INTRODUCTION
Before the COVID-19 epidemic, travellers were primarily either underinsured or uninsured for their journeys. This issue is expected to worsen upon the resumption of international travel. Only 12.8% of tourists in the United States typically acquire travel insurance. Various factors may elucidate tourist underinsurance, including risk perception, a false sense of security from location familiarity, and travellers’ (mis)comprehension of risks at the destination. This research note emphasizes the implications of reverse moral hazard arising from the COVID-19 epidemic and stakeholders’ need to devise new measures to mitigate this issue.
TRAVEL INSURANCE CLAIMS AND THE COVID-19 PANDEMIC
During the initial phase of the pandemic, numerous travel insurance claims were rejected owing to the enforcement of pandemic and/or known event exclusions. Evidence submitted to the House of Representatives Standing Committee on Economics reveals that in April 2020, primary travel insurance received 10,000 claims, most likely to be rejected owing to a pandemic or known event exclusions (Commonwealth of Australia, 2020). Certain insurers and travel providers opted to reimburse the unutilized segment of travel insurance coverage (e.g., if the travel was scheduled post-pandemic declaration).
Nevertheless, for individuals who incurred travel losses due to the epidemic, travel insurance was ineffective in the situations where it was most essential. Issues in conveying, utilizing, and comprehending the exclusions and stipulations of insurance products are widely recognized. Despite these difficulties, the lack of travel insurance when essential may affect the future adoption of travel insurance due to a reverse moral hazard impact. The reverse moral hazard effect is referenced in medical insurance literature as the cause of decreased home medical care use and spending due to less generous insurance coverage.
We assert that recent developments related to COVID-19 will diminish the perceived coverage and value of travel insurance, thereby leading to increased hesitance to travel overall, especially to areas considered more hazardous. Pandemics are less insurable than natural disasters because of the magnitude of losses and the challenges in risk diversification. Reinsurers likewise encounter these challenges, rendering pandemics a complex risk to underwrite. Likewise, previous insurance experiences with COVID-19 may diminish the perceived efficacy of travel insurance, prompting travellers to choose alternative risk mitigation techniques. This results from two prevalent phenomena: the pandemic experience and inadequate product comprehension.
Individuals have previously encountered losses despite being insured (e.g., discovering that their insurance did not cover luggage loss within 12 hours). Still, these instances are isolated and do not attract considerable public attention. The simultaneous losses numerous travellers face underscore concerns regarding the clarity, usability, and appropriateness of exclusion clauses and other stipulations. Consequently, the broad use of pandemic and known event exclusions can alter views of travel insurance value and create a reverse moral hazard issue in the market. The perceived decrease in travel insurance coverage will influence traveller decisions and spending behaviours.
VALUE IN TRAVEL INSURANCE
The value proposition of insurance for travellers is its capacity to mitigate risk exposure when traveling substantially. Travel insurance policies generally encompass only idiosyncratic (insurable) risk occurrences (Doherty & Dionne, 1993). Idiosyncratic incidents like theft or lost items are linked to individual traveller situations and can be diversified by the insurer. The insurer can reasonably presume that these risk events among travellers are separate and, when combined, present a relatively modest risk.
In contrast, catastrophic risk occurrences like pandemics exhibit a significant correlation among policyholders and incur disproportionately large losses. These are predominantly excluded from nearly all insurance policies due to their challenging diversification, resulting in minimal risk mitigation when incorporated into a portfolio. Excluding specific catastrophic risk events is necessary to maintain insurance solvency, but this may be a recent understanding for misled policyholders. For persons who do not read or comprehend disclosure statements, many travellers may have a diminished perception of the value proposition of travel insurance policies that address idiosyncratic risks. This would intensify the issues of underinsurance and non-insurance due to a reverse moral hazard effect when customers modify their behaviour in response to a perceived decrease in risk transmission. Consequently, due to the perceived inadequacy of risk coverage from insurance policies, visitors may resort to excessively cautious actions and decisions. These decisions can exert substantial economic repercussions.
EFFECTS OF INCREASED TRAVELLER UNDERINSURANCE
The COVID-19 travel limitations have arguably inflicted reputational harm on travel insurance, since numerous consumers incurred financial losses despite their belief in adequate risk coverage. For instance, RoomerFlex refrained from disbursing their policies despite the lack of pandemic or known-event exclusions. Instead, they have reimbursed their clients’ premiums, akin to a victorious lottery ticketholder being returned the ticket price rather than collecting the appropriate amount. Reverse moral hazard may lead to less travel to specific areas, adversely affecting tourism operators, local economies, airlines, and travel insurers.
Certain individuals may exhibit a diminished propensity to travel altogether. Recent research suggests that 35% of Australians expressed a diminished propensity to travel globally after the virus is suppressed. The selection of a destination may be influenced by the prevailing circumstances and the understanding that catastrophic travel risks are excluded from insurance coverage. The implication is that a destination’s inherent risk profile, or capacity to manage risk events, will now hold greater significance. Travellers unable to obtain insurance for significant risk occurrences, such as flight disruptions resulting from an unaddressed health crisis, may opt for alternative destinations.
This aligns with the personal risk management literature, which encompasses tactics such as risk reduction, transfer, avoidance, finance, and retention. Travellers may pursue insurance coverage for pandemics; but policies that encompass such situations are not commonly accessible. Perceived health and safety hazards, along with concerns around return journeys and repatriation during the epidemic, will complicate individuals’ perceptions and valuations of travel insurance. This will fluctuate based on the goal of the travel, educational background, financial level, portability of current health insurance, and perceptions of the epidemic. Furthermore, there will likely be specific implications for elderly travellers, individuals with pre-existing medical illnesses, persons with disabilities, and those with relatives who belong to these groups. Governments will possess a heightened vested interest in guaranteeing that travellers are adequately covered. Home governments would likely seek to reduce expectations around repatriation and the expenses associated with consular aid, particularly given research indicating that a substantial number of tourists misinterpret the extent of assistance their country can offer.
CONCLUSION
In the future, passengers must meticulously examine the exclusions of their policies and be ready for catastrophic risk scenarios that could result in their being stranded and incurring out-of-pocket payments. This may affect the choice of locations based on the perceived safety of local circumstances. Insurers must improve communication with consumers to clearly convey the advantages and coverage of their plans, and we recommend a robust marketing and communication campaign to restore travellers’ confidence. Governments and destination marketing groups will likely begin to highlight the significance of travellers’ perceptions of safety in their choice of locations, promoting themselves as low-risk options. Upon the resumption of foreign travel, the significance of travel insurance will be paramount, necessitating additional research on the efficacy of insurers’ communication to consumers concerning product coverage, value, and risk.
The COVID-19 travel limitations have arguably inflicted reputational harm on travel insurance since numerous consumers incurred financial losses despite their belief in adequate risk coverage. For instance, RoomerFlex refrained from disbursing its policies despite the lack of pandemic or known-event exclusions (Tims, 2020). Instead, they have reimbursed their clients’ premiums, akin to a victorious lottery ticketholder being returned the ticket price rather than collecting the appropriate amount. Reverse moral hazard may lead to less travel to specific areas, adversely affecting tourism operators, local economies, airlines, and travel insurers. Particular individuals may exhibit a diminished propensity to travel altogether. Recent research suggests that 35% of Australians expressed a reduced propensity to travel globally after the virus is suppressed. The destination selection may be influenced by the prevailing circumstances and the understanding that catastrophic travel risks are excluded from insurance coverage. The implication is that a destination’s inherent risk profile, or capacity to manage risk events, will now hold greater significance. Travelers unable to obtain insurance for significant risk occurrences, such as flight disruptions resulting from an unaddressed health crisis, may opt for alternative destinations.
This aligns with the personal risk management literature, encompassing risk reduction, transfer, avoidance, finance, and retention tactics. Travelers may pursue insurance coverage for pandemics, but policies that encompass such situations are not commonly accessible. Perceived health and safety hazards and concerns around return journeys and repatriation during the epidemic will complicate individuals’ perceptions and valuations of travel insurance.
This will fluctuate based on the goal of the travel, educational background, financial level, portability of current health insurance, and perceptions of the epidemic. Furthermore, there will likely be specific implications for elderly travellers, individuals with pre-existing medical illnesses, persons with disabilities, and those with relatives who belong to these groups. Governments will possess a heightened vested interest in guaranteeing that travellers are adequately covered. Home governments would likely reduce expectations around repatriation and the expenses associated with consular aid, particularly given research indicating that many tourists misinterpret the extent of assistance their country can offer.
In the future, passengers must meticulously examine the exclusions of their policies and be ready for catastrophic risk scenarios that could result in their being stranded and incurring out-of-pocket payments. This may affect the choice of locations based on the perceived safety of local circumstances. Insurers must improve communication with consumers to convey the advantages and coverage of their plans clearly, and we recommend a robust marketing and communication campaign to restore travellers’ confidence.
Governments and destination marketing groups will likely begin highlighting the significance of travellers’ perceptions of safety in their choice of locations, promoting themselves as low-risk options. Upon the resumption of foreign travel, travel insurance will be paramount, necessitating additional research on the efficacy of insurers’ communication with consumers concerning product coverage, value, and risk.
