There are a number of factors that go into determining the premium you pay for travel insurance. Your destination plays a big role as some places are more dangerous than others.
The purpose of travel is important in determining the cost of travel insurance as well since an adventure holiday is likely to be riskier than a business trip. Finally, if you have pre-existing health conditions, they can contribute to higher premiums. The bottom line is that your travel insurance premium will go up if there is a higher chance of you filing a claim.
This is exactly why the modern day travel insurance model is flawed. Every journey is unique in its own way and the premium you pay does not account for all the risks (or the lack thereof) posed by your trip.
The true risk factors of travel
Think about it — the insurance premium you pay for a flight today is not likely to be too different from what you pay tomorrow or the day after. Yet, if you have a snow forecast for tomorrow, then this is likely to cause more traffic delays and flight cancellations. In the above scenario, more people are likely to file a claim for tomorrow than they might for today.
Similarly, all road trips are not created equal, even if they are all on the same roads.
For example, the I-95 corridor from New York City to Washington DC is reported to have the most traffic during the Thanksgiving holiday season. The chances of an accident along the I-95 are perhaps lower during the first week of November compared to the last, simply because there are fewer cars on the road at this time of the month. Given the higher risks, it makes sense to charge a higher premium for travel during Thanksgiving compared to the week before.
Another factor to consider is the health condition of the traveler.
If you suffer from asthma and are traveling to a country like India, the chances of you facing an asthma attack are pretty high during the Diwali festival season or if you visit the smog-covered capital during winters. In other words, you may not have many health complications if you visit the serene Himalayan foothills that are free from pollution. Charging a uniformly high premium simply because the traveler suffers from asthma may not be fair.
Moving towards a dynamic travel insurance model
Unlike traditional travel insurance policies that factor the risks based on static data, a dynamic insurance takes factors that are unique to your trip and assesses risks based on these factors.
This way, your travel insurance would work very similar to airfares and is likely to change based on weather, traffic and other dynamic patterns on a day-to-day basis. So while the insurance premiums might go up for an asthma patient visiting polluted cities like New Delhi or Beijing, they may be lower for such travelers visiting other cleaner cities in India or China.
There are two ways a dynamic model is more profitable to insurance providers. In the current model, travelers do not have an incentive to pick any particular route or travel date over another since the premium to be paid is the same.
As a matter of fact, there is no reliable way for a traveler to know how risky a journey between two cities is on any particular date. Your airfare only measures how busy a particular route is on any given day. It does not tell you how risky your trip to and from the airport is going to be. A dynamic insurance that can base its premium off the weather patterns can raise the costs for travel on a snowy day compared to one when it is sunny. It brings down the number of claims filed by travelers.
This leads to the second benefit: a lower cost of travel.
According to a 2015 study, nearly 57% of global travelers have never purchased travel insurance. Reducing the premium on days when the journey is less risky tends to make travel insurance more affordable, thereby increasing the number of people purchasing them.
Also, dynamic premiums help create better awareness about non-conventional risks that are not normally taken into account by travelers while planning a journey. This can push more people into purchasing premiums on dates when the risk profile is higher.
Dynamic travel insurance is already a reality in one form or the other among many leading providers. Such providers make use of big data technologies to assess risks based on factors that are not immediately discernible. However, the truth is that this is still not mainstream.
More importantly, travelers do not have a reliable method to assess their risks for a journey on any given day. Creating a publicly available route and profile-based travel risk index for each date can go a long way in not only making insurance more affordable to the average traveler but can also push higher adoption rate among consumers.