Select Committee on Treasury Fourth Report

1  Introduction

Travel insurance and its regulation

1. Effective travel insurance cover is essential for the well-being of people travelling abroad. Around 42 million visits abroad on holiday are undertaken by people from the United Kingdom each year. Some 20 million consumers purchase travel insurance each year, and around half of those purchases are made by people at the time they book their package holiday. Some people who suffer accidents or other problems while abroad and claim on their insurance policies find that they are not covered for the circumstances that have arisen. Some such difficulties may arise from the way in which travel insurance is sold. The sales process and the way in which it is regulated depends upon the form of travel insurance purchased. Some travel insurance is sold by intermediaries such as travel agents alongside a package holiday—"bundled" travel insurance—while other policies are sold directly by insurance companies—"standalone" travel insurance. When travel insurance is sold as an unbundled product, it is subject to regulation by the Financial Services Authority (FSA) in the same way as most other insurance products. When travel insurance is sold by an intermediary along with other products, it is not subject to such regulation.

2. Is there evidence of consumer detriment in the travel insurance market? Does the variation in the forms of regulation affect the provision of service to the customer and the extent of detriment? Are there ways in which the regulatory and other measures could improve the sales process for travel insurance to the benefit of consumers? These are the issues which the current Report considers.


3. Under the 2002 Insurance Mediation Directive (IMD), the Government was required to introduce a new regulatory framework for general insurance regulation.[1] In October 2002, the Treasury published a consultation document, Regulating Insurance Mediation, which invited views on whether travel insurance ought to be brought within the new regulatory framework. In June 2003, the Treasury reported that its consultation on general insurance regulation had found no evidence of "systematic mis-selling of travel insurance sold as part of a package". Consequently, when the FSA assumed responsibility for general insurance regulation in January 2005, bundled travel insurance products remained outside the scope of FSA regulation. In announcing its decision in June 2003, the Government indicated that it would undertake a further review of the market in 2007. In 4 August 2006, responding to what the Treasury characterised as "growing concerns from consumer groups and sections of the industry that the [travel insurance] market is not working as well as it could do", Mr Ed Balls MP, the Economic Secretary to the Treasury, announced that he would be launching a review into the selling of travel insurance sold alongside a holiday.[2]

Our work

4. In October 2006, as part of our continuing scrutiny of the work of the FSA, we took evidence from consumer groups, the Association of British Insurers and the FSA itself on the FSA's Annual Report for 2005-06. The FSA's work in relation to the regulation of general insurance was one of the areas on which we decided to focus.[3] The FSA is currently undertaking a review of the effectiveness of its general insurance regulatory regime. This review is due to report in the first quarter of 2007 and we expect to examine the operation of the regime further following that review. However, following our evidence, we decided that early attention could usefully be paid to the scope of FSA insurance regulation and we announced an inquiry on that subject on 7 November 2006.[4]

5. On 23 November 2006, we heard oral evidence from the Financial Services Consumer Panel, HolidayTravelWatch (HTW), the Association of British Travel Agents (ABTA)—which represents 1,620 tour operators and travel agents, covering 80% of the package travel market by value—the Office of Fair Trading (OFT), and the Economic Secretary to the Treasury. We also received a range of written evidence which is published, together with the oral evidence, in Volume II of this Report. We are grateful to all those who contributed to our inquiry.

6. Our inquiry on the scope of FSA insurance regulation examined two main topics—the regulation of travel insurance and the regulation of extended warranties. In the latter area we found a confusing patchwork of different regulatory regimes: extended warranties are either FSA-regulated (most notably in the motor industry sector); regulated through a specific statutory regime (in the case of electrical goods); or not subject to sector-specific regulation. We found the evidence on the impact of these differing regulatory regimes incomplete. Further information on the operation and regulation of these markets is urgently needed, and some evidence is likely to emerge in the first half of 2007. In the absence of such evidence, we have decided to concentrate in this Report on travel insurance, although we expect that the evidence we are now publishing will assist with further consideration of public policy relating to extended warranties, and we may return to the topic in the future.

1   Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation Back

2   HM Treasury, Travel insurance review: Call for evidence, November 2006, paras 3.21-3.22 Back

3   Treasury Committee, Oral and Written evidence, FSA Annual Report Scrutiny, HC (2005-06) 1594-i & ii Back

4   For terms of reference for the inquiry, see Treasury Committee press notice No. 64 of Session 2005-06, "Treasury Committee announces new inquiry into the scope of FSA insurance regulation", available at Back

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Prepared 25 February 2007