Select Committee on Treasury Fourth Report

3  Evidence on consumer detriment

The need for travel insurance

16. Travel insurance is a relatively specialised insurance product, but it is important for many people. The Treasury's recent call for evidence as part of its review of travel insurance referred to data from the Office for National Statistics showing that there were approximately 64 million visits abroad by United Kingdom citizens in 2004, of which two-thirds (42 million) were holidays. Of these, half (21 million) were package holidays.[20]

17. The Treasury also observed in the same document that travel insurance is a product designed to protect an individual from a variety of adverse events that could occur while they are on holiday or travelling. The Treasury noted that some 20 million consumers purchased travel insurance each year—making the market worth £670 million in 2006.[21] Travel insurance sold by tour operators and travel agents ("bundled" travel insurance) comprised just under 50% of all sales of travel insurance in 2004.[22]

18. Travel insurance forms part of a wider framework of protection for travellers, including the Civil Aviation Authority's licensing and regulation of finances and fitness of travel organisers selling flights and package holidays in the United Kingdom through the Air Travel Organisers' Licensing (ATOL).[23] Structural changes in the air travel market have led to the proportion of leisure air travellers who were ATOL-protected declining from 98% in 1997 to 61% in 2005.[24] This trend could be seen as reinforcing the need for travel insurance for all travellers.

Consumer detriment and bundled travel insurance

19. We received some evidence to suggest that the cover offered by bundled travel insurance products and the accompanying sales process led to significant consumer detriment. Mr Frank Brehany of HTW thought that such consumer detriment often arose from inadequate information available to the purchaser of the policy and failures in the assistance provided by those selling policies.[25] Recent survey data from Which? suggested that only 19% of travel agents explained what the policy covered and none explained policy exclusions.[26] Mr Brehany highlighted the significance of the trend towards exclusions for certain legal expenses, so that

a consumer, for example, is buying a travel insurance [policy] believing that they have legal expense insurance cover, but unfortunately when they come home and look at the exclusions they find they will not be able to use that benefit within the policy to be able to pursue any action that they believe they have against the provider of the accommodation or indeed the holiday.[27]

20. It was suggested that there were particular problems in the sales process for bundled travel insurance in relation to medical cover. Recent Which? survey data showed that almost two thirds of travel agents failed to ask about medical history before selling a policy.[28] We heard three examples of the possible consequences of consumers not being made aware of the limitations of medical cover:

i.  Direct Line highlighted pre-existing medical conditions as a specific cause for concern. Around 20% of holidaymakers travel with pre-existing medical conditions, but three-quarters of those surveyed were not asked whether they are awaiting any form of medical investigation or surgery. According to Direct Line, "not being asked about [pre-existing] conditions may mean that holidaymakers are not appropriately covered and are risking damage to their health or considerable financial loss if they require treatment whilst abroad or repatriation to the UK".[29]

ii.  Mr Brehany noted that exclusions applying to pregnant women travelling abroad were not well understood by consumers, referring to the example of a woman who required emergency hospital treatment during pregnancy, but was not covered by her travel insurance contract because she had travelled "outside the threshold period stated in her insurance".[30]

iii.  Mr Brehany also referred to a tour operator supplying travel insurance under which children under 15 years suffering a permanent physical injury would not be entitled to receive an injury payout.[31]

21. The Economic Secretary to the Treasury noted that "in recent years, there has been increasing concern from consumer groups and sections of the industry that the market is not working as well as it could".[32] The Treasury's call for evidence as part of its travel insurance review cited the following statement from the Financial Ombudsman Service's Annual Review for 2005-06:

The policy terms for travel insurance remain complicated, and the sales process is frequently limited—given the low value of the transactions involved. As a result, whilst there is considerable competition on the pricing of travel insurance, there is also widespread misunderstanding on the part of consumers about the scope of the cover they have and the eligibility criteria that apply.[33]

Policy exclusions and industry standards

22. While some problems were felt to relate specifically to the weaknesses of a sale process undertaken by non-insurance professionals, some of the problems with the potential adversely to affect the protection available to consumers appeared to be common both to bundled and standalone travel insurance products. Mr Brehany considered that policy exclusions from four major insurance companies and tour operators effectively "stripped the holidaymaker of any real protection".[34]

23. The Economic Secretary to the Treasury expressed particular concern about the impact of exclusions relating to cover for terrorist incidents. He cited ABI data indicating that only half of insurance policies covered medical expenses in the event of a terrorist incident. Around ten million United Kingdom holidaymakers in 2006 would not therefore have been covered for medical expenses in the event of terrorist incidents.[35] HTW also referred to policies that excluded medical expenses and personal accident cover in the event of terrorism.[36] The Treasury's call for evidence for its travel insurance review stated that

anecdotal evidence suggest that it is not always clear that people understand what is and, more importantly, what is not covered by their travel insurance policy. Terrorism cover is an example of where individuals may only realise after the event that they may not be covered … The Government is working closely with the insurance industry to ensure that, where policies do exclude cover for acts of terrorism, these exclusions are signposted to the consumer prior to the purchase of the policy.[37]

24. As part of its review of its general insurance regime, the FSA is expected to examine whether disclosure documentation is suitable for the consumer's needs.[38] Mr Brehany went further, arguing that consumer understanding would be enhanced by insurance contracts "produced on an industry-wide standard format, with clear explanation of benefits, alongside clear explanations of exclusions", pointing out that this was in line with practice in certain other insurance markets.[39]

ABTA's response and travel without insurance

25. Mr Mike Monk, Head of Finance of ABTA, was sceptical about evidence of consumer detriment in the bundled travel market.[40] He acknowledged that consumers often spent little time discussing travel insurance packages, but argued that this was unlikely to be changed by fresh regulation because it would not change consumers' reluctance to read insurance documents.[41] He considered that travel agents were best-placed to sell travel insurance at the time when consumers most needed it, at the same time as they bought their holiday.[42] ABTA viewed the suggestion of a standard contract as "bizarre", arguing that it would undermine market differentiation.[43]

26. Mr Monk argued that any consumer detriment alleged in connection with sales of travel insurance by travel agents ought to be considered in the context of the risk of travel without insurance:

Fourteen per cent of people who go abroad do not take out travel insurance. I would suggest that if they cannot buy at point of sale that number is going to increase and that is going to cause consumer detriment.[44]

The ABI made a similar point:

The Foreign and Commonwealth Office is also rightly concerned that people should travel with adequate protection. It is therefore important that regulation does not put people off from purchasing travel insurance.[45]

20   Travel Insurance Review: Call for evidence, para 3.1 Back

21   Ibid, para 3.2 Back

22   Ibid Back

23   Ev 71 Back

24   Ev 72 Back

25   Qq 4-5 Back

26   Ev 71 Back

27   Q 4 Back

28   Ev 71 Back

29   Ev 39 Back

30   Q 4; Ev 56 Back

31   Ev 63 Back

32   Q 151  Back

33   Travel insurance review: Call for evidence, para 3.24 Back

34   Ev 68 Back

35   Q 151  Back

36   Ev 67 Back

37   Travel insurance review: Call for evidence, p 13 Back

38   Ibid, para 3.13 Back

39   Ev 70, 63 Back

40   Qq 44-47 Back

41   Q 48  Back

42   Q 47 Back

43   Q 65 Back

44   Q 52 Back

45   Ev 32 Back

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Prepared 25 February 2007