Outlook for Travel-Exposed Lines

Many industries are obviously going to see economic stagnation or contraction due to the COVID-19 pandemic. And many will recover over time – how much time is unclear and will vary by industry. That revenue contraction or stagnation will have a knock-on effect on insurance premiums for those sectors. For example, if construction projects are cancelled or put on hold as they often are in recessions, we can expect Architects & Engineers E&O and Builder’s Risk to see contractions.

While these spaces should recover, as they did from the hits they took in 2008-2009, I believe travel-exposed business may be facing a paradigm shift in demand that will have a ripple effect on premium for insurance in that sector.

Demand Paradigm Shift

Let’s start by investigating the dynamics at play in the sector itself before looking at the knock-on effect on insurance.

International and domestic travel has become so common-place and accessible. For many businesses, it is how business is done. I remember making day trips to Europe more than once in my career, and countless domestic trips for one-hour meetings.

On some routes I would frequent, I started to recognize other passengers, either those who were on both my outbound and return flights, or, when I went to Atlanta weekly for three years, I would see some of the same people each week for months on end. Being based in Boston, the idea of flying to NYC for a meeting gets little thought or consideration for alternatives to making the trip because it’s so easy and common. If you did debate the trip, it was likely about whether to take the train or to fly.

Travel may not be how all business is done, but it clearly is how a lot of business is done. We value face-to-face interaction for many types of meetings.

Adding to that, many companies shunned work-from-home or remote working arrangements. Many experimented with it, or allowed people to work from home once a week, but in general, people are still expected to be in the office in the vast majority of role at the vast majority of companies.

Then they weren’t. Overnight.

Companies who were not comfortable with wide-scale remote working suddenly had no choice but to be comfortable with it. Meetings you never would have considered doing via Zoom or Webex suddenly had to be done that way. Even the ability to use tools like that in corporate settings, which IT security teams may have shunned in the past became mandatory for the company to keep operating.

That is, where there was resistance to doing things without being in person, that resistance has been broken through by necessity.

But that’s not all. In addition to breaking cultural or political barriers to doing things virtually, people are now forced to learn how to do things remotely and have been equipped with the tools to do so. That is, they have now been taught new tools to enable staying remote.

So we have a combination of a removal of constraints along with giving people the tools to act on this new freedom to be remote.

This combination is why I think we are going to see a shift in demand for travel, certainly from business travelers. People will no doubt go back to traveling, and there are some situations that really demand being in-person. But there are now situations where people will look at travel as one of several options, along with using Zoom, Microsoft Teams or something else to save on the travel costs, hassle and time where they would not have considered this before.

As a result, while I’m sure spending on travel services like plane tickets, hotel nights and rental cars will bounce back, I don’t foresee them bouncing back to the level or path they were on before.

Insurance Impact of Reduced Travel Demand

With a smaller travel economy, we will see commensurate reduced insurance needs for providers in the space. I can see several lines of business being impacted:

  • Aviation insurance will contract due to fewer flights;
  • Mainline P&C coverage for hotels will drop if the number of hotels in business contracts and does not rebound (e.g. Property, Auto);
  • Lines with revenue as a core ratable like GL, E&O and D&O will see premium drop;
  • EPLI and Workers’ Compensation, which are driven by employee count and payroll size, will come down as travel providers run with fewer employees due to their reduced size;
  • Benefits for employees of the travel industry will go down for the same reason as EPLI and WC;
  • Travel Insurance will likely see a drop simply due to the reduced number of trips, but I’m doubtful this is bought by business travelers much, so I do not think we will see the same level of paradigm-shift-drive reduction (if and when leisure travel recovers)

We still do not know exactly how, when and to what extent different lines of business will be impacted. It is important to think about the immediate or obvious impacts to coverage or losses. However, it is also important to assess shifts in the longer-term dynamics of demand for coverage itself or for the products and services that end up needing coverage to fully understand the impact the insurance market will see from COVID-19.

This post is inspired by the upcoming book, The Future of Insurance: from Disruption to Evolution, coming out June 24th, 2020 at Connected Claims USA, written by Bryan Falchuk and published by The Insurance Nerds.

Pre-order your copy today at future-of-insurance.com.