The ATOL fund is finally back in the black, thanks to the introduction of Flight Plus ATOL and increased contributions from a whole range of retailers, but in particular OTA’s like Travel Republic who finally joined the scheme in 2012.
However, as usual when dealing with the Government, the goal posts have shifted again and instead of the expected reduction in the ATOL fee, we are faced with a “Call for evidence”. As part of this, they have made it clear that the Government wants the CAA to continue to provide “Repatriation cover”, but to remove the Governments role as insurer of last resort. Instead it is asking the travel industry to come up with its own scheme to provide financial security for the customer. In my opinion this is perfectly reasonable and actually not that hard to achieve for the Flight Plus sector, if the CAA will continue to play a key role.
The CAA has mooted “Trust funds” as one possible solution for Flight Plus travel agents, but in really this is a bit of a red hearing. Yes, “Trust funds” would extend current financial protection to cover pipeline moneys held by agents, but it does not deal with the key risk that ATOL currently covers i.e the failure of an airline, causing the failure of the Flight Plus ATOL holder.
The majority of Flight Plus holidays use Low cost carriers who demand payment on booking. Therefore, if an airline went bust, there would be no money in the trust fund to replace the flight and the ATOL holders still goes bust. The only real solution is compulsory insurance backed Supplier Failure Cover (SFC)
The collapse of an airline would cost insurers a large amount and is therefore regarded as a “Systemic Risk”. This is where the risk outweighs the annual premium paid to the insurance, to such an extent that it could take 5-15 years of premium before it’s covered. If the CAA leaves agents to get their own individual policies, then multiple insurers, all of which will have a percentage of the market, will face this one “Systemic Risk”. This is highly inefficient and in itself will lead to higher average premiums.
The logical party to aggregate all the demand for SFC and place a policy to cover this risk is actually the CAA, since its what it currently does. The only fundamental change is that the CAA would be swopping out a Government bond, for an insurer or panel of insurers who specialise in this type of risk covering.
Having researched the market extensively as part of my Non Executive duties at Rock Insurance, I know that an SFC policy could be placed for £1.50 per person or less and if £1.00 is put into a fund to cover repatriation cover, the current ATOL fee of £2.50 can be used to provide both repatriation and financial protection as it currently does.
The CAA could reduce the cost of insuring against airline failure, if it insisted that retailers used “Virtual’ credit card technology or company cards when booking flights. These allow re-charges non-delivery of service against any airline’s credit card clearer, if the airline fails and provides a level of defence in front of the insurance policy.
The CAA could then use this saving to extend the SFC policy to also cover the collapse of Flight Plus agents and any “pipe line” money. Although, some travel agents do regularly fail, these failures represent relatively small hits to insurers and therefore are relatively cheap to insure. Also by pooling the risk of failure across all Flight Plus agents, it removes the need for the CAA to insist on differential premiums depending on the risk of the agent and in turn the need operate complex trust fund schemes or financial regulation.
The above model is simple to introduce across the Flight Plus sector since it can all be achieved with no visible change to the scheme. ATOL holders still pay £2.50; customers still get financial and repatriation protection.
I wish the same could be said in the case of the major tour operators since most insurance companies will be scared by the shear scale of cost if one of the big two collapsed, irrespective of its likelihood. However, for once hopefully the CAA will not burden the Flight Plus sector with this risk as well, since after all, we are only agents!!