RISK

Deloitte and TICO held several meetings to determine factors that expose TICO to risk. These include the consolidation of the travel industry, which impacts smaller businesses and thus shrinks the base of Registrants, as well as fraud and cyber-crime (93% of all travel transactions are through credit cards).

Over- and under-booking by tour operators in terms of booking rooms and airlines is also causing disruptions in consumer travel. Capacity can make or break profitability, and as such, this can have a dramatic impact on the funding sources for TICO as these are revenue driven.

CHARGEBACKS

Chargebacks are the return of funds from a credit card merchant to a customer who successfully disputes a credit card transaction. The percentage of chargebacks over the last 20 years was approximately 9.47% (or $1.3 million) against total claims paid of $13.2 million.

But in the future, reliance on a chargeback remedy for consumers is uncertain at best. In Deloitte’s view, it is highly likely that leading credit cards and rewards programs’ General Terms and Conditions will end up excluding liability due to failure, insolvency or inability to perform a service from a travel agent, tour operator, accommodation provider, airline or other carrier. In other words, a chargeback is a policy decision and not a guarantee.

Based on analysis, Deloitte believes that going forward, the amount of chargebacks will likely be reduced to be in the range of 4% to 6% of total amounts claimed.

TRUST ACCOUNTS & SECURITY DEPOSITS

Under current TIA regulation, it is mandatory for Registrants to maintain a trust account to protect customer monies from being misused for reasons other than the purchase of travel services. But since many transactions are purchased via credit card, many TICO Registrants were critical towards the trust accounting system, saying it’s too complicated and costly.

TICO has proposed to eliminate trust accounts in favour of enhanced security deposits. With this model, existing deposits (initially to be maintained by TICO for two years and amounting $10,000) will be maintained for the life of the TICO licence. Current security deposits, amounting approximately $3.2 million, will be extended from two to five fiscal years. After five years, the security deposits will be calculated as percentage of Ontario Gross Sales up to a maximum of $100,000.

Deloitte has assessed that higher security deposits can easily triple TICO’s current investment returns of currently $0.5 million.

ALTERNATIVE FUNDING

In the event that a CPF is not implement, an alternative funding mechanism would be needed. One alternative is increasing the amount paid to the Fund by TICO Registrants, which wouldn’t be ideal since it would take longer for the Fund to reach its desired target level. Also, with this scenario, it is likely that a gap in consumer coverage would occur. As an example, to reach a target Fund level of $50 million by the end of 10 years, the amount paid by Registrants would need to be increased to $0.55 per $1,000 of sales, or an increase of 120%.

LOSSES

While 95% of claims are considered small at less than $400,000, large and catastrophic failures are also a possibility and pose a potential risk to the Fund. Large failures could be greater than $2 million; a catastrophic loss is defined as a loss in excess of $5 million. This size of failure has not been seen in Ontario over the past 20 years, however, TICO should prepare the Fund to handle a loss this size or consider alternative risk mitigation options, including the use of reinsurance protection.

REINSURANCE

If a failure occurred that was larger than the size of the Fund, the consumer would not be refunded the full amount of their purchase. Reinsurance coverage offers an additional layer of protection against catastrophic losses. At the time of writing, TICO has received non-binding indicative pricing from a major reinsurer. This indicative pricing will be funded from the CPF, which Deloitte has found to be more than sufficient to fund this premium.