The business of protection

With insolvencies and bankruptcy filings on the uptick among travel businesses in recent years, is the trade seeing enough protection against such risks from insurance providers? TTG Asia reporters find out

As the middleman in the travel business, running a travel agency in the current challenging economic climate is not without its perils, as risks ranging from bankruptcy and sudden cessation of services from partners could affect their operations and cause financial loss.

However, a check with agencies across the region reveals that there is currently no insurance or scheme in place that offer a hedge against such specific business risks.

“Travel agencies are the weakest part of the entire travel distribution (chain), but there is no insurance protecting our business,” lamented Royanto Handayam, CEO of Panorama JTB Tours Indonesia.

Travel agents are also vulnerable as there is no insurance protection against defaulters or scams, some common risks that agencies face, especially as the threshold for entry into the travel agency business is relatively low in certain markets.

Fe Abling-Yu, second vice president of Philippine Tour Operators Association, welcomes the tackling of such issues. “It is easier to apply for a business permit to open travel agencies unlike before when licensing is with the Department of Tourism, and there are cases of consumers getting scammed. If something happens to consumers, the bottom line is we need to take care of them more than anyone else.”

“There is no insurance policy in existence as it is difficult to prove to an insurance company that you have not been paid by your client whose business is still in operation,” said Ally Bhoonee, executive director of World Avenues Malaysia. “If they default, there is also nothing much we can do. If we decide to take them to court, it will have to be in their home country and getting a hearing may take years.”

Limited insurance coverage
Earlier this year, the collapse of Tokyo-based discount travel agency Tellmeclub, which affected as many as 90,000 corporate and leisure travellers, has forced the Japanese trade to reappraise its existing regulations on insurance, which were last revised around 20 years ago.

“The bankruptcy of Tellmeclub has the potential to damage the image of the travel industry,” admitted Yoshinori Ochi, director of the board and secretary general at Japan Association of Travel Agents.

“For this reason, the Japan Tourism Agency has set up a working group to look into ways to conduct management governance in the industry so that the involved parties can act accordingly, and in a timely manner, in the event of travel agency bankruptcies in the future.”

He added: “Consumers are protected from bankrupted agencies – if they are JATA members – under our Compensation Security System, but neither consumers nor the agencies buy insurance against bankruptcy from insurance companies. JATA’s system does not cover agents dealing with errant clients or partners, although they are eligible for protection through other channels not related to JATA compensation.”

Current insurance protection in the travel agency community is typically limited to IATA’s default insurance scheme or selected programmes signed up based on their own needs, Elly Hutabarat, chairman of the Association of the Air Ticketing Companies in Indonesia (ASTINDO), told TTG Asia.

She said: “As IATA agents, it is mandatory for us to take the Default Insurance Programme as well as the bank guarantee payable to banks appointed by IATA.

“If an agency defaults, the insurance company will settle the payment to IATA. But it does not mean that the default agent is free from any debt. Instead of paying to IATA, it will need to pay back the debt to the insurance company. In this case, the insurance that we are paying is to protect the airlines and not the agents. On the other hand, if an airline collapses, agents will be impacted.

“ASTINDO once worked on finding an insurance company who would protect agents from a default airline. This move was (initiated) when a number of Indonesian airlines like Sempati Air, Adam Air and Mandala Airlines collapsed, leaving agents in limbo and forcing some to close shops.”

Elly added that Raya Insurance had rolled out a scheme to protect agents’ deposits with domestic non-IATA airlines, so that if an airline ceases operation agents can get back their deposits. However, few took up the insurance. Furthermore, following the improved regulation in Indonesia’s transportation sector, there has not been no more airline defaults.

ASTINDO is currently working with airlines to agree on transactions using credit cards only, starting with Garuda Indonesia, according to Elly. “With credit card payment, liability will lie with the credit card operators, not with us,” she said.

Elsewhere in the region, Hong Kong Association of Travel Agents’ (HATA) chairman, Jason Shum, said: “For inbound travel agents, it’s not mandatory to insure for professional indemnity, but agents handling group tours tend to have their protection in place if clients (make claims in event of accidents). Therefore, some operators handling inbound groups would buy insurance.”

HATA, as an example, also insured its annual overseas convention from AIA to ensure a safe trip for delegates, said Shum.

Other Hong Kong agents like Swire Travel, which uses Aon, also takes up insurance separately for its cruise business, according to managing director, Gloria Slethaug.

Worth paying a premium?
Intensifying competition from OTAs, discounts on direct flights and hotel bookings, and higher merchant fees for credit card companies are some key reasons why more agencies are “struggling to stay afloat”, remarked Kay Swee Pin, president of Singapore Outbound Travel Agents Association (SOTAA).

The industry is seeing more agencies shuttering, with the most recent case of the Singapore Tourism Board revoking MISA Travel’s agency licence. As a result, the sudden closure of high-profile agencies makes it “increasingly harder” for the surviving operators to acquire financing from banks, explained Kay.

And even if insurance was available to travel agents to protect themselves against bankruptcy, the premiums are likely to be exorbitant, several agents pointed out. Most players, big and small alike, hence do not see the urgency of taking up such insurance.

Pauline Suharno, managing director of Indonesia’s Elok Tour, said: “There are a lot of small- and middle-sized agents who feel that paying the premium means cutting their slim profit margins even thinner.”

World Avenues’ Bhoonee shares similar sentiments: “It is good to have bankruptcy protection coverage, but the premiums will be high. How can we cover premiums when profit margins are so thin? If we increase the profit margin, it will be ideal.

“However, to do this, we have to educate our clients (both local and overseas agents) who buy from us that they are protected. This way they will accept higher rates knowing that they are covered in the event that my company goes bankrupt,” he added.

The Philippine Travel Agencies Association (PTAA) had earlier tried to push for industry-wide coverage for its members, said Jojo Clemente, president of Rajah Tours, during his term as PTAA president from 2005-2007. “But it didn’t push through because of the big amount involved and not all agencies wanted to be a part of it,” he explained.

Exercising own diligence, checks
In the absence of  insurance coverage against partners’ insolvency and defaulting clients, it all boils down to having their own checks and schemes in place to protect their business, said travel agency bosses.

“We will study how bona fide the client or business partners are,” said Panorama JTB Tours’ Royanto, who added that it is still “easier” to monitor a partnership than with a company contracted through a sub agent.

To minimise business risks and potential losses from bad business dealings, Abdul Rahman Mohamed, general manager at Mayflower Holidays, said: “We have a set of internal criteria for procurement dealing with agents. Our partners must be the top three players in their respective markets. We also ask for documentation such as the last three years of audited accounts to check their credit worthiness. We check our partners on a yearly basis to check their financial health.

“It is the same with clients who engage our services. They too will do their due diligence and check our financials. If our shareholder fund is in a negative position, they will reduce their risks by giving us small projects or not appoint us as well.”

World Avenues’ Bhoonee shared: “We protect ourselves when dealing with a new client by asking them to pay a bank guarantee. On the other hand, regular clients expect us to give them limited credit so they are not inconvenienced and they don’t have to pay bank charges for every booking they make.”

As well, Chan Brothers Travel in Singapore has cast its own safety net with more than “S$200 million (US$144.6 million) of asset backing in local and overseas properties… (spanning) Singapore, China, Hong Kong and Australia”, said spokesperson Justine Koh.

The agency is also selective in choosing only “longstanding partners” and establishing “a wide network of operators worldwide”, said Koh, in order to“circumvent such circumstances and minimise its liabilities”. – Reporting by Mimi Hudoyo, S Puvaneswary, Julian Ryall, Pamela Chow, Prudence Lui and Rosa Ocampo

Viewpoints What kind of insurance coverage do travel agents want?

Ally Bhoonee, executive director, World Avenues, Malaysia
Insurance companies could look at devising policies to protect agencies from going insolvent in the event of civil unrest, war and continuous acts of terrorism in a particular destination. Banks may close so how are agents to transfer money to their partners’ overseas? Agents may also face cash flow problems due to weak business at the time.

Raaj Navaratnaa, general manager, New Asia Holiday Tours & Travel, Malaysia
The umbrella bodies of the travel associations in ASEAN should spearhead a group insurance coverage to cover its members against potential bankruptcy and other forms of business losses. By having a centralised insurance policy, the coverage can be wider and premiums made more affordable. The minimum requirement of premiums can be met based on an individual company’s turnover.

Jojo Clemente, president, Rajah Tours, Philippines
It would be helpful if there’s an insurance policy that will cover all incidents that occur against our clients. Travel agencies going bankrupt have happened before, and sad to say you are only covered by how much the Philippine Deposit Insurance Corp covers you – there’s no protection. The most you can do is to be accredited by the Department of Tourism if you’re an inbound (agency) but if you’re outbound, you don’t need to be accredited.

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