Is Travel Insurance Built Only for Broken Legs and Not Black Swans?
Travel insurance sells an emotionally powerful promise: protection against uncertainty. Miss a flight, lose a bag, fall sick abroad, cancel a long-planned honeymoon- the policy is there to absorb the financial shock. At the checkout, the pitch is three words: you are covered.
But mathematically, that promise only works for a very specific kind of uncertainty.
The Law of Large Numbers
At its core, insurance rests one on foundational principle: the law of large numbers. Flip a coin once and the outcome is unknowable. Flip it a million times and you can predict with near certainty that roughly half will land heads. The unpredictability of one event becomes the predictability of many in aggregate.
Travel insurance works the same way. One traveler’s skiing injury is impossible to predict. But across millions of travelers, insurers can reliably estimate how many injuries, lost bags, medical emergencies, and missed connections will occur in a year. Your broken leg has nothing to do with the stranger on the next ski run. Your stolen bag does not cause a wave of stolen bags. These personal, one-at-a-time mishaps are what insurers call idiosyncratic risk. That independence is what allows insurers to spread risk across a portfolio and make the numbers work.
When it does work, the product can deliver extraordinary value. In 2023, travelers who successfully claimed received on average roughly six times the cost of their premium in reimbursement- a traveler paying $300 receiving close to $1900 after a cancellation or emergency. This is insurance working exactly as intended.
When the Model Breaks
The problem begins when the uncertainty is no longer personal.
A pandemic, war, volcanic eruption, or border shutdown creates a completely different kind of risk: correlated risk. Instead of a few isolated travelers filing claims, the same event triggers losses across a large share of the portfolio simultaneously. In a normal year, an insurer with one million policies may expect 40,000 trip-cancellation claims. Premiums are priced for this, reserves are built for this, hence the system is stable.
In a pandemic year, that same insurer could suddenly face 800,000 cancellation claims arriving at once. At that point, the law of large numbers stops helping. The statistical elegance of the model collapses because the losses are no longer independent. The same event is driving every claim.
What COVID Actually Revealed
COVID-19 did not just test this theory. It confirmed it in real time and the answer was not reassuring.
In April 2020, one large travel insurer received 10,000 claims. Most were denied due to “known-event exclusions” - a clause that strips coverage the moment a risk becomes public knowledge. By the time most travelers were canceling trips, COVID was already a "known event." The insurance, in effect, had expired before they filed.
Allianz, one of the world's largest travel insurers, explicitly stated its plans excluded losses "resulting directly or indirectly from an epidemic." This was not improvisation. Insurers had quietly inserted viral exclusion clauses into policies after the SARS outbreak years earlier, ring-fencing the scenario before most consumers knew such clauses existed.
In the UK, complaints about travel insurance to the UK's financial disputes regulator nearly quadrupled (from roughly 2,000 to 8,175) in 2020/21. Millions of travelers discovered, at the worst possible moment, that the coverage they believed they had did not cover the event that had actually occurred. Additionally, the US Government Accountability Office concluded that pandemic risk is largely uninsurable: too large, too simultaneous, and too unpredictable for any conventional insurance model to absorb.
The Economics in Normal Times
The structural problem doesn’t begin with pandemics. They exist in ordinary years too.
For every $100 you pay in travel insurance premiums, only $40 comes back to travelers as claims. The remaining $60 is split between:
Vendor [airline or booking platform that sold you the policy] ($24),
Operating costs ($20),
Insurer profit ($16).
Compare that to US health insurance, where the law requires at least 80 cents of every dollar to go back to patients. Or UK auto insurance, where the figure typically runs 60–70%. Some European travel insurance products return as little as 20 cents on the dollar. By any benchmark, travel insurance is a structurally expensive product for the average buyer.
The incentive structure is equally revealing. In some embedded checkout models, the airline selling the policy earns more from the transaction than the insurer bearing the risk. An insurer collects $100, pays $40 in claims, gives $50 to the airline, and keeps $10. The distributor took zero underwriting risk and earned five times more than the insurer. This reframes travel insurance as much as an ancillary revenue engine as a protection product.
The Honest Assessment
The most important lesson from COVID is not that travel insurance failed. It is that it was never designed to succeed in that scenario. The exclusions existed before the pandemic, the math made coverage impossible, and the gap between what the marketing implied and what the policy actually covered became visible to millions of people all at once.
Travel insurance is not a broad uncertainty insurance. It protects you from personal mishaps. When the mishap becomes a global event, the policy quietly stops applying.
Is There a Better Way?
The solutions most often discussed to cover Black Swan Events are government reinsurance pools, parametric triggers, cancel-for-any-reason add-ons which exist on paper but have not been implemented at scale. The problem is not a lack of imagination. It is that no pricing model can make simultaneous, system-wide loss commercially insurable without public money backstopping the tail.
But there is a quieter, market-native possibility the COVID era gestured toward without fully articulating.
Consider what the crisis exposed about structure. Airlines with deep multi-brand ecosystems had an instrument available that pure-play carriers did not. A traveler whose flight was cancelled didn't just need a refund. They needed liquidity. Points that can be used across many partners can give customers full-value compensation, while costing the airline less cash upfront.
That infrastructure already exists. IAG's Avios spans British Airways, Iberia and Vueling, with partnerships across supermarkets and fuel retailers. Qantas runs loyalty through a Woolworths partnership and everyday spend categories. American Airlines has reframed AAdvantage as a lifestyle program spanning PGA, FIFA and entertainment with the stated ambition of making the airline a central part of daily life. These are no longer frequent flyer programs. They are spending ecosystems that happen to include an airline.
The financial logic is already half-written. During COVID, United raised $6.8 billion securitising MileagePlus, Delta borrowed $9 billion against SkyMiles, and American secured $10 billion using AAdvantage. Airlines instinctively understood that loyalty programs were their most valuable asset in a liquidity crisis. What no airline has yet done deliberately, is flip that instrument toward the traveler. Points deployed as crisis settlement cost the airline a fraction of their face value in cash. The customer receives full-value settlement rather than a partial payout. It becomes customer value, not an immediate cash payout.
In markets where super-apps and quick commerce are rewriting loyalty, the model becomes more compelling. An Air India and Zomato collaboration could allow a cancelled-flight settlement to convert into food delivery credits or grocery vouchers which is immediately useful, redeemable, and far cheaper than a cash refund. The stranded traveler gets value they can use today, not a flight credit they may never redeem. For the airline, the settlement cost is a fraction of face value. For the ecosystem partner, it is customer acquisition that cost them nothing.
The question is not whether the economics work. They do. The question is whether any airline is designing for that role deliberately or whether it will take another crisis to make the answer obvious.