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Comment: Managing risk exposure in travel

TMU Management chief executive Sami Doyle considers the fallout from the failure of FTI in Germany and whether it’s time for a shift in risk management in travel, in comments endorsed by ECTAA secretary general Eric Dresin

The failure of FTI Group in Germany in June raised fresh questions around the resilience of the sector’s largest businesses. But is the industry talking down its resilience amid consultations on reform of both the UK Package Travel Regulations (PTRs) and EU Package Travel Directive (PTD)?

No one is suggesting we discount the real financial exposures on the industry, but stock reactions to the collapse of FTI and Thomas Cook in 2019 are potentially unhelpful to the industry’s sustainability. The UK insolvency rate for travel companies remains relatively low and there is similar evidence across Europe.

Can we honestly say legislators, underwriters and acquiring banks fully understand the industry?

Those charged with regulating the industry know it is risky, and this perception has led to overly rigid technical regulation and expensive financial services products. But the sector is more diverse than it seems. Despite a global pandemic, the industry as a whole has not just survived but thrived.

Given this, why are flood, terrorism, cyber or property insurance less expensive than travel bonds or financial failure insurance?

The downfall of individual companies does not mean a broader failure in the travel ecosystem. Rather, each collapse provides an opportunity to examine the specific factors that led to the failure and to target reforms where needed.

We need to change from a perception of largescale risk of contagion in the industry. Other risk-bearing industries point to different approaches.

Following the financial crisis of 2008, many countries implemented solvency ratio legislation on the banking sector aggregating risk for the wider market. Out went ‘Delta One’ financial derivatives trading and in came ‘Basel Two’ international banking regulations.

Proposals to limit the banking sector would have been laughed at in Brussels or Westminster. Yet the EC has proposed limiting prepayments for holidays in reform of the PTD, a blunt way to address a problem in the individual financial situation of certain businesses.

Targeted regulation

Integrated travel businesses which operate their own airline or cruise line carry different exposure to a high street travel agency or tour operator.

Direct suppliers of products carry capital-intensive overheads that represent a completely different exposure and require a regulatory framework that reflects that difference.

Should there be a public-private re-insurance entity for travel like that which ensures terrorism insurance (Pool RE) or flood insurance (Flood RE) is always available? The UK Air Travel Trust Fund and Danish Travel Guarantee Fund prove this is possible.

It would be naive to suggest risk just sits with suppliers, as the cost to the Atol scheme of the failure of Luxtripper this year shows. But it may be time to rip up the rule book and look at how other industries manage such problems.

Is a travel business any different to other businesses handling consumer monies and does it need a European Banking Authority/Financial Conduct Authority style approach, leaving the business to operate within a financial risk framework rather than a travel regulatory framework?

Do travel consumers care if their holiday is protected? The data is patchy, but there is not conclusive evidence that a consumer books one provider over another based on this. Price remains the main driver. The regulatory framework should roll back from focusing on consumer monies to focus on the destabilising features of a travel company.

Technology now gives us the ability to be transparent about where consumer monies are in the supply chain and where the risk exposure sits. Greater visibility of the exposure could have reduced the cost of the Thomas Cook and FTI failures.

How many passengers who were repatriated could have had their holidays fulfilled? For failures of big suppliers, repatriation may be the only option. But what about failures where the supplier has not failed and products could be fulfilled, especially if the supplier has been paid?

If we knew at the point of failure which products could go ahead, claims could be tailored. This would alleviate the supply chain risk which was FTI’s downfall. It struggled to obtain supply on credit without prepayment and as a result struggled to offer competitive terms to consumers.

A regulated supplier backstop would focus risk on distribution and supply, which could be governed by different frameworks.

The travel industry is doing a terrible job of marketing itself to financial services providers and legislators. The industry needs to look at other sectors to see how they have reacted to risk events and needs to take responsibility for improving the data flow between parties to a booking to increase transparency and make it easier for products still to be provided in the event of a failure.

TMU Management is an insurance broker providing data-based financial failure products. The European Travel Agents’ and Tour Operators’ Association (ECTAA) represents 80,000 travel agents and tour operators.

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