Recent years have witnessed unforeseen natural disasters, political upheaval in North Africa and appalling weather conditions affecting travellers across Europe. Yet, in what would seem the perfect conditions to sell travel insurance, the challenges are as great as ever.
Despite the media’s focus on these risks, most travellers regard these incidents as one-offs unlikely to affect them on their long-awaited holiday. Demand for protection often only lasts as long as the media coverage. This is not helped by many travel insurers reluctance to cover such trouble and strife. One of the challenges has been to develop travel insurance that can address these risks with more innovative providers adding trip disruption and volcanic ash cover to their portfolio.
Over the last two years, the number of trips abroad has reduced year-on-year by over 20% as the economic climate took its toll, shrinking the potential travel insurance market. With travellers choosing to reduce the duration of their holiday or opting for short-haul against long-haul, the premium pool has also been dropping, putting pressure on all insurers to manage costs more effectively.
However, in recent months, the impact of these incidents, continuing currency weakness and medical inflation have led many insurers to increase premiums. Provided the upward movement is industry-wide and not short-term, this is no bad thing in a market where travel insurance premiums have stagnated for the last 10 years. But with changes in price comes increased competition – in particular when annual policyholders react to rate change by looking around. This increases the acquisition cost for all direct providers, adding to the challenge.
Turning to customer acquisition, many travel insurance providers have benefited greatly in recent years from the aggregators. As inter-aggregator competition starts to increase across all insurance products, so do the significant marketing costs. Sponsorship of prime-time television and free cuddly toys has meant upward pressure on the cost to the providers to help fund the marketing budgets. The purchase of BeatThatQuote by Google, and the potential competition that this will create, can only add to the aggregator market share.
Consumer Intelligence reported earlier this year that 52% of travel insurance quotations were via comparison sites, with 75% of customers confirming that price was the key motivator for choice of provider. No surprise, then, those such customers are the least brand-loyal and least likely to promote the value of their insurance provider. In other words, the cost of acquisition is higher and the lifetime value of that customer is lower. Now that is a big challenge but one that many of us have to consider.
At the other end of the spectrum, the growth of added-value accounts (AVA) and possibly the customer’s awareness of what is being offered has seen the bancassurance market share increase from 8% to 18% in the 12 months to February 2011. However, too much of a good thing can backfire and many AVA providers are re-considering their travel insurance offering under pressure from the Financial Services Authority (FSA). The regulator has announced a review later this year to determine whether packaged travel insurance offers good value and suits the needs of the typical AVA customer.
As travel insurance providers have learned in recent years, the introduction of further regulation leads to increased fulfilment cost in time and money. However, the cost of regulation for travel insurance with its lower average premiums is proportionately so much higher than other Personal Lines products. At what point does it become too much, especially with other, more rewarding insurance products to sell?
The task for us all is to manage any increase in costs while retaining existing customers, attracting new ones and maintaining our brand identity in a reducing target market. It is survival of the fittest but, then again, that’s always been the case and the travel insurance industry is not alone in facing these challenges.
Greg Lawson, Head of Retail at Columbus Direct