The cost of scheduled airline failure insurance (Safi) could rise unless more providers enter the market, after one of the two major providers stopped offering cover following the ash flight ban.

IGI Insurance has written to trade partners saying it would not consider new Safi business, but existing customers would continue to be covered.

IGI underwriter Patricia Bird said: “We have been given instructions from our parent to withdraw from the market. The position will continue to be reviewed.”

Antony Martin, Rock Insurance managing director, said it was talking to a number of other providers about creating similar products to ensure there remained a competitive market for Safi and to keep prices down.

“IGI’s decision means there is less choice and other providers, such as International Passenger Protection (IPP), could charge what they want,” Martin said.

Sources said IGI’s move reflected nervousness about the financial impact of the six-day flight ban and the continuing threat of ash flight bans on airlines already struggling with reduced demand and high fuel costs.

The withdrawal of IGI leaves IPP as the other main player offering Safi, along with a clutch of much smaller underwriters.

Rock said IGI’s decision did not affect its supplier failure cover brought in after the failure of XL Airways in 2008.

Martin said most of its customers did not take out Safi because they were buying no-frills flights that are not considered to be a major risk.

“The insurance sector as a whole has been fragile for some time in its attitude to risk,” he said.

“IGI will be looking at this as a perfect opportunity to review its business. I think they will come back with something slightly different.”

This week there was further disruption to flights due to ash clouds from Iceland’s Eyjafjallajokull volcano.

Northern Irish and Scottish airspace was closed on Tuesday and Wednesday after the Civil Aviation Authority said ash levels had risen above new safety levels.