The crowded market

Competition in the £555m travel insurance sector is making the market as crowded as a Costa del Sol beach in peak season. It can seem to the observer that all types of retailers are jumping on the travel insurance bandwagon. Usurpers include direct sellers, banks and even supermarkets such as Tesco and Boots. Nevertheless, travel agents have managed to hold on to around 70% of the travel insurance market in terms of the value of premiums.

Direct travel writer Club Direct has issued a report on current trading conditions in the travel insurance market, which it estimates is worth £555m. Brent Escott, Club Direct's managing director, says travel insurance rates are generally increasing by up to 10% in 2000, in response to higher claims costs of between 20% and 25%.

However, he says these current premium rises are only bringing the market back into line with levels prevailing three years ago.

During this period, the market has seen a significant shake-up in terms of underwriters. Escott says GE Capital, CGNU and Axa have all emerged as major players following the stumbles of two of the market's former Goliath insurers - Home & Overseas and Bishopsgate (now Fortis). Home & Overseas lost ground when it lost the £100m Thomas Cook contract to Axa 18 months ago and, Bishopsgate slipped back when Lunn Polly decided to take its annual £30m business elsewhere.

Prices to fall in longer term
Claims costs are increasing says Escott, because of several factors including the strong pound, higher medical costs, particularly in the US, and policyholders' greater propensity to claim.

Despite these cost pressures, Escott believes prices for the consumer will actually fall in the longer term. He also expects travel agents will retain a sizeable chunk of their currently generous levels of commission. "Travel agents will probably see their margins fall but only from 60% to around 40%," he says.

He predicts direct writers will bear the brunt of tightening trading conditions: "Competition between direct writers for market share is squeezing profit margins and making it more difficult for them to pass on these costs to the consumer."

He expects only a minority of direct writers will be able to survive this onslaught, which he says will lead to a round of consolidation.

"Many direct writers that have sprung up in the past five years could drop out of the market. The key to success for those that remain will be responsive marketing that gets their product noticed ahead of their competitors' products."

High street providers
Among those travel insurers Escott expects to survive the tough market are high street providers. Tesco has made it as easy to buy travel insurance as it is washing powder or baked beans.

All that any of Tesco's nine million club card- holders has to do is drop their preferred insurance package, ie annual or single trip cover, into their shopping basket and pay at the checkout.

This scheme began with a pilot in seven Tesco stores in summer 2000. Paul Baxter, head of insurance at Tesco Personal Finance, says: "Sales of travel cover at our pilot stores has exceeded our expectations by a large margin."

He said the main selling points to customers were the product's convenience and low cost.

"The product appeals to both the last-minute buyer and the uninsured. Many customers are buying Tesco travel cover for their holiday in the same month. Other customers would have previously bought their cover from a travel operator but find our insurance offers better value."

Baxter said that Tesco's target for next year is to double its total sales when it rolls out the product to its stores nationally.

Another source of competition comes from banks such as Lloyds TSB. They are increasingly offering annual travel cover to their higher status current account holders as part of a package of perks to retain their loyalty.

To date, more than two million of its customers have signed up to its gold account which comes with annual travel cover and other benefits for a fee of £8 per month.

This complimentary travel insurance covers both the account holder and an additional person, and includes personal injury cover up to £5m and £1,500 for lost baggage. An advantage of the cover is that it does not need to be renewed as it lasts for as long as the account is kept open.

A spokesman for Lloyds TSB explained the attraction of the cover: "Customers are looking to their bank to provide more than just a bank account. Benefits such as travel cover and commission free travel money represent added value to the account holder."

The retail revolution in travel insurance is being compounded by the internet, which allows travellers to buy bespoke cover at the click of a mouse. Direct Line is just one insurer that sells travel insurance over the internet. Justin Skinner, the insurer's ecommerce manager, says: "Travel cover is currently our second biggest selling line of insurance after motor policies." He would not reveal exact sales figures but did say motor accounts for 50% of Direct Line's sales.

He attributes the growth of buying travel insurance over the web partly to the popularity of holiday-related internet sites such as lastminute.com and go.co.uk. Skinner says: "Customers are becoming used to buying airline flights and holidays on the internet and are purchasing travel cover as part of this package."

He added that travel insurance is more suited to being sold on the internet because of its relative simplicity compared to motor or household insurance. Customers have only to type in their personal details and opt for single trip or annual cover for a quote. Winter sports cover can be purchased additionally. Skinner says the typical buyers of travel insurance on the web are mainly younger men who are frequent travellers. However he stressed that this stereotype is giving way to a more mainstream market of women and older buyers.

A significant attraction to Direct Line travel insurance customers is the 5% discount it offers for using the web. Direct Line says a 35-year-old man buying cover for his wife and two children would pay £53.85 for single trip cover and £97.91 for an annual European policy without winter sports cover.

Carole Harris, travel manager at MMA Insurance and secretary of the travel underwriters group, acknowledges that travel agents enjoy the significant advantage of direct contact with clients that brokers lack.

She says: "Instead of taking time to track down the most competitive quote, many travellers still simply sign the policy that is offered to them, even though it may be more expensive."

Harris said brokers can fight back against this advantage by offering annual travel cover that becomes cost effective for clients who take more than one main holiday each year.

"Because the cover is automatically renewed unless the policyholder requests otherwise, the chances of the broker retaining the business are significantly increased, with little or no effort on their part. The policyholder also benefits if the policy is claim free as they can get a no claims discount of up to 20%," says Harris.

In addition, brokers can use travel insurance, which generates only relatively small premiums, to sell a portfolio of other products.

Stephen Howard, chief executive of specialist travel insurance intermediary the Travel Protection Group, believes increasing competition from direct writers is beginning to squeeze the travel agent's share of commission.

Customers don't shop around
He says: "Travel agents account for 65% of policies sold in the travel insurance market because they are a convenient one-stop shop for the consumer. But this is weakening as a growing proportion of policies are sold by direct writers."

However, Howard does not think the position held by travel agents will readily be overturned by direct writers and other distribution channels.

Customer inertia when it comes to shopping around for cheaper deals benefits travel agents to a significant degree.

And while he acknowledges that banks have a role to play in the market, he warns that their free annual cover may not match up to the consumer's requirements, especially for long haul holidays.

He says: "Some cover only applies to scheduled flights and not chartered trips and can exclude repatriation for medical reasons. Customers should check such cover carefully."

He adds: "The only way travel agents will drop out of the travel insurance market is if the General Insurance Standards Council (GISC) makes it difficult for them to sell insurance."

A spokeswoman for the GISC says its objective is to regulate general insurance sales, including travel insurance, irrespective of whether the distribution channel is the internet, direct sellers or brokers. But she adds that a GISC working party is still drafting its rules for the travel insurance market.