As the spread of Covid-19 continues around the world, the UK’s population is now on “lockdown”.
With the possibility of getting away feeling more remote than ever, we review the potential impact of Covid-19 on the insurance companies providing protection for our cancelled holidays.
Unprecedented claims
With flights grounded and borders closed, travel insurers should expect to see significant claims emerge on policies sold before the pandemic took hold. It is possible that almost all policies covering this year’s Easter and summer vacations will see claims emerging as a result. This would be unprecedented and likely to significantly exceed the scale of losses following the Icelandic volcano eruption in 2010.
The cost of each cancellation claim might be modest (perhaps £2,000-£3,000 for typical package holidays) but implications for travel insurers are likely to run much deeper than claims cost alone. In particular, they face being overwhelmed by the sheer number of claims that they will have to service, with consequent increases in claims handling costs.
Impact on claims handling
Claims handling delays will be exacerbated by the impact of Covid-19 on the claims teams. Staff absences are likely to be significant in the coming months and this will reduce insurers’ capacity to meet the claims surge. Those who have invested significantly in remote working for claims teams will be better protected. I have seen at least one insurer already advertising for new travel claims handlers to meet this expected additional demand, but it may be challenging to successfully find, train, and then support new staff in the current environment.
The inevitable delays in claims settlements are likely to frustrate customers, and insurers should be prepared for the PR implications. Many of their customers will be confined at home with time on their hands to chase up claims. For those whose employment prospects are now uncertain, there may also be a serious need for prompt settlement.
Reputational risk
Insurers must tread a fine line when applying policy terms and conditions. There may be a temptation for insurers to enforce terms strictly, for example making customers wait until their summer holiday flights/bookings are formally cancelled. The idea would be to “broaden the peak” of the work for claims teams, and to mitigate losses if the coronavirus situation improves markedly before the summer.
However, this approach increases the potential PR risk. Faced with unprecedented global turmoil, customers may become frustrated by insurers attempting to wriggle out of claims on technical grounds, especially with terms and conditions being relaxed on other financial products such as mortgages and loans.
Looking ahead
In the early stages of the pandemic, insurance providers pulled their travel products out of the market faster than the loo-roll disappeared from my local supermarket. As the situation has developed, that response no longer looks disproportionate. The losses on policies taken out pre Covid-19 will be compounded by the loss of future premium income, either through customers not booking travel (and therefore not needing policies) or insurers declining to provide cover going forwards.
The next challenge for travel insurers will be when and how to re-engage with the market, to ensure that they capitalise on opportunities when travel restrictions are finally eased and holidays are rebooked. At the same time, the risk landscape has changed fundamentally and insurers will want to manage accumulations of risk with a more careful eye than before. Is it a safe bet that travel insurance will cost more in the future, or will competition see rates eroded back to pre Covid-19 levels? Only time will tell.
EXAMPLE