The travel bug

The travel bug

The pandemic crisis has decimated demand for travel insurance and a lengthy recovery is the best the industry can hope for

By Miranda Maxwell

It’s not an honour anyone would choose, but the travel and tourism industry has nevertheless taken the blue ribbon for the industry most devasted financially by COVID-19.

Australia’s “Do Not Travel” restrictions are at the highest level in history, putting major airlines in jeopardy and seeing jobs in the sector vanish almost overnight.

Extraordinary lockdown measures and closed borders have decimated global tourism and led to bankruptcies or profit warnings across the tourism, travel and hospitality sectors around the world.

Travel insurers are among the industry victims. They have hit unprecedented hard times after claims spiked and premium refunds were demanded, while pandemic exclusions have also placed travel insurers in the regulatory and media spotlight.

TravelCard Chief Executive Peter Klemt told Insurance News every travel insurer will need to demonstrate real value to prosper going forward.

“I don’t see a V-shaped recovery – more an L on its side, slower and more spread out,” he says.

“The days of high commissions, in some cases over 40% of the premium, will be under immense pressure.”

The mothballing by Qantas of its 12 A380 super-jumbos for three years is a particularly worrying barometer and a stark hint at the airline’s true demand outlook for air travel.

A blog published by the International Monetary Fund in July singles out air travel as a sector that may permanently shrink, and recommends that affected staff should be supported while they retrain in areas such as digital services.

“Any company exposed to international tourism, whether it is an airline, travel agency, tourist operator or an exposure to the international student market needs to be considered in the context of a five-year timeline to the resumption of the previous volume of business, if at all,” says Michael Goldberg, the founder and managing director of Collins Street Value Fund.

The recovery will be prolonged as the initial suppression from COVID-19 is extended by the economic recession that will follow.

This year departures from Australia will plummet to around 2 million – levels not seen since the recession of the early 1990s and in stark comparison to recent averages of 12 million, according to projections from Finity Consulting, with reference to the Australian Bureau of Statistics.

The vast majority of the world’s population has lived in a country where cross-border travel restrictions prevent anybody from leaving or entering, with the lack of international tourists decimating every tourism-associated company, from airlines and cruise companies to hotels and hospitality venues.

TravelCard predicts it will take until 2023 to return to 2019 volumes. Even then business travel will lag as professionals use the technology they have embraced during lockdown as a replacement for more costly faceto-face trips.

Business travel makes up only about 8% of Australian overseas trips. The crucial ingredient will be the return of international travel, which dominates cover.

Grounded: global air travel has been devastated by COVID-19

Although prospects for travel within Australia are improving as some states cautiously open up to select travellers, Finity says most of this type of interstate visitation is uninsured. While 90% of overnight trips are domestic, only about 10% of policies sold online are for domestic travel, and such trips are generally low value.

Travel premium volumes will remain a small fraction of pre-pandemic levels without international voyages.

“It’s going to be a slow return to normal,” Finity Actuarial consultant Danielle Casamento says.

Encouragingly, she says that though more cautious travellers may take less trips, they will likely buy higher-value products and demand more coverage. Insurers able to pivot coverage to better align with new customer demands “could gain considerably,” Ms Casamento told Insurance News.

“While price will always be a consideration for customers, COVID-19 will highlight the need to spend a little more to get the right coverage in the future,” she says. “Many Australians would be reluctant to travel internationally without medical cover for COVID-19, even to ‘safer’ destinations.”

Finity estimates that if there had been no pandemic exclusions, the additional cost for COVID-19 related cancellation insurance claims could be in the order of $150 million-$250 million.

The actuarial firm says insurers which effectively manage customer frustrations will build brand value and strengthen their pipeline of future sales.

“Given the volume of people impacted by cancelled travel plans, customers will consider how insurers managed and responded to the current pandemic in making decisions on their next policy purchase,” Finity says.

Ms Casamento recommends insurers tailor cover to complement flexible offerings from airlines and hotels and encourage consumers to feel safe to travel again, and also work on improving the perceived value of the ‘automatic’ cover provided through credit cards.

“I am trying to encourage the industry to think about new ideas, using artificial intelligence and customer behaviour insights to improve the marketing experience as they have time to do it,” she says. “This is an opportunity for travel insurers to reset the status quo and think about their products, and potentially rethink their overall business model.”

Customer demands will change after the pandemic. Ms Casamento points to the use of technology by US insurers using weather forecasts to automatically offer compensation for a cancelled camping trip due to rain. Behaviour insights could help build an online marketing tool helping customers identify holiday destinations suited to their individual profile.

“How can product design help travellers feel safer when overseas travel to nearby destinations starts to open up? Travel insurers might need to reconsider their offering, product design and coverage in response to short-term changes in travel habits and longer-term market expectations.”

The Australian Prudential Regulation Authority (APRA) says 96 general insurers suffered a loss of $997 million in the March quarter, after a net profit of $220 million in the final three months of last year.

“The microscope is on all product classes in insurance, and travel insurance is likely to be close to the top of the list,” Mr Klemt says. “Some smaller players may withdraw from the market. Those without a strong support and the required capital to weather the downturn will be in a difficult position.”

Looking to 2021, TravelCard is bracing for what it expects to be a material decrease in travel insurance volume, which it describes as “a direct reflection of a world impacted by COVID-19 with no vaccine”.

Mr Klemt has pushed back earlier recovery forecasts by a few months after COVID new infections topped 700 in one day in Victoria, and New South Wales was “teetering on the brink” of a second community-transmitted wave.

TravelCard has also brought forward product diversification plans and swiftly reduced operating costs by more than half, and is insulated for now by ongoing revenue from its annual corporate travel contracts.

A new expat health insurance product is to be added to TravelCard’s offering after parent company The David Shield and PassportCard Group saw a spike in enquiries and policy sales from expatriates for medical insurance during COVID-19.

“The market remains dynamic, and our ability to pivot makes us ready to work with our partners and insured businesses to keep them on track as business recovers and push past this difficult period,” Mr Klemt says.

TravelCard plans to offer COVID-19 cover later this year, which it expects will provide a sense of security to travellers, though policyholders will be expected to “take greater care, avoid unnecessary risks and be mindful COVID-19 is still out there”.

“The future of travel insurance will be a little more limited,” Mr Klemt says. “Some travellers will find it harder to find travel insurance to cover them.”

Competitor Cover-More, which is owned by Zurich and holds a dominant 30.7% revenue share of the $1.2 billion Australian travel insurance market, has retrenched close to 10% of its 2300-strong workforce.

New Zealand’s largest travel insurer, Southern Cross, pared back its staff from 116 to 45 while at Nib Travel, employees have had their hours cut back and management is relying on the JobKeeper payment scheme to avoid redundancies.

Larger and mature players in the market will more easily reposition themselves. Notably, IAG has revealed a net benefit of around $100 million as higher claims costs in travel and landlords’ insurance were offset by lower motor claims frequency in April and May.

“For some of them it’s kind of a rounding error in the overall scheme of things – it’s a small component of their overall portfolio,” says Ms Casamento, who does not expect widespread industry consolidation, as the number of insurers selling purely travel cover in Australia is small.

Various COVID-19 covers are expected to become available in the market, though Ms Casamento says customer and regulatory pressures mean travel insurers will need to carefully consider the pricing and product responses needed to provide future pandemic coverage in a sustainable way.

“All insurers are considering pandemic cover at the moment, but affordability is the question,” she says. “There’s obviously a cost to the customer for that.”

Travellers might face higher premiums in the short term due to claims costs as well as a rise in the average cost of flights and accommodation.

“You are insuring a higher-value trip because of that,” she says.

Finity says the few players in Australia which offer “cancel for any reason” cover have withdrawn these policies from the market. It believes this type of cover will be less generous going forward as insurers and reinsurers globally are paring back their offering and tightening policy wording.

Even when the pandemic is over, many countries are likely to still impose restrictions in ways they didn’t before, particularly with mandatory quarantining regulations. For the medium-term, people will travel differently, with significantly fewer international trips and shorter, cheaper holidays.

Mr Klemt says he is reminded of the adage that out of adversity comes opportunity. He says the eventual rebound, when it comes, could be fast and furious.

“As a challenger brand we are excited about the opportunity the restart creates for us as we view it as an equalisation of the market,” he says. “Within three months of a vaccine, all bets are off and we expect to see a sharp recovery.”