Travel supplier insolvency is not a guaranteed cover in travel insurance, nor is it automatically written into travel insurance policies.
This is according to Travel Insurance Consultants (TIC), which clarified the parameters for insurance cover when a business, specifically an airline, started or exited business rescue proceedings.
TIC’s head of travel insurance, Jason Veitch, told Travel News supplier insolvency benefits were withdrawn when an airline entered business rescue. However, benefits were not automatically reinstated when that process ended.
Risk profile
The issue of supplier insolvency cover is top of mind because of current trading conditions and also due to heightened sensitivity from agents and customers over the issue of refunds and cancellations.
During his address at the opening of the Asata AGM on Thursday (August 19), ceo Otto de Vries told members it was incumbent on agents to perform their own risk assessments on suppliers to keep agency and customers’ money safe. He described airline risk management as a critical focus area for the organisation, and said supplier safety extended to safety and hygiene but also refund and cancellation policies.
Currently, TIC has withdrawn travel supplier insolvency benefits for a number of international carriers and several domestic airlines, among them Mango and Comair, which both remain in business rescue.
SAA – restricted cover
In the case of SAA, it is on TIC’s list of suppliers where insolvency cover has been limited. In a notice dated April 21, 2021, TIC said: “The Travel Supplier Insolvency Cover relating to SAA will only be valid if the travel insurance policy is purchased within 48 hours of the purchase of SAA airline tickets, in full or in part. Should these terms and conditions not be met, there will be no benefit for Travel Supplier Insolvency for SAA.”
Jason explained: “The question of business rescue is a difficult one to work around. The airline failure cover provided is when the airline actually is insolvent. In the case of business rescue, the entity makes an application to a competent court to stave off any legal action to force it into insolvency. You can appreciate that suppliers may choose this option because they want to get something of what they are owed before it is all gone.”
Therefore, Jason said, if an airline was in business rescue it was not yet insolvent and so did not qualify for a claim under the airline failure cover benefit of the policy. This was standard across all travel insurance policies worldwide, he said.
“In the event that an insurer deems an airline to be acting in a manner that is not consistent with ‘going concern’ business practices, then it will naturally protect itself against a potential failure. At the time of this decision the insurer will honour all existing policies but then remove cover from all future policies. The insurer will then wait and assess the risk associated with an airline before looking to insure the risk again.”
According to Jason, this means that an insurer “will not necessarily insure an airline as soon as it is out of business rescue, but may choose to wait a while so that the airline can demonstrate that it is solvent and has certain prospects of succeeding as a going concern”. “This demonstration is usually a legitimate set of financial results, not simply that it has been operating for a few months.”
Medical claims
Medical treatment costs were still responsible for the majority of payouts, said Jason, pointing out that supplier cover was only one element of an itinerary that agents, customers and insurers needed to consider.
“TIC does not insure suppliers or wholesalers of travel product for the simple reason that there is no way to ascertain the financial stability of the suppliers and wholesalers, and there are thousands of them.”
A case in point was United Europe, he said. “Everyone thought they were doing so well, and then they collapsed. It is inconceivable to expect an insurer to cover this risk.
“A travel insurer’s main responsibility is to insure the medical claims of its policyholders. This is where approximately 70-75% of the risk premium will be allocated. The policy premium simply would not be able to cover large-scale losses from suppliers and wholesalers. It would be devastating for an insurer, during this COVID period, to cover all the suppliers and wholesalers who have disappeared.”