffirm the dominance of travel agents."

At present, composite insurers operating through travel insurers have 60% of the travel insurance market.

Direct players are estimated to have 15%, with the most prominent players being Columbus Direct and Direct Line. Tesco, Boots and Sainsbury's are also gaining a strong foothold in the market.