Travel insurers are looking at the small print of their policies to avoid payouts. But all is not so gloomy as Kathryn McCarthy reports

LAST YEAR WAS a taxing year for the travel industry, with domestic tourism grinding to a halt during the outbreak of the foot and mouth epidemic, and foreign travel slowing significantly after the attacks on the World Trade Centre.

According to latest estimates from the Association of British Travel Agents (ABTA), 16 tour operators and 20 travel agencies went out of business as a result. Big travel groups such as Thomas Cook, Thomson and Airtours also had to cut back, leading to thousands of job losses.

Travel insurance was not immune from the dual pressures of 11 September and the foot and mouth outbreak. Many providers saw a significant drop in their premium income last year, as a result.

Slow growth
In 2000, the travel insurance market was worth £548.5m, with penetration at 80% to 90%. Between 1994 and 2000 average annual growth was 7.2%, but financial analysts Datamonitor forecast in its report (UK Personal Niche Lines Insurance 2002, published in October 2001) that this could slow over the next five years to around 1% annually.

Experts predict annual insurances will sell less well and this will favour travel agents and broked policies rather than directly sold policies. One recent trend, highlighted by Datamonitor, has seen direct insurers, which have 15% market share, gaining 1% to 2% annually. Yet composite insurers dominate the travel scene with 60% market share through tie-ups with travel agents. Datamonitor analyst Richard O'Donoghue says that because of the WTC disaster more people will revert to the safer option of booking through a travel agent, rather than independently planned holidays.

O'Donoghue says: "The other problem for direct insurers is they sell a lot of annual policies, which has been great over the last couple of years when people were taking three or four holidays a year. But if people are travelling less they will be less inclined to buy these policies."

Short-term blip
In the immediate aftermath of the WTC disaster, it was estimated that worldwide demand for travel and tourism fell by 30%. But this is a short term blip as a recent survey conducted by MORI for ABTA showed that few travellers (3%) had actually been put off travel by war and terrorism. In fact, a clear majority said their holiday plans were unaffected, although 13% said they would leave it later than usual to make decisions.

The travel insurance sector's response to the WTC event was compassionate, with exclusions waived in order to help where they could. According to Royal & SunAlliance (R&SA) travel insurance manager Fiona McDonald, there was a meeting of the Association of British Insurers (ABI) Travel Insurance Committee, which she chairs, on 12 September, at which point there was no idea how many Britons might be involved.

McDonald says: "The one thing the market was unanimous about was that there was no way we were going to leave our customers unsupported."

Few WTC claims
At a subsequent market meeting at the end of November, executives were surprised to learn that no one had any medical claims. McDonald says: "From that we can assume, either no one who had taken out travel insurance was just hurt, or the hospitals weren't charging.

"At R&SA we haven't had any claims, and none of the other insurers which were at that meeting had any either. So it would seem that although the decision was made that we would support our customers in that situation, in actual fact it wasn't necessary."

Although most travel insurers say the actual cost of the tragedy is difficult to estimate at this stage, travel group Club Direct estimates that it is in the region of £40m in the four months since the attack.

The limited financial impact is in part due to the limited nature of travel policies. Policy wordings are very similar throughout the industry and it is often the interpretation of the wording, rather than the wording itself, that differentiates insurers. There are very strict limitations on the types of loss covered and the amount the insurer will have to pay. Exclusions are made for terrorism and scheduled airline failure, two of the areas affected by the WTC and the ensuing problems in the airline industry.

More restrictions
McDonald says the area causing difficulty was that of travel delay because it couldn't be quantified. "In those cases, the majority of companies didn't use the terrorism exclusion, but the exclusion for failure of the operator to provide the service."

As a result of the WTC, travel policies are likely to become tighter, with further restrictions in cover.

According to Club Direct managing director Brent Escott, personal liability could be a problem area, since insurers will seek to minimise their exposure in this area. But Escott says hijack cover, which was viewed by some as outdated and close to being taken out of many policies, may be left in as a result of the WTC tragedy.

As for terrorism cover, he believes there is almost no chance of terrorism being removed or weakened as an exclusion.

Among travel insurers, meeting as the ABI Travel Insurance Committee, there is less appetite for covering the areas of the policy that relate to inconvenience, such as compensating for travel delay and cancellation through disinclination to travel. But restrictions in the wider market for certain types of cover could well be an opportunity for niche players to capitalise on.

McDonald says: "There may be some specialist insurers which have some interest in providing these covers.

"Going forward, we want to be able to insure our customers, for whatever reason, against injury or bodily harm of any kind. And it is possible that the cost will have to be passed on to the customer."

According to the Financial Services Ombudsman, travel insurance is perhaps the most complex financial product many people will purchase during this year. This is borne out by the fact that one in eight complaints to the ombudsman are about travel policies.

Escott says there needs to be greater clarity from travel insurers in explaining to customers exactly what is and is not covered under the policy.

He says: "At present, this often depends on the individual insurer's interpretation of its own policy wording. Some insurers will pay up for some terrorist events, while others will not. Insurers need to be more specific about explaining insurance cover, in particular to destinations, when new risks become apparent, as for example, in the US at present."

Price rises
So what next for the travel insurance market? Increased premiums are likely across what has been a soft market for some time, returning business to profitability.

Escott says: "There are two main reasons for price rises. First of all, the cost of reinsurance will rise and second, capacity in the market will reduce, leading to more demand than supply."

R&SA's McDonald is expecting some shrinkage in the market. "As far as the impact on the market, we are all expecting the size of the travel insurance market to shrink. If people are travelling less, then they are going to be buying less travel insurance."

The long-term effects of the WTC disaster on the travel insurance industry will depend on how the travel sector fares over the coming months. Some believe cheap flight and holiday deals coupled with low interest rates and high retail spending could lead to an unexpected upturn in fortunes. Those who remain in the market will reap the benefits of tighter policy wordings, improved risk profiles and increased premiums.

Insurer helps client amid World Trade Centre chaos
FirstAssist received a request to help a young woman stranded in Manhattan with no access to money due to the WTC tragedy.

All parties were aware there was no insurance cover as such, but FirstAssist contacted her mother in the UK who requested its help in arranging a money transfer.

Local banks in Manhattan were closed, as were the bridges leaving the island.

FirstAssist contacted money transfer company Western Union, which said there were limited operations in the area due to the circumstances. However, it identified one office it knew to still be operating in Manhattan.

FirstAssist attempted direct contact. Lines into the area were continually engaged and communication was difficult. After several dozen calls, it managed to get through to the local office. The area was overwhelmed by tight security because of a visit by President Bush.

Despite the circumstances, arrangements were made within the hour to transfer funds to the customer.

In another incident, FirstAssist had a serious medical case in New York arising the week before, but due to flight restrictions there were no suitable flights out of the area.

It made arrangements with another assistance company, which also had a patient in the locality, to share an air ambulance.

The two patients were moved swiftly and safely out of the US, allowing further treatment to continue back in the UK.

As the air ambulance was shared it was also very cost-effective, as medical expenses in the US would have been significantly more, at about £3,000 per day.