As people take to the skies again, travel insurance is becoming more popular than ever. That isn’t always a good thing for the companies that provide coverage.
Global insurers say they are selling more policies at higher prices as travel recovers from the pandemic, with young people particularly enthusiastic. Some insurers have expanded coverage to include previously excluded epidemics and pandemics, providing protection against flight cancellations, lost baggage, and medical assistance abroad.
However, this shift is colliding with a travel industry that has been losing workers for the past two years and is experiencing major capacity constraints as it attempts to ramp back up. Staffing shortages and training bottlenecks are forcing some airlines to reduce flight frequencies, while airports in Europe are becoming overcrowded as travel demand surges.
Heathrow Airport, London’s main gateway, decided last month to limit the number of passengers leaving the hub, requesting airlines cut flights to and from the airport. Flights have been reduced by US carriers such as Alaska Air Group Inc. and JetBlue Airways Corp., in part due to staff shortages. In one instance of airport chaos, Delta Air Lines Inc. flew 1,000 pieces of delayed luggage back to the United States on a jet after a passenger flight was canceled.
Cover-More Group Ltd., a subsidiary of Zurich Insurance Group, stated that a lack of flight availability is doubling claims costs to return customers home. In general, it is estimated that the cost of expanding coverage to include Covid-19 now accounts for 30% to 40% of total risk costs associated with travel insurance.
According to Allianz SE, it is receiving more claims for post-departure issues than it did earlier in the pandemic. According to Daniel Durazo, a spokesman for Allianz Partners, a unit of the insurer, Covid-19 is responsible for roughly a quarter of cancellation and interruption claims.
“Travel suppliers’ operational challenges have resulted in an increase in claims for travel delays and baggage issues,” he said.
Inflation is another source of concern for insurers. Airfares have risen dramatically this year as airlines seek to offset rising energy costs and employee wage demands. Some business-class tickets are nearly twice the price they were prior to the pandemic. When insurers have to reimburse customers for canceled flights, higher fares hurt them.
Repatriation and air ambulance costs have risen significantly since the pandemic, owing to higher fuel costs, additional regulatory requirements, and safety precautions, according to Cover-More.
As a result, most providers will likely lose money on travel insurance this year, according to Marcos Alvarez, head of insurance at credit-rating firm DBRS Morningstar.
He believes insurers could respond in the short term by raising prices by 20% to 30%, building on increases implemented earlier this year, though it is unclear whether even this would guarantee a profit. In light of the recent large delays experienced by airlines worldwide, some companies may decide to limit or charge extra for trip interruption and cancellation coverage.
Others, he believes, may abandon the travel-insurance industry entirely. Bupa Group stopped selling travel insurance through two of its businesses last year, in part due to the complexity introduced by Covid.
“Premium growth is good for insurance companies, but only if claims growth is proportional,” Mr. Alvarez said.
Because travel insurance accounts for a small portion of many providers’ overall revenue, the financial impact of higher claims costs is unlikely to be severe. Furthermore, analysts and insurers see positive trends for the industry beyond the current turmoil.
One is that the pandemic has raised awareness of the benefits of travel insurance among age groups that were previously less likely to purchase one. Should Covid-19 cases fade and travel disruptions subside, that business could become sticky.
Because travel insurance accounts for a small portion of many providers’ overall revenue, the financial impact of higher claims costs is unlikely to be severe. Furthermore, analysts and insurers see positive trends for the industry beyond the current turmoil.
One is that the pandemic has raised awareness of the benefits of travel insurance among age groups that were previously less likely to purchase one. Should Covid-19 cases fade and travel disruptions subside, that business could become sticky.
According to Cover-recent More’s research, 87% of the 11 million Australians planning an overseas trip next year intend to purchase travel insurance. People over 60 had the highest rates, but 84% of travelers under 30 said they would purchase policies.
“For the younger cohort, this represents a significant increase,” a Cover-More spokesman said. “Historically, only about three-quarters of travelers under 30 took out travel insurance.”