Offshore and unrated: Supplier failure is crying out for capacity

The supplier failure insurance market is under-reserved by insurers and requires more capacity, according to brokers offering the product. While there are rumours of new entrants, the product remains unpopular with insurers because of high risks and relatively low rewards.

“There needs to be more players in this market,” said travel broker Rock Insurance’s managing director Andy Martin.

Andrew Donnelly, broking assistant at fellow travel broker Advantage Financial Services, adds: “More would be better but it is very hard to find more.”

Demand for more supplier failure cover?

Supplier failure insurance, a commercial offering, protects travel agents against the risk of having to rearrange flights, accommodation or other services if the suppliers go bust. The product has gained in popularity following the number of high-profile supplier failures.

Some also expect reforms to the Air Travel Organisers Licensing (ATOL) scheme, which are aimed at increasing customer protection, to boost demand for the product, as travel agent’s liabilities to clients will be more clearly defined.

Northern & Western comes to fill the gap

Until recently were two main players: IGI Insurance, now known as AmTrust Europe, and underwriting agency International Passenger Protection, which is backed by capacity from Lloyd’s insurer Sagicor and Groupama. But AmTrust Europe withdrew from the market in August 2010.

One new company, Northern & Western Insurance Company (NWIC), has entered the market. Rock Insurance, which previously used capacity from AmTrust Europe, switched to NWIC following AmTrust’s withdrawal. But the company is unrated and based in the West Indian island nation of Saint Kitts and Nevis. It is not registered in the UK or Europe.

Not ideal choice but options are limited

Martin insists that despite NWIC being an offshore, unrated player, it provides good service and pays claims. Donnelly agrees, but adds that his customers are plumping for NWIC because of the lack of other options that suit them. Advantage has access to coverage from both NWIC and IPP, but Donnelly says more customers opt for NWIC.

He admits that because of its offshore, unrated status, NWIC is “not the most ideal option” but adds: “IPP provides a more limited cover compared with AmTrust and Northern & Western provided a little bit broader cover. The cover being more similar to what people are familiar with outweighs the risk of NWIC being offshore.”

When asked how his company gets clients comfortable with using an offshore, unrated carrier, Donnelly says: “There are people who rely on the product quite a bit to cover their risk and a lot of people have got a lot of value out of the product in the years that it has been in place. People will take whatever options are available. There is a lot of pressure to have the coverage.”

Who’ll take on the risk?

While brokers need more supplier failure capacity, they are unlikely to get it. Martin says there are rumours of new players entering the market. But Donnelly points out that convincing insurers to write it is no mean feat.  

“There are not a lot of insurers because it is not a very appealing insurance,” he says. “It is not a large market; it is specialised. To encourage people to take on the risk is a difficult task. It’s not for want of trying but the pot isn’t quite big enough to entice many players to come in.”

Michael Ward, a director at IPP, adds that the risk of loss could also deter new entrants. “The appetite for insolvency in the insurance market is pretty low at the moment. It is quite difficult for new companies who want to start up a travel insurance facility to underwrite this kind of risk.

“It may be difficult for them to get the security to underwrite the risk because there have been so many failings.”