Cicero Policy Briefer

Issue 7, December 2006

The Insurance Mediation review:
Grasping the nettle of travel insurance sales

By Mark Twigg

The announcement was no doubt lost on many, but during the summer silly season the Treasury launched its review of the EU Insurance Mediation Directive (2002/93/EC), or IMD. Hardly a headline grabber, the review will look at how the UK implemented the Directive and whether there are any ‘problem areas’ which need to be addressed. Step forward the Treasury Select Committee, which announced with breakneck speed in November that it was to launch its own inquiry specifically into the “scope of FSA regulation” following the implementation of IMD.

The key areas of that inquiry will be:

• The current extent of regulation of the insurance market;
• The need for extending regulation to the bundle travel insurance and extended warranty markets; and
• The form any proposed future regulation might take, including non-statutory regulation.

I for one can’t wait to see the Committee’s recommendations—particularly given the significant role travel insurance played in the original discussions to frame the Directive. The travel agents had, after all, refused to play ball with the General Insurance Standards Council (the precursor to FSA regulation). This finally forced the Government in 2001 to abandon any hope that the general insurance market could regulate itself. But having killed off effective self-regulation, the travel agents went one step further in negotiating themselves an interesting carve out from statutory regulation too; presumably the authorities deemed no form of regulation at all as an acceptable outcome given the low risk to the consumer.

How times have changed! Ed Balls, the Treasury minister responsible for overseeing the review, has added some spice to the debate. In giving evidence to the Select Committee, the minister argued that the Directive was not exactly “state of the art”. Not a surprising admission to regular EU-watchers: after all, when the Directive was passed in 2002 the EU Commission’s record on undertaking cost benefit analysis or attempting to understand ex-ante regulatory impacts was rather poor, all too apparent when looking at many of the early FSAP directives. The minister went on to stress his personal concerns that the current regulations do not offer the fullest possible protection to the buying public, particularly highlighting the lack of disclosure over certain key policy exclusions: for example, the fact that 50 per cent of travel policies don’t pay out on terrorist-related claims is poorly understood by consumers. He also highlighted the specific areas of motor and home insurance as possible areas of deregulation, following work by the ABI.

It would seem that this review is far from being pre-determined, with lots still at stake. And so it should be! The fact that a travel insurer could sell a product direct to the consumer and face sales regulation, or sell an identical policy indirectly through a travel agent and avoid sales regulation clearly makes no sense from the consumer’s perspective. While ABTA likes to cite the lack of mis-selling complaints from consumers it ignores a rather obvious point: there is no statutory authority, such as the Financial Ombudsman, to deal with consumer redress where sales are not regulated, as is the case with most travel insurance policies. On what grounds, therefore, could a consumer complain?

This unlevel regulatory playing field, in which consumers are typically unaware of the different levels of regulatory protection being offered, actually makes the travel agent sale far riskier; a fact which can never be fully reflected in FOS complaints. Nonetheless, and thanks in large part to a powerful lobby, the travel agents have been allowed to carry on selling travel insurance without having to worry too much about whether they were doing a good job of it. While an industry training programme is now in place, it isn’t enforceable. Nor is it clear to what extent it has ever been independently assessed.

Not surprisingly, the Financial Ombudsman seems to think that many people selling travel insurance policies are doing anything but look out for the consumer’s interests. In all its recent annual reports it has singled out travel insurance as an area of concern. In 2006 the FOS reported that disputes arising out of travel insurance claims had increased by 17 per cent over the year—and they are now more than double the number received in 2001/02. In 2005 it reported that even the people selling the policies get confused by what exactly it is they’re selling.

The conclusion seems pretty clear. If the Directive was supposed to improve consumer protection across the European Union, then travel insurance regulation—or the lack of it—is a botched job in anyone’s language.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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