Travel insurers are doing their customers a disservice with shoddy, inadequate travel policies, says Chris Wheal, and should start offering fair, high quality products to their consumers

Insurers get their worst press over travel insurance. And they deserve it.

It is hardly surprising that the Association of British Travel Agents (Abta) reckons as many as one in five travellers take out no cover, insurers behave as if half the people who have paid for travel insurance have no cover either, no matter how much they have paid.

Despite a very low claims rate for travel insurance, virtually every claim is rebutted, reduced and, frankly, belittled through a range of exclusions and conditions. Claimants will be told, with all the finesse of a size 12 clodhopper, that the small print denied this was covered; limited how much that was covered for; or that the insured should have revealed something earlier, in writing, in triplicate, counter-signed by a doctor or a policeman. "Oh, and if it is actually covered, there will be several different excesses to whittle down the total paid-out, I'm afraid sunshine," they will say through a snarling teeth.

Travel insurance is the stage on which insurers regularly turn the proverbial drama into a crisis.

Brian Brown, general insurance guru at research outfit Defaqto, says: "The problem is not just the things that aren't covered but that the limits are poor and the exclusions can cut a claim."

He gives some real examples. "Apart from pre-existing medical conditions, which cause a lot of problems, simple things, such as riding quad bikes and jet skis, or mountain bikes or going horse-riding are often not covered. Soccer, rugby and games such as baseball are excluded too. Motorbikes - even your own - are not covered in most policies and, if they are, they won't be covered if you go anywhere that's not on tarmac. These are things people don't consider to be dangerous or out of the ordinary so they think they are covered when they're not," he says.

But there's more. "Quite a few policies only cover children if they travel with the first named person on the policy and if they normally live with that person," he says. "I know a man who is divorced and discovered that his children, who live with his ex-wife, were not on his policy nor on hers when he took them on holiday.

"The problem is that only claims assessors read the policy wording and then only when you come to make a claim."

What is the point in taking out travel insurance when most people who do so, in good faith, find the claim they need to make is not covered?

The Financial Services Ombudsman's office has so many travel insurance complaints he uses them as doorstops. Despite the lower numbers of travel policies and the even smaller number of claims, complaints to the ombudsman about travel claims now rank third behind the more common policies of motor and household. But worse, the complaints are growing. Last year the ombudsman dealt with 1,787 travel complaints, up from 1,525 the previous year. That represents 12.5%, or one in eight, of all complaints and is double the number of travel complaints from five years before.

Norwich Union's personal lines travel and niche underwriting manager, Luis Berraondo, says: "Probably per head, per policy, there are more complaints than for any other line of business but holidays are important to people, so they do get more emotional about it."

The Ombudsman's annual report is having none of that. "The policy terms for travel insurance remain complicated, and the sales process is frequently limited - given the low value of the transactions involved," the report says. "As a result, while there is considerable competition on the pricing of travel insurance, there is also widespread misunderstanding on the part of consumers about the scope of the cover they have and the eligibility criteria that apply. We also see evidence of unsophisticated claims-handling by some firms and their sub-contractors."

That reads like an epitaph, or at least it should do. Anything with that kind of report needs to shape up and get leaner and fitter if it is to survive. The rewards will be worth it with more customers paying more money for fewer risks.

Stephen Howard runs specialist travel insurance broker Milsom Howard and chairs the Association of Travel Insurance Intermediaries. He says: "Travel insurance is sold as if it covers everything but it doesn't. It's primarily a cancellation and medical expenses cover. It is a simple product that now has one of the most complicated policy wordings, of any insurance product, to cover all the cost containment that has to be done when claims are made."

There's a history that needs explaining. The route to market has had an impact. For years, the vast majority of policies were sold by travel agents and tour operators. Many made taking their insurance a condition of the holiday. As competition for holidays grew and prices fell, the travel trade squeezed more out their insurers, adding to policies while reducing how much of the premium actually went to the insurer.

That grip has since been broken by an array of direct sellers and affinity groups who could sell at half the price and still provide the underwriters with more money than they got from travel agents. But that hasn't helped insurers, who have simply competed even more on price.

Although policies vary widely in their limits and excesses, and many do not suit the buyers' needs (is £1m medical expenses cover suitable for anyone going to the US?), travel insurance has been sold as a commodity product competing only on price. So prices have plummeted.

The basic policy has had cosmetic bells and whistles added over the years because insurers could add them at very little cost. Lost or stolen property could be added with high excesses and low limits because a history of few claims and payouts averaging just £250 meant it could almost be thrown in.

Any sensible insurance adviser would suggest a traveller's possessions are better covered under their home contents insurance, but that never stopped the industry lemmings following each other over the top of the inevitable insurance cycle. Many similar covers have been added to look good, without adding any real value to the customer. And so policies have become huge and unnecessarily complex while prices have fallen.

Howard wishes it would stop and the industry could go back to basics. "If we could rewind, we would need to cover cancellation; medical expenses, including repatriation; curtailment; delay and baggage delay - but delay only, not lost baggage. A person's lost or damaged possessions should be covered on their home policy, as could their public liability. Personal accident should be a separate policy and so should legal expenses," he says.

NU's Berraondo says the ombudsman recently advised a seminar of travel insurers to get rid of lost and stolen baggage cover from their policies. But will insurers listen? "The problem is that the price would not come down as a result but you would have a simple policy. You would have a £10 policy down to £9.50 but with lots of window dressing removed," says Howard.

But other industries have been successful selling their product because "it does exactly what it says on the tin".

And the policy could be improved to reduce the complaints. Think of some of the things that are not covered and ask yourselves why? Is it really necessary to exclude that? How many times will you have to pay out and how much? Would it not be better to include it and have happy claimants?

Having repatriated an injured skier, for example, why not pay for their vehicle to be recovered from the airport car park where they left it? Why agree to cover things they don't need, such as lost possessions, but not the cost of bringing their vehicle home, which they do? Forcing the claimant either to run up huge parking bills or arrange for collection privately will only make the claimant resent the insurer. No matter how good your service at bringing them home, they'll think you a miser - and, be honest, you are.

What the industry needs is a simple, basic policy that covers only the areas directly affected by travel. And it needs to cover those to a greater degree, with high enough limits to cover the claimants' true needs. Different insurers can then add on the travel-specific extras needed for specialist holidays, such as for off-piste skiers, mountain climbers and pot-holers. Customers will have a choice about which policy best suits their needs and proper sales advice will be key. "We need a little less choice and a little more guidance," says Howard.

The industry also needs to tackle how travel insurance is sold - because that is misleading too. A single-trip policy designed specifically for, and sold by, a tour company is likely to be better suited to those going on that tour than many other policies on the open market.

Travel insurance offered for free on credit cards or bank accounts is also often misleading, ill-explained or lulls the insured into a false sense of security about what is and what is not covered. Either the first person named on the account must be travelling with the party or the whole holiday needs to be booked with the card for the holiday to be covered.

Travel agents don't have the same rules governing their sales as direct insurers and intermediaries and anyway the size of the documents the FSA forces the industry to hand out makes them unreadable.

All these issues need tackling but the regulated industry can hardly consider itself a paragon of virtue compared with the unregulated sector. It is only when people claim that they discover what they have bought is not what they thought.

The ombudsman has made clear that specific exclusions and conditions need to be spelled out in advance. And he has said that just asking for any medical conditions to be flagged up is too vague; insurers should ask specific questions about named conditions and ailments.

Insurers really don't need to know someone has irritable bowel syndrome or haemorrhoids, so why put customers through the embarrassment of having to declare it? Ask only about the important illnesses that will affect the premium.

And if some exclusions remain necessary, flag them up and provide a reason. Better still, offer to extend the cover to include them at a price. Make the truly comprehensive travel policy available at a price that enables claims departments to treat the insured with sympathy and compassion, while allowing underwriters to make a profit. And demand that assistance companies live up to their name instead of acting as claims cutters and loss reducers.

Is the price right?
It's not that easy, says NU's Berraondo. "One of the biggest factors people look for when buying travel insurance is price, so you have to make a balance between what is in it and the price," he says.

"You could have a high net worth-style policy but the price of that would be high and would result in fewer customers going away insured."

Jonathan Buttery, director of Voyager Insurance Services and past chair of the ATII, agrees. "Customers will buy because it is £8.50 not £8.55. Insurers could provide much higher levels of cover with no surprises for just £15 but nobody will buy it at £15.

"About 19 people out of 20 will not make a claim, so they will never know that their insurance is not such a good quality product and the savings they make will only buy them a round of drinks on their holiday," he says.

Here's another way of looking at the travel insurance market.

Think of travel insurance as a personal music player. The mother of these is the Apple iPod. Shop around and the price for the same unit can vary by as much as £100 - the most expensive will be delivered faster, have an extended warranty and come with a belt holder, but the cheapest will still be an iPod. When people buy travel insurance they think they are buying the iPod, but all they're getting is a cheap MP3 player - some of which only hold 100 or so songs.

The iPod of travel insurance needs to be designed, agreed upon and sold. By all means keep the cheap MP3 player versions but sell them honestly as inferior products. There will always be a market for the cheap imitations but a lot of customers will go for the iPod and some for iPod with accessories. That has to be worth it.

There is a real problem. As the ATII's Howard says, no insurer will risk being the first to sell this iPod of travel insurance - a pukka, travel-only insurance product that properly pays out for travel problems - not when all around are selling cut-price imitations with loads of fancy frills that make them look better than they are.

"The pioneers get the arrows and the settlers get the land," he says. It's a good analogy because travel insurance does appear to be run by cowboys. IT