Bonds and financial failure insurance (FFI) have become more readily available for businesses looking to meet financial protection rules, but choices remain constrained and costs higher than pre-pandemic.
That is according to industry lawyer Farina Azam, partner at Fox Williams, who told the recent Abta Travel Law Seminar in London: “The bond market is significantly stronger than during and immediately after the pandemic.
“Abta recently approved two new bond providers. Hopefully, we’ll start to see more, but probably not until there is more certainty around Atol reform.”
She pointed out the number of bond insurers working with the sector is limited by the condition that “insurers can’t refuse any claims in the event of a failure” and noted: “The bond organiser must be a member of an approved body, which means Abta or ABTOT [the Association of Bonded Travel Organisers Trust].”
A bond is then based on the maximum amount of payments an organiser expects to hold at any one time or 25% of all the payments in a 12-month period or 10% of all payments if the approved body has a back-up fund or insurance.
Azam said: “The issue during the pandemic was there weren’t many insurers approved.”
She added: “There was a scramble by FFI [financial failure insurance] insurers to get out of the market. FFI policies are more readily available now, although not as much as bonds, and premiums are higher than before.”
Azam noted: “Trust accounts, with payments held in trust by an independent trustee, have been around a long time.”
These allow the travel organiser to use customer money to pay suppliers so long as the payments are covered by insurance. If the trust covers package holidays including transport, there must also be insurance to cover repatriation.
She explained: “The main issues with trusts are around cost and complexity and a lack of available insurance There has been a shift by Abta to accept trust accounts, but only one member has so far opened a trust account.”
Tejash Bhagani, underwriting director at Travel and General Insurance Services which provides bonds and insurance to the sector, insisted: “We’ve seen growth in the industry in all sectors in 2022-23, and growth in bonding enquiries.”
He noted bonds cover bookings for 12 months but frequently include an additional six-month ‘run-off’ period which increases the cost.
Bhagani explained: “We require 18 months because typically there is a time delay before alternative provisions are in place. If there is an agreement in place with an insurer, there is no run-off period.”
Jordan noted: “If you renew your bond [with Abta] in time you don’t incur a fee for a run-off period.”