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This oft-revised article first appeared as an editorial in Home At First's "HomEzine" internet newsletter in Summer, 2010.

 

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 to $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 2001. 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 next vacation. You may have lingering concerns over the economy. But, when the conversation turns to travel, please remember there is very good news for the year ahead.

Happy HOLIDAYS from Home At First!

--------------------
Ron Fahnestock
Editor


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