The Recovery of the Tourism Industry Slows Down, Travel Insurance to Become More Expensive

With vaccination incidence reaching nearly two-thirds of the global population and coronavirus cases significantly dropping from a peak at the start of 2022, the need for business and leisure travel has continued.

International travel from Europe is set to make a good start to recovery in 2022. However, turmoil at many airports in Europe is likely to hamper growth as queues and cancellations are fast becoming the norm in air travel.

The summer holiday season in the Northern Hemisphere has posed additional challenges for airlines and airports around the world, with thousands of flights canceled and delayed due to severe staff shortages, labor actions, increased prices. operational requirements, and fleet reductions during a pandemic. These factors have pushed airlines around the world to cancel an unprecedented number of flights in recent months.

Hannah Free, Travel and Tourism Analyst at GlobalData, commented, “International departures from European countries are expected to reach 69% of 2019 figures by 2022, according to GlobalData forecasts. Although destinations are eager to receive visitors, supply cannot meet demand following severe staff shortages and industry disputes, which have coincided with a resurgence in international travel. “

As well as the observed chaos and cancellations at some airports in Europe, the rise of the travel industry is also struggling with other challenges including inflation, the rising cost of living, and the Russia-Ukraine conflict. All of these challenges are likely to significantly reduce the need for travel.

Free continuation, “Airports such as London Heathrow and Amsterdam’s Schiphol have been forced to ask airlines to reduce flights, while many carriers have had to pre-emptively cull their schedules by the thousands, affecting millions of holidaymakers. EasyJet has reportedly cut more than 11,000 flights from its summer schedule. Meanwhile, British Airways has now canceled 13% of its summer schedule, following a statement on July 6, 2022, that the company would cancel another 10,300 short-haul flights by the end of October 2022. .

Both easyJet and British Airways cited staff shortages as the reason for culling flights. However, when looking at British Airways hiring trends, the airline may have failed to prepare adequately for the rebound in travel demand this summer. In November 2021, British Airways announced it would increase its workforce by 15%, adding approximately 4,000 personnel including pilots, cabin crew, ground staff and back-office duties as part of a recruitment drive to prepare for in the recovery of COVID-19.

However, the recruitment drive collapsed after British Airways reportedly cut up to 10,000 jobs during the pandemic. Furthermore, according to hiring trends data in GlobalData’s Job Analytics Database, British Airways did not increase the number of job postings (active jobs) on its career pages until at least March 2022. GlobalData found that active job postings dropped by 18.4% between November 2021 and February 2022.

Free added, “Although this example looks specifically at British Airways, it should be emphasized that it is an industry-wide issue with massive staff shortages, following cuts during the pandemic, causing key issues for some airlines.The interconnected nature of the tourism ecosystem – which sees hotels, airlines, car rental firms, tour operators, cruise lines and others relying on each other while traveling – means that disruption issues at any point along this chain have the potential to negatively affect others. Unfortunately, prolonged financial difficulties for a number of industry players are the result of canceled flights. “

The situation in North America

Although passenger volume is still lower at 2019 pre-pandemic levels, it is not only European travelers who have faced massive flight cancellations and delays since May 2022. Travelers to North America also having the same nightmare. For example, Air Canada recently announced that it will cancel more than 9,500 flights in July and August, representing approximately 15% of its scheduled flights in the summer, one of the largest cancellation actions in the global airline this year.

Impact on Travel Insurance Business

The increase in flight cancellations and delays, as well as baggage losses, will make travel insurance unprofitable for most insurance carriers by 2022.

“With many airlines and airports around the world facing very high levels of flight cancellations and delays in recent months, we expect the travel insurance industry to experience combined ratios of more than 100% due to increasing insurance losses, making this line of business unprofitable for. most insurance companies in 2022, “he said Marcos Alvarez, Senior Vice President and Global Head of Insurance.

Even if airlines manage to accept passengers with canceled flights at a later time or fully refund the cost of the ticket, travel insurance policies are likely to be triggered. In such cases, many policyholders will claim under their trip cancellation or trip delay coverage any associated non -refundable travel costs such as connecting flights to other airlines, as well as prepaid hotel and car rental. Flight and baggage delays will also trigger financial compensation under most travel insurance policies, which will further increase travel insurance companies ’loss ratios, according to DBRS Morningstar.

“This will include the problems the travel insurance business has experienced since the beginning of the pandemic, as insurance companies were first hit by an increase in claims and then by the collapse of global travel, which greatly reduced the demand for this product. “

Impact of Travel Insurance Bankruptcy on Insurers’ Credit Profiles

While it is expected that the travel insurance business will not be profitable for most companies this year, losses should remain manageable due to the high degree of diversification of insurance companies into different lines of business. For most of the largest travel insurance providers, Travel insurance typically costs less than 5% of their total total written premiums. The relatively low contribution of travel insurance to overall revenues will help reduce the impact on the credit profiles of insurance groups.

Expect that travel insurance will be more expensive in the short term, due to rising losses generated numerous delays and flight cancellations. Some travel insurance companies may also stop providing trip delay and cancellation coverage for some time, focusing more on the medical side of the business. However, we believe that such an approach is only a temporary restriction as airline and airport performance improves in the coming months. However, some insurance companies may exit or significantly reduce their exposure to the travel insurance business, due to volatile profitability since the start of the pandemic. Moreover, the resurgence in coronavirus cases could force governments to reintroduce travel restrictions, which would negatively affect the need for travel insurance.