The government will consider captive insurer arrangements to provide consumer financial protection against airline failures when it finally acts on the recommendations of the Airline Insolvency Review.

The Review, set up in the wake of the collapse of Monarch Airlines in 2017, published its final report in May 2019 and transport secretary Grant Shapps pledged to overhaul the airline insolvency regime following the liquidation of Thomas Cook in September 2019.

Deloitte partner and expert on restructuring David Gard said a captive insurer for the airline and travel sectors had been proposed to the government as an alternative to trust arrangements or bonding.

A ‘captive insurer’ is a dedicated insurance company set up by an organisation or group of organisations solely to insure members of the organisation or group. It is the model operated by Abta.

Gard told a Travel Weekly Insight Report launch event in December: “The transition to greater protection is challenging.

“The problem is that people can’t afford to put aside money suddenly – the money is being used as part of the working capital of the business.”

He said: “We’ve suggested some kind of captive-insurance arrangement because there isn’t a raft of insurance companies offering this [insurance] on sensible terms.

Gard added: “I like the idea of a captive-insurance arrangement that covers both airline and travel tickets. So you are charged a premium for each journey, whether you’re charged as a consumer or it’s in the cost of travel. Then you have capital held in a captive insurer that covers the risks.”

He acknowledged there would be “all sorts of challenges in how you get there”, saying: “Starting from scratch, it will take a number of years to build an appropriate level of risk capital.”

But Gard highlighted the need to overhaul consumer protection, saying: “As a consumer, it’s not clear where you’re protected and where not. If a company provides an extension of a credit note outside the terms of Atol, you’re no longer protected. But a consumer may not know that.

“Or if I buy a flight with car rental, I’m in Atol. But if I buy a ticket and separately book car rental, it is not protected. It’s really not clear what protection you get.”

During the Covid pendemic, he said: “We’ve seen airlines choosing not to provide a refund, but providing a credit note for future flying and positioning it so that, as a consumer, you don’t even realise you can get a refund.

“You get manoeuvred into accepting a voucher, which means you fall outside credit card protection.

“The existing protection arrangements aren’t funded in a way that gives the protection we require so the government has to pick up the pieces. They will need to fundamentally change how it works currently to create something which doesn’t require substantial government support.”

Gard pointed out the approach of card acquirers to the risk of airline failure adds to the challenge facing carriers but could support the captive-insurer model.

He said: “At the moment, the credit card acquirers’ approach is to start squeezing when they release funds to an airline. So we go from an airline receiving [a payment] when I buy a ticket to the airline potentially not receiving it till I fly, and that has a significant working-capital consequence to an airline.

“A combination of interim government funding and the credit card acquirer passing some of their risk capital into a captive-insurance company could allow us to offset the risk better. It’s one of a number of options we’ve offered.”

More: Access the 2020-21 Travel Weekly Insight Annual Report