Travel insurance claims jump amid spike in flight cancellations, delays

A surge in delays and flight cancellations, coupled with evolving market dynamics, has resulted in an increase in claims for travel insurers, according to several industry executives.

In 2022, airline staff shortages and severe weather caused flight cancellations to nearly double. From Jan. 1 to Sept. 18, U.S. airlines canceled more than 146,000 flights, a sharp increase from the same period in 2021, when flight cancellations stood at around 83,000, according to data from flight tracking site FlightAware.

Flight delays from U.S.-based carriers also increased. Roughly 20.9% of flights from Jan. 1 to Sept. 18 were delayed, compared to 16.3% in the same period in 2021, according to FlightAware.

All this uncertainty has made travel insurance "far more attractive," according to Paula Twidale, senior vice president of travel for AAA.

This increase in disruption and demand has also driven claims higher, as evinced by rising direct incurred loss ratios among some carriers since the end of 2020.

"It's kind of the perfect storm," said Shannon Lofdahl, president and CEO of broker Travelex Insurance Services Inc., a subsidiary of Zurich Insurance Group AG. "We're absolutely thrilled that we're seeing more consumers see the value of insurance, but we're certainly paying a lot more claims than we have historically."

Pandemic sparks demand

Demand for travel insurance has been higher since the start of the COVID-19 pandemic as travelers look to protect themselves from unexpected delays, cancellations and other travel woes.

National Association of Insurance Commissioners regulatory statements do not provide granular reporting on travel insurance; it is bundled under the inland marine business line, making it difficult to analyze data specific to travel insurance.

Out of the insurers in the travel insurance market in the U.S., Allianz SE's Jefferson Insurance Co., American International Group Inc.'s National Union Fire Insurance Co. of Pittsburgh Pa. and Zurich American Insurance Co. recorded some of the largest premiums for the inland marine business line in the second quarter of 2022.

Out of the insurers in the travel insurance market in the U.S., the individual units underwriting the business for Zurich and recorded some of the largest premiums for the inland marine business line in the second quarter of 2022.

Insurers saw inland marine premiums spike following the height of the pandemic as people began to travel again and demand for travel coverage boomed.

An evolving business model

The way travel insurance is used has also evolved since the start of the pandemic, Lofdahl said.

As the world dealt with the impacts of the pandemic, buyers wanted coverage that would allow them to cancel for any reason, looking for protection if they caught the coronavirus, Lofdahl said in an interview. Cancel for any reason, a more expensive coverage option, remained popular during the second wave of COVID-19 as the delta and omicron variants became more dominant.

As borders opened and life became more normal, the focus shifted to trip delay and trip interruption claims, Lofdahl said.

More young people are also purchasing travel insurance, according to Michael Grossman, associate vice president of travel insurance for Starr International Company Inc., pushing the average buyer age down. All of these factors have driven claims volume for insurers higher, according to Grossman and Lofdahl.

For now, travel insurance claims are still manageable; some insurers, though, have had to take steps to adapt to the increased volumes.

Increased demand for coverage and higher claims have also slowed claims processing, forcing insurers to beef up their call centers and claims departments, Grossman said.

Whether these new customers will continue to buy coverage in the years ahead if the travel environment returns closer to historical norms is uncertain. Insurers must also make sure that policies provide comprehensive coverage but are not too expensive.

"Especially with new buyers, if the price is too high, you will lose them immediately," Lofdahl said.