The default insurance programme was put into place some three years ago to address the issue of agents having to post a bank guarantee in order for them to participate in the IATA Billing Settlement Plan (BSP). The facility has experienced a number of claims of varying size over the past three years and we have summarized a few scenarios for the purposes of this update.
The claims against the facility have principally come as a result of late payment by the agent’s clients for tickets issued thus the agent goes into default.
Other scenarios such as offering extended credit terms to “unvetted” new clients or bypassing protocol because of the temptation of increased ticket sales have been experienced. The result is that the facility has experienced a significant increase in the number and size of claims being submitted to the South African DIP facility.
Interestingly claims can also be seasonal and we are seeing a rise particularly at Christmas time.
When the facility was put together, in our opinion, the spirit and operation of the DIP were never to provide cover for agents who erroneously or even deliberately cut corners with procedures and protocol in the knowledge that the DIP is there to pay as a last resort. Nor was the intention to cover the agent against failure to recover ticket sale monies timeously (the credit risk) however, we are seeing these types of claims.
In writing this article we needed to think long and hard as to how we should be tackling this and we are indeed in discussions with IATA as to how to take these issues forward because the future of the DIP is in the balance due to the fact that the claims for 2018 currently exceed the premium received to date by a significant amount thus placing the Insurer in a loss position.
Notwithstanding the above, we believe that there is an onus on the agent to ensure that their staff are trained and follow procedures correctly. Claims where the agent has made a true error or where one of its staff has not followed protocol are generally covered under the professional indemnity section of an agent’s insurance and if agents are not purchasing this type of insurance then we will happily direct them to a broker who can assist in this regard.
Other observations revolving around claims is that we have been surprised at how freely credit is offered to clients – some of whom have not been checked properly and this is of major concern for the insurer. When we consider the renewal of the agent’s entry into the DIP, we may well be asking for additional information relating to how credit is given and to what extent. We are already asking how much government business if any is handled by the agent for example. The new changes to the BSP in 2019 which will move agents from monthly to fortnightly or even weekly settlement should help the DIP by reducing the size of possible claims in any one cycle however, we urge agents to manage the credit that is extended to their customers because if it is not managed correctly then we could see a large rise in default claims which would be very unhealthy..
What we can say is that whilst the Insurer has agreed to pay all valid claims to date, if an agent makes a claim against the DIP then the likely scenario is that IATA will switch off the agent’s ability to trade via the BSP. Secondly, the DIP Insurer will not allow claimants to re-enter the scheme even if IATA are prepared to reconsider their stance thus the agent will need to provide a bank guarantee at cost.
Lastly and most importantly, once a claim is settled by the Insurer to IATA, the claim doesn’t just go away. All rights are subrogated by IATA to the Insurer; that is to say that the Insurer then reserves the right to claim against the agent for the full claim. This is a double whammy for the agent in that its IATA endorsement is in all likelihood cancelled thus making it difficult to trade and then the Insurer will be looking to recover the claim from the agent via the legal route. We will also be tracking those agents who have defaulted and then piggyback another agent. This could mean cancelling the sponsoring agent’s membership of the DIP.
Taking all of the above into consideration, we are urging agents (especially in the run-up to Christmas) to seriously consider the ramifications of making claims against the DIP simply “because it is there and the insurer will pay”. The scheme was set up to provide agents with an alternative to posting a bank guarantee – something that has been seen as a huge expense especially to the smaller agents whose balance sheet have been encumbered by the guarantee.
The fact that the scheme is currently running at a loss will mean a rethink. This will mean an increase in the current premium to enable the Insurer to claw back some of its loss and to be fair, the price has been held for three years now. We may have to address some other operational issues however, we will keep you apprised of these.
What the facility also needs is more agents to join. We need as many agents in the scheme as possible to spread the risk and this is, of course, the principle of insurance.