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Millions of travelers around the world are facing the difficult decision of whether to cancel upcoming trips because of the coronavirus outbreak.

Those who booked a trip with travel insurance could be feeling smart about their decision. The reality, however, is that the viral epidemic has been a known quantity for many weeks now, and travel insurers have been categorizing it as a “foreseen” event and a “known risk” and therefore not covered unless the ticket was booked by a specific date.

Standard policies typically reimburse only travelers who fall ill during the course of a trip for emergency evacuation or an emergency hospital visit. Beyond that, no policies cover events like a viral outbreak. The reality is ongoing mass disruptions are uninsurable — and bad business for insurance providers.

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Indeed, travel insurance has its limits. In the case of the coronavirus, insurance carriers aren’t providing protection against consumers deciding of their own volition to not travel. The exception is cancel-for-any-reason policies, but these packages come with a premium price tag and refund only a portion of a purchase.

If the U.S. government issues a travel advisory, travelers would need to look to their airline carrier to waive change fees.

Flyer Beware

Travel insurance is often marketed in a misleading way. Travel companies will squeeze a few more dollars out of consumers at the end of their purchase process using hate-selling techniques. Those expecting to get their money back immediately will be disappointed, too, as the claims process for a trip can be byzantine.

Some U.S. states have banned more extensive policies, but that said, they are outliers. New York outlawed cancel-for-any-reason policies because the state claims it is illegal to insure against a personal choice instead of a particular event. It makes sense because there is no actual reason an airline can’t refund your booking — it just chooses to make that option unavailable for revenue management purposes.

Airlines and online booking sites are particularly guilty of pushing insurance policies to generate extra revenue and could do a much better job of clearly outlining restrictions for less-informed travelers.

For what it’s worth, travel insurance providers say they are indeed clear on the terms of their products and are working it out with frustrated customers.

“Some travelers, particularly those who have never previously purchased travel insurance, may have been hoping that travel insurance would cover fear of traveling,” said Daniel Durazo, director of marketing and communications in the U.S. for Allianz Partners. “We have received some calls from consumers asking if they could purchase insurance today for trips booked long ago to destinations now impacted by coronavirus in the hopes they could then cancel those trips. Unfortunately, this is the equivalent of trying to buy homeowners insurance when your house is on fire.

“Like other types of insurance, travel insurance covers unknown and unforeseeable events. Travel insurance covers a specific list of common situations that may cause a consumer to cancel a trip, but fear is not covered. In light of the current situation, we have placed alerts on our website and at other points of purchase to let consumers know how our coverage works. We have also passed along this information to our distribution partners and encouraged them to have their customers call us if they have questions. Finally, we do offer a 15-day free look that allows consumers to review their policy and cancel it for a full refund if it doesn’t meet their needs.”

Unmet Needs

Don’t just take our word for it. A 2018 report from the American Academy of Actuaries’ Travel Insurance Task Force lays the whole game bare.

Travel insurance generally falls into three different categories: generic travel insurance, travel assistance services, and cancellation fee waivers. These are often sold in conjunction with some non-insurance services like local assistance services or concierge access. The cancellation fee waiver product is often baked into the higher fare or rate you pay for a refundable air ticket or hotel booking.

The report notes that the travel insurance landscape has shifted in recent years to incorporate property or casualty benefits like insurance for trip delays or cancellations. There is also the functional reality that insurance sold through a particular travel supplier may be part of a group policy, even if individual travelers are buying in.

“For example, consider a situation where an insurer seeks to package a product for a cruise line to be offered to travelers on that cruise line,” posits the report. “If all the insureds are on the same cruise itinerary, treatment as group may be more obvious than if the insureds are not on the same itinerary, even though each insured is using the same cruise line. In any case, the cruise line seeks to provide insurance options for all travelers in the group and may not have enough information on all the insureds to support individual rating.”

This is part of the reason why a traveler’s insurance may not actually meet his or her individual needs. Insurance is complicated, so even companies that sell customized policies don’t make it easy to get a quote.

“Although there is a wide range of products and companies for consumers to choose from, the opportunity to design their own policies by selecting specific coverages and limits is not widely available,” the report continues. “Therefore, with rare exceptions, when visiting an individual travel insurance company website, the consumer choice will likely still be limited to a collection of prepackaged products.”

Insurers themselves create prepackaged policies to make it easier for travelers to buy. There are “no commercially available rating systems” that compare competing policies. It’s the wild west out there, basically. These packages are also marked up in true travel industry fashion due to net pricing, where the distributor jacks up the price of policies to make money as a de facto commission on the sale.

A Challenge Against Tactics

U.S. legislators have put a spotlight on travel insurance carriers in recent years. Senator Edward Markey, a Democrat from Massachusetts, pushed back against the industry in 2018 by outlining how aggressive marketing tactics are taking advantage of U.S. consumers.

An investigation undertaken by the Senator’s office found that 15 out of 16 sites (both airline and online travel agency) forced a traveler to accept or decline travel insurance before booking. Southwest Airlines, fittingly, was the only major airline or booking site to not offer travel insurance. The policies were also hidden, while 87 percent of the policies themselves were actually serviced by the same two companies.

“Having created this problem, the airlines have manufactured a seemingly inexpensive solution in the form of travel insurance,” the report concludes. “But the policies to which consumers are pushed are often riddled with exclusions and limitations that can render them useless. Consumers could be better served by searching non-affiliated, third-party travel insurance comparison websites that sell similarly priced policies with more comprehensive coverage than what is typically offered directly by airlines and OTAs.

“Unsurprisingly, the sale of these policies has become a profit center for the airlines, OTAs, and insurance companies. According to the most recently available public data, travelers spent $2.8 billion on travel protection in 2016, two-and-a-half times more than they spent in 2004. And it should come as no surprise that the airlines and OTAs earn an undisclosed fee on every policy sold to a traveler, providing incentive to continue the policies’ aggressive marketing.”

Creating a problem and selling the solution back to consumers — why does that sound familiar? It’s the business model of aviation at large in recent years, of course.

The un-skippable insurance buying prompts are also strewn with fear-inducing statements like “No, I’m willing to risk my flight.” A breakdown of individual insurance products sold shows that while the coverage limits for trip cancellations can appear quite high, there are tons of carve-outs and limitations restricting actual payouts.

A bill intended to limit the impact of fees on the flyers remains mired in committee.

Need for Transparency

The ongoing coronavirus chaos has outlined the constraints of travel insurance as a valuable option to global travelers. Until the sector is reformed, possibly by governmental intervention, travelers should think twice before purchasing an insurance product.

There are exceptions, of course; those with medical conditions or those traveling to dangerous areas should still consider insurance products particularly based on their traditional health insurance coverage.

Travelers should have the ability to decide whether they move forward with an insurance purchase only after they have full knowledge of a policy’s coverage and restrictions. Especially in this time of coronavirus, airlines and insurers have to be more transparent about what their insurance products are covering — and what they’re not — to better serve paying customers.

Photo Credit: Passengers stand in line to check-in at Heraklion International Airport, Greece. Thomas Cook has gone into liquidation. Loulou D'Aki / Bloomberg