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HOW TRAVEL INSURANCE WORKS:
• Why &
when you might need it
• Why &
when you might not need it
• How Insurance
Companies Mine Your Wallet by Milking Your
Fears
•
How Insurance Companies Profit by Dragging
their Feet and Getting
Everyone Else to Pay
Pity the poor travel insurance
industry. Imagine its losses after recent world events have caused major
travel disruptions. Volcanic eruptions in Iceland and major earthquakes
in Haiti, Chile, and China have added new concerns to travelers already
worried about terrorism and political unrest abroad. Travel
insurers—like the rest of us—must surely long for the tranquil days of
travel when we and our luggage arrived together safely, on-time, in
style, at destinations that welcomed us sincerely and even thanked us
for coming. When was that, the Eisenhower Administration?
The fact is that the good old
days for the travel insurance industry are now. One recent news item
noted the insurance industry’s growth since September 11, 2001. Prior to
then not more than ten percent of travelers invested in travel
insurance. Since then, sales of travel insurance have steadily climbed,
with an AIG (yes, that AIG) spokesperson claiming 25% of 2008 travelers
as the new benchmark.
THE NATURE OF TRAVEL INSURANCE
Travel insurance is a kind of
life insurance. You buy it for the worst case scenario, and hope you
never need to make a claim. Insurance companies like to sell this kind
of insurance. They know their customers will cancel their trips only
very reluctantly. Our in-house study here at Home At First suggests an
annual trip cancellation rate of between 2-6%. Yet, a review of a
typical range of policies by a number of mainstream travel insurers sets
common premiums charged at 10-15% of the cost of a trip. Simple math
suggests that premiums collect probably double the amount paid out by
travel insurers.
With sales growth approaching
300% over the last decade and premiums collected amounting to twice the
level of claims paid, what insurance company wouldn’t consider travel
insurance the windfall profit center of the decade? No wonder the number
of companies offering travel insurance has steadily grown since 2001.
However, unlike auto insurance—a required insurance with low profit
margins, lots of competition, and a susceptibility to fraud—there are no
travel insurance companies promoting revolutionary low premiums or
packages. The variety of travel insurance products and premiums offered
by virtually all insurers are remarkably similar. There are no Geicos in
travel insurance.
PROFIT CENTER #1: FEAR
The explosive growth in the
travel insurance industry may be traced to one emotional factor in the
traveling public: fear. Fear drives the sales of travel insurance much
as it does the sales of life insurance, except that travel insurance is
often an impulse buy, and is a short-term policy that requires little
maintenance by the insurer. (We risk exposing our age when we recall the
“flight insurance” vending machines that for years preyed on the
impulses of fearful fliers in airport departure terminals everywhere.)
Because fear has become woven into the fabric of the last decade, few of
us make major decisions—including planning international travel—without
first examining our close-to-the-surface anxieties. Travel insurers have
been paying attention. For them the math is simple: FEAR=PROFIT.
WHO NEEDS TRAVEL INSURANCE? WHAT KINDS OF COVERAGE?
For consumers, insurance may
or may not be a good bet. Those facing little risk need insurance least.
That group includes healthy domestic travelers who are otherwise insured
against sickness, accident, and luggage loss by personal health,
accident, life, and homeowners’ insurance policies, and/or (if they
purchase flight tickets with credit cards) by coverage provided by their
credit card providers.
International travelers can
face more risk. First, they probably have more financial risk if their
trips are cancelled, delayed, or interrupted: non-refundable
international flight tickets, plus pre-paid housing and ground
transportation that may be fully or partly non-refundable, plus
non-refundable costs (such as deposits) and/or service fees charged by
tour operators, travel consultants, or other trip arrangers. Second,
medical and accident insurance they have at home (including Medicare)
may not cover travelers outside the US. Third, some medical emergencies
that could occur overseas may be best treated back home and require
arranging for expensive airline upgrades or even private evacuation
flights.
TRIP CANCELLATION INSURANCE: THE PROFITABLE BOGEYMAN
Because of the overwhelming
psychological disappointment they fear, most international travelers
concern themselves more with forced trip cancellation than with the
possible interruption of a trip when they are already overseas. No one
wants to cancel a much-anticipated trip. Insurance companies know this.
If fear motivates people to buy trip cancellation insurance, the
reluctance to cancel makes trip cancellation insurance a safe,
profitable bet for insurance companies. More simple math:
DESIRE TO TRAVEL=FEAR OF CANCELLATION=FEW INSURANCE CLAIMS=MORE PROFIT.
CLEVER WAYS INSURERS REDUCE PAYOUT FOR CANCELLATIONS
Most trip cancellations occur
within a couple days of departure. By then, any penalties for
cancellation of trip arrangements are probably at their maximum,
suggesting that trip insurers are likely to take the maximum hit. What
most people do not know is that many elements of a trip may be partially
refundable or exchangeable for a credit toward a future trip. These
elements combine to make a list of “credits” that, like cash refunds,
can reduce an insurance company’s liability. (Example: a $1,000 airfare
may be non-refundable, but may be exchangeable for or applicable to an
identical airfare at some future time. If the traveler accepts such an
offer, his insurer is of the hook and does not reimburse him the $1,000
he spent for his cancelled airline ticket.) Travel insurers vigorously
investigate any trip cancellation claim for such “credits” to mitigate
their pay-out liability, having discovered a new profit center.
Importantly, most travel
insurance policies stipulate that insurers only pay last. Insurers get
in line behind any other source available to reimburse a claimant for
his losses. If, for instance, your luggage disappears on your trip but
luggage loss is an item covered by your credit card contract or your
homeowners’ policy, your travel insurer will pay only any excess in
value beyond the coverage provided by the credit card issuer or your
homeowners’ insurance company. (Some travel insurers offer optional
policies that make them the primary insurer. Such primary coverage
comes, as you might imagine, at a substantial extra charge.) Even more
simple math:
AGGRESSIVE ACCOUNTING=REDUCTION OF
LIABILITY=EVEN MORE PROFIT.
TRAVEL INSURANCE
YOU MIGHT REALLY NEED 1:
TRIP DELAY & TRIP INTERRUPTION
Because trip cancellations
are often mitigated by refunds and credits toward future travel, the
actual cost of a trip cancellation is often less than anticipated.
Conversely, the cost of an unexpected trip interruption can be much
greater than anticipated. Imagine having booked a fixed itinerary with
pre-arranged flights, accommodations, car rental, ferries, and some
activities all with set dates. Now imagine getting caught by a sudden
wildcat airline strike or railway “job action”. (Such things occur
unexpectedly with great regularity, it seems to us, at around the time
summer vacation weather arrives in Europe). Such a sudden interruption
in transportation services might stop you in your tracks for a few hours
or a few days. Either way, your fixed itinerary will need to be altered,
and significant costs will begin to accrue within just a few hours.
If, in our example, a wildcat
airline strike stops you between flights en route between two
destinations, your vacation might be interrupted for a day or more and
incur these costs:
• Lodging & meals at an airport hotel
• Clothing, medication, toiletries (if your luggage is in the hands
of the striking airline)
• The loss of vacation time (a
portion of your lodging; a portion of your car rental or
other pre-paid ground transportation, like a
railpass; and any pre-paid activities
that you may miss)
Such interruptions are maddening, but rarely catastrophically expensive,
costing a small fraction of the total trip cost.
But now imagine an
interruption to your overseas vacation like this one: The morning you
arrive at your destination you receive a phone call reporting an
emergency that you requires you to return home as soon as possible.
Under this scenario the costs build calamitously:
• Re-booking and re-ticketing your
flight home (often at a higher fare plus airline-
charged change fees)
• Loss of all remaining days of your
vacation (and all pre-paid lodging, transportation,
and activities)
Such a devastating trip interruption
could easily end up costing more than 100% of the value of your total
trip cost. Many trip insurance policies offer trip cancellation coverage
at 100% of trip cost, but trip interruption coverage at 150% of the
total cost of the trip.
Trip delay and trip
interruption are normally bundled with trip cancellation insurance as a
one-premium package frequently under the “trip cancellation insurance”
label. Because travelers fear cancellation more than trip delay or
interruption, insurers stress selling “cancellation insurance”. As we
have shown, insurers have found creative ways to mitigate their payout
on cancellation claims. Claims for trip delays and potentially
catastrophic trip interruptions are rarer and more difficult for
insurers to mitigate. As a consequence, insurers promote “trip
cancellation insurance” as their primary product.
TRAVEL INSURANCE
YOU MIGHT REALLY NEED 2:
MEDICAL, ACCIDENT, & EMERGENCY EVACUATION
Because your health and
accident insurance may not cover you beyond the borders of the USA, you
may need a travel insurance policy that covers medical, accident, and
emergency evacuation contingencies. Most all travel insurance offers
this coverage bundled with trip cancellation, interruption, and delay
insurance, however, individual policies vary widely on the amount of
coverage included. Most policies offer medical, accident, and emergency
evacuation on a non-primary basis: the trip insurer pays only what other
sources do not cover for any specific claim. Some policies require that
you have a primary insurer before they offer medical insurance for your
trip. Before you order a policy, be sure to check with your normal
health and accident insurers to determine what if any coverage they
provide if you travel internationally.
Some travel insurance policies
include dental coverage in the medical insurance; some do not; some
offer only limited coverage: e.g. up $100/tooth. Some policies put a
deductible on the medical portion. Medical evacuation limits vary wildly
from policy to policy: the current range is $20,000 to $1,000,000 of
medical evacuation coverage among 30 prominent travel insurance
companies. Planning an adventure trip to a remote portion of the world?
You might want to buy a policy offering a high level of medical
evacuation coverage. It can cost a bundle to rescue you from Antarctica,
Siberia, the high Himalayas or the Hindu Kush.
TRAVEL INSURANCE
YOU MIGHT REALLY NEED 3:
PRE-EXISTING MEDICAL CONDITIONS
CANCELLATION AND MEDICAL COVERAGES.
Just as this subject fueled a
major controversy during the writing of the recently approved federal
health insurance bill, the concept of medical trip insurance covering
travelers with regulated or dormant pre-existing conditions (e.g. a
heart condition controlled by medication, a cancer in remission, etc.)
is frequently misunderstood. Many trip insurance policies offer medical
coverage to travelers whose illnesses have first appeared or have flared
up or reappeared from a previously controlled or dormant state during a
period of specific length (often 60-180 days) prior to the first date of
travel when the policy takes affect. This means: if your health
deteriorates by illness or accident within (usually) two to three months
of departure forcing you to cancel your trip, you are covered for trip
cancellation losses. Conversely, medical coverage during your trip for
flare-ups of pre-existing conditions incurred months or even years in
advance of your departure may not be provided by your travel insurance
without opting for expensive “gold” policies or extra-cost optional
riders to basic policies.
TRAVEL INSURANCE
YOU MIGHT REALLY NEED 4:
RENTAL CAR COLLISION DEDUCTIBLE INSURANCE.
Rental Car companies, like
travel insurance companies, exploit niche areas of their businesses as
minor but lucrative profit centers. In some countries rental car
companies may charge extraordinarily high fees for optional collision
insurance on the amount of the deductible (can be $1200 and higher) that
cannot be pre-purchased as part of the advance rental, but is sold as an
option at the delivery point. We have seen such fees (usually charged on
a daily basis) as high as $15/day in certain countries—Ireland is
one—and from certain companies. In other countries (and from other
companies) similar collision coverage against the deductible amount may
cost a less unreasonable $7-10/day. If you need and want collision
deductible protection on your overseas rental car, but do not want to
pay exorbitant rates for the coverage, many travel insurance policies
offer option collision deductible coverage, typically for $8-$10/day.
You can save up to $50/week by adding this option to your trip insurance
package.
THE SMELL OF
MONEY MADE THIS STINK.
Pre-September 2001 was a more innocent time for travelers,
airlines, insurance companies, and tour operators (like us). Back then,
before everything was computerized, we helped our customers figure out
which insurer and what coverages might serve them best. Very simply, we
looked for the lowest rates from companies that didn’t drag their feet
checking and paying claims. Most policies were simple, and most rate
structures nearly identical. Service and reliability factors were
usually the crucial characteristics that made one company the choice
over another. We were involved in every claim, because we had to produce
an official accounting of trip costs and reimbursements on our
letterhead to the insurer so it could verify the amount they needed to
pay the client. Back then, Home At First was a paid a commission
(variable, but usually around 10% of the premium paid) for any policy
that was sold to a Home At First traveler. We were not party to the
insurance contract, and, because all insurers paid us, we had no
self-interested financial reason to promote one insurer over another.
The only pressure we felt was from insurers who wanted us to build
travel insurance into our travel packages. But we felt then—and do
still—that travel insurance (like life insurance) is a matter of
personal preference and should not be forced on anyone. Approximately
10-15% of our customers bought travel insurance and paid approximately
6% of their trip cost for their policies. We accepted our small
semi-annual commission checks from the various companies they bought
from, and considered it apt payment for the individual counseling and
research we did for guests interested in travel insurance. We usually
earned less than $10/person insured.
After September 2001, the
travel insurance industry—like many parts of the travel business—changed
dramatically. Suddenly about two or three times as many travelers were
purchasing travel insurance. Policies were becoming more complex: full
of new niche profit centers that have driven the cost of travel
insurance up from (typically) 6% of total trip cost to around 12% (and
often more). Simple math shows that in the decade since September 11
twice as many policies are sold at twice the rate. Since the number of
international travelers in 2010 is predicted to be about the same as in
2001, it is easily calculated that today travel insurance companies
stand to gross four times what they brought in by policy sales in 2010.
As we have shown, aggressive accounting tactics have reduced claims
payouts over the last decade, adding to the profitability of the travel
insurance business.
With all the money coming into
the business, insurance companies became greedy. They saw travel agents
and tour operators as a vast source of untapped sales. Under the old
system insurance companies had no real influence over these independent
sources of clients. So insurance companies lobbied state governments to
change the rules governing such customer referrals. Now, in the State of
Pennsylvania, tour operators and travel agents who wish to refer their
customers to any travel insurance company are required to register as a
licensed insurance agent of that company. Despite facing the loss of
no-longer-insignificant commission revenue if we did not choose to
become tied to the insurance companies, Home At First chose to opt out
of the business. We saw the agent affiliation with any insurance company
as a conflict of interest in which our customer’s interest could be
viewed as compromised by our financial arrangement with the insurer.
For many international
travelers trip insurance is a necessary evil.
Home At First is committed to helping
our clients navigate the minefield of a confusing menu of choices and
profit centers travel insurers offer. We continue to recognize the issue
of travel insurance as a matter personal choice: no one policy or
insurer can provide a one-size-fits-all solution. Therefore, we
encourage Home At First travelers to visit a web site clearing house of
information (insuremytrip.com
or
squaremouth.com) to
compare the offerings and prices of most of the players in the crowded
travel insurance field. These interactive sites let you create your own
policy and compare its features and costs simultaneously among twenty or
so of the principal travel insurance companies. These sites must earn
some kind of commissions when policies are purchased through them, but
they remain unallied to any specific company, acting like a general
insurance agent for them all. We at Home At First will help our clients
walk through the choices and understand the insurance terminology and
complexities of their offerings.
Basic travel insurance is already
overpriced.
It can easily be made even more expensive by purchasing unneeded or
duplicated elements. Home At First recommends the purchase of travel
insurance to almost every customer. Like life insurance, it provides
peace of mind and security. No one wants unnecessary worry and stress to
affect their vacation plans. However, no one wants to pay more than
necessary for a product they hope never to use. Insurance for your trip
is a little like safety features for your car: you know you need to be
safe, but you don’t need to gold plate seatbelts or have designer-label
airbags. Home At First is committed to helping its travelers get the
most for their money:
1. The
best travel experience to produce the fondest memories.
2. The
best value insurance just in case something unexpected happens to
interfere with item 1.
CHEAP ADVICE:
For most of you these are trying economic times.
Travelers travel.
Money matters. The cost of travel has retreated for the first time in
years, and by previously unheard of percentages. The dollar has
rebounded, retreated, and rebounded again. But the economy is still
struggling. If you wait, you might be richer next year. But, you will
not be younger — and probably not healthier or fitter — next year.
You may have delayed planning your 2010 vacation. You may have
lingering concerns over the economy. But, when the conversation turns to
travel, please remember there is very good news for 2010.
Happy HOLIDAYS
from
Home At First!
--------------------
Ron Fahnestock
Editor
This year, give yourself a
gift you’ll always remember: make a dream come true.
Home At First provides flexible, independent travel tailored to your
goals at
dream locations throughout
IRELAND & BRITAIN,
SCANDINAVIA, and
NEW ZEALAND.
Talk with
HOME AT
FIRST
toll-free at
(800)
523-5842
(USA & Canada residents only),
or learn about us here on
the web. |
