Security Amounts - Increased Securities

The new system of insolvency protection is meant to be beneficial to travel agencies as well as consumers.

The Travel Insurance Fund is a system to protect consumer rights and refund in full any payment made for package travel or linked travel arrangements in the event of insolvency or bankruptcy of a trader or if a trader´s licence is cancelled pursuing to Article 27. of the Act on package travel and linked travel arrangements (failure to submit security, pay premium or base fee on the due date, or provide the information required to determine the amount of premium and security).

The aim of the insolvency protection system is also to benefit travel agencies. The system is a mutual system of insolvency protection, based on the following financing scheme:

• Base charge
• Annual premiums
• Security provided by each travel agency, according to the decision of the Icelandic Tourist Board based on the documentation and information submitted.

Contribution of a base fee and annual premium to a mutual fund results in lower securities for travel agencies than in the previous system, lowering financial commitments of travel agencies relating to bank guarantees (securities) and hence improving their financial standing.

The Icelandic Tourist Board is legally obliged to consider the financial situation of a trader as well as the risks ensuing from the trader’s operations when determining the traider's security amount. If the financial situation of a travel agency is such that the travel agency is likely to become insolvent, the Icelandic Tourist Board must take that into account.

In these cases the security amount may, according to Article 10 of the Regulation, be increased following mandatory assessment.

The security amount may be increased according to Article 10 of the Regulation on the Travel Insurance Fund if:

It is foreseeable that turnover subject to insolvency protection will be significantly higher than indicated by the information submitted for the annual reassessment of package travel security. In these cases, travel agencies must report increased turnover to the Icelandic Tourist Board.

The operations of the travel agency are considered to entail special risks. The Icelandic Tourist Board must annually publish criteria for raising securities. 

There is reason to belive that the information and documents submitted in accordance with Article 6 of the Regulation, will lead to the security amount being decided lower than the operations of the travel agency warrant. In these cases the security amount may be raised up to the base security amount.

The Icelandic Tourist Board has published the 2024 criteria for the raising of package travel securities based on the financial position of travel agencies:

• The working capital ratio is below 1,2
• The equity ratio is below 5%
• Credits of travelers for package travel or linked travel arrangements that are not part of regular business and will not be delivered or refunded during the current year. This refers to credits for package travel that have been cancelled by the travel agency or the traveller or they postponed.

Travel agencies with annual turnover subject to package travel security below 20 million ISK in the year the package travel security is based on are excempt from surcharge on the security based on financial standing.

Security amounts are calculated based on a formula in Article 7 in the Regulation on the Travel Insurance Fund. Following Article 10. of the Regulation, the Icelandic Tourist Board is authorized to increase the security amount of travel agencies that are considered at risk of insolvency or bankruptcy. When raising security amounts of travel agencies based on weak operational standing, the Icelandic Tourist Board applies criteria that are signed by the Minister.

The Icelandic Tourist Board maintains that there are substantial arguments for employing set criteria and when security amounts are being raised. There are around 400 decisions on security amounts made annually based on documents that travel agencies must submit by April 1st. each year. Raising securities for some travel agencies beyond others can affect their competitiveness, it is therefore highly important that travel agencies know what to expect and that all cases are being treated equally. The Icelandic Tourist Board sees clear procedures as imperative in this effect.

When it becomes clear that the operational standing of a travel agency calls for raising of security according to the criteria, mandatory assessment is performed and each case reviewed, taking all circumstances into account.

The surcharge is based on the working capital ratio (VFH in Icelandic) and the equity ratio (EFH in Icelandic) of travel agencies.

When determining the surcharge percentage, the VFH weighs 2/3 and the EFH 1/3.

The maximum surcharge is 50% and the minimum is 8% of the difference between the calculated base security amount (GT) and the caclulated sercurity amount (T). Travel agencies with turnover subject to insolvency protection below ISK 20 million are excempt from surcharge.

The percentage of the surcharge depends on the combined effect of the working capital ratio and the equity ratio. Each ratio is divided into three risk levels.

The surcharge is calculated according to the following:

• The base security amount (GT) is calculated according to Article 7 of the Regulation.
• The security amount (T) is calculated according to the formula in Article 7 of the Regulation.
• The security amount (T) is subtracted from the base security amount (GT); (GT-T)
• The surcharge percentage is determined based on the combined effects of VFH and EFH.
• The resulting amount from (GT-T) is multiplied by the surcharge percentage; (GT-T)*surcharge percentage = amount of surcharge (Á).
• The surcharge amount is added to the calculated security amount (T); T+Á. The result is the security amount the travel agency must provide.
• In the case of travelers holding credits for package travel and linked travel arrangements that will not be performed or refunded during the current year, the amount of the credits is added to the calculated security amount; T + surcharge + credits. The result is the security amount that travel agencies holding such credits must provide.

Travel agencies with annual turnover subject to package travel security below 20 million ISK in the year the package travel security is based on are excempt from surcharge on the security based on financial standing.

The combined effect of the two ratios and the possible surcharge percentages is best explained using colour-coding.

Working capital ratio (VFH):

VFH is below 1 the colour-code is red
VFH from 1 up to 1,5 the colour-code is yellow
VFH is 1,5 or above the colour-code is green

Equity ratio (EFH):

EFH is below 0% (negative EFH), the colour-code is red
EFH from 0% up to 5%, the colour-code is yellow
EFH is 5% or above, the colour-code is green

VFH and EFH both red the surcharge percentage is 50%
VFH and EFH the surcharge is 42%
VFH and EFH the surcharge is 33%
VFH and EFH the surcharge is 33%
VFH and EFH the surcharge is 25%
VFH and EFH the surcharge is 17%
VFH and EFH the surcharge is 17%
VFH and EFH the surcharge is 8%
VFH and EFH there is no surcharge

Travel agencies with annual turnover subject to package travel security below 20 million ISK in the year the package travel security is based on are excempt from surcharge based on financial standing.

The working capital ratio (the ratio between working capital and current liabilities in the year end financial statement) is used as a criterion since it is a key indicator for the ability of a company to pay its debt in the upcoming 12 months.

The nature of the operations of travel agencies makes the working capital ratio the most relevant criterion to use. It reveals the financial situation of individual travel agencies and their ability to pay debts and honour obligations during the upcoming months. A company with sufficient working capital (current assets) that can, with short notice, be turned into cash can pay its current liabilities. The credits of travelers, for travels that are subject to insolvency protection, are a part of the current liabilities of travel agencies.

It must be considered that it may not be possible to convert working capital (current assets) into cash at full book value to honor liabilities with short notice, or maybe not at all. The real value can be, and often is, less than the book value. 

The Icelandic Tourist Board considers it normal and cautious to set the working capital ratio at a minimum of 1,2, and that a ratio below that minimum is considered an indicator of increased risk of insolvency.

Working capital ratio between 1,0 and 1,2 is considered an indicator of increased risk of insolvency, leading to a surcharge on the security (T); working capital ratio below 1 indicates that the ability of the travel agency to honor its liabilities is highly questionable, resulting in a double surcharge.

The working capital ratio is a direct measure of the solvency of a company; hence it weighs heavier than the equity ratio when the Icelandic Tourist Board assesses of the risk of insolvency or 2/3 vs 1/3 for the equity ratio.

Equity ratio is a strong indicator of how resiliant a company is during times of operational losses. Equity ratio is the second main indicator to assess a company´s future operability; that is how likely the company is to stay in business for the upcoming year at least (going concern).

A company with negative equity is technically bankrupt, and a company with low equity is not as well prepared to withstand operational difficulties as is a company with a healthier equity ratio. For this reason, the likelihood of a travel agency becoming insolvent  increases, as a rule, in the case of low equity ratio, and the likelihood of insolvency significantly increases whit negative equity.

Thus, the Icelandic Tourist Board considers it fair and equitable to base the assessment of risk-involved surcharge on the equity ratio as well as the working capital ratio. Icelandic Tourist Board determines a surcharge on the security amount of companies with equity ratio between 0% and 5% and double surcharge on companies with equity ratio below 0%, negative equity.

The equity ratio weighs 1/3 and the working capital ratio 2/3 when determining surcharge based on operational standing, since the equity ratio is a more indirect indicator for solvency than the working capital ratio.

The working capital ratio is a direct indicator of the solvency of the security provider for the 12 months following the date of the balance sheet and hence is given the highest weight when assessing the need for increased security due to weak operational standing (weight 2/3).

The equity ratio is an indicator of the financial strength of the security provider, it has considerable effect on the risk of insolvency, but in a more indirect way. Thus, the weight of the equity ratio is less than that of the working capital ratio, when determining the surcharge (weight 1/3).

Confirmation deposits and installments towards future package travel

Customer credits resulting from current operations are reflected in the information that travel agencies submit to the Icelandic Tourist Board and  are as such part of the premises for regular assessment of security amounts (T) and do not have to be considered further. This includes confirmation deposits and pre-payments for future tours.

Credits that travelers have chosen to hold instead of getting refunds for travel that has been cancelled or postponed

Credits that travelers have chosen to accept for package travel or linked travel arrangements that will not be settled either by refund or travel in the current year, are added to the security amount regardless of whether the security is decided with a surcharge according to Article 10 of the Regulation.

It is the opinion of The Icelandic Tourist Board that the interests of the Fund and its members are best served if liabilities, in the form of customer credits that travelers hold for package travel or linked travel arrangements that has been cancelled or postponed due to extraordinary and unavoidable circumstances and will not be delivered during the current year, are the responsibility of the individual travel agencies.

VFH is below 1 and EFH is below 5% (both ratios are red)

Calculated GT = 32.000.000 (according to Article 7 of the Regulation)

Calculated T = 4.500.000 (according to Article 7 of the Regulation)

Both ratios are red, hence the surcharge percentage is 50%

(GT-T) * surcharge percentage = (32.000.000-4.500.000) * 50% = 13.750.000. The surcharge amount is 13,75 million.

The surcharge is added to the T: 4.500.000 + 13.750.000 = 18.250.000 that becomes the final security amount (in the absence of credits)

In the case of credits as described above, e.g., ISK 6.000.000, the credits will be added to T + surcharge: (4.500.000 + 13.750.000) + credits (6.000.000) = 24.250.000. In this example the security amount is set at ISK 24.250.000.

(GT-T)* surcharge percentage = surcharge amount

T+ surcharge amount = amount of security

In the case of credits;T+ surcharge amount + credits = amount of security.

The base security amount (GT) is a measure of the risks involved in regular insolvency bound operations of travel agencies. The purpose of GT is to assess the amount of money a travel agency has collected for package travel and linked travel arrangements that have not yet started and the cost of possible repatriation of travellers on tours. GT thus represents the costs ensuing from a travel agency ‘s commitments, related to insolvency bound operations, in the event of bankruptcy or insolvency.

Where it not for the mutual insurance of the Travel Insurance Fund, each individual travel agency would have to provide a security equal to the GT amount.

Based on the mutual insurance provided through the Travel Insurance Fund, travel agencies are granted a discount from the calculated base security. The security amount (T) calculated based on the formula in Paragraph 7 of the Regulation is considered to be sufficient when operations are sound.

As a rule, the security amount is 12% of (GT) but can be as low as 3%. The percentage is based on the preceding year’s income that is subject to insolvency protection. 12% applies if the income subject to insolvency protection is below 300 million ISK, 3% applies if the income is above two billion ISK. In the light of experience, the discount is higher the higher the insolvency bound turnover since the risk of bankruptcy decreases with increased operations.

When determining security amounts the base security amount (GT) is calculated according to the rule: GT = G*N/30 + G*h + G*d/30 and the security amount (T) is calculated according to: T = a(V)* GT, which gives the security amount to be provided.

Base security amount:

• (G) base number, the average of income subject to insolvency protection for the two highest-income months of the preceding and current year of operation
• (N) weighted average number of days from full payment until the start of package travel, if a package tour is paid for in two or more instalments excluding the initial confirmation deposit, the N value must be calculated based on the percentage of the total price received any given point in time.
• (h) average proportion of confirmation payments of the total payments
• (d) weighted average duration of package travel in days

The above values are determined for the preceding and current year of operation.

Security amount:

Also, to be determined is the previous year’s turnover subject to insolvency protection (V), and the ratio a(V).

The ratio a(V) shall be:

12% if the annual turnover is less than 300 million ISK,
12% - 6%*(V-300 million ISK)/700 million ISK if V is between 300 million ISK and 1 billion ISK,
6% - 2%*(V-1 billion ISK)/1 Billion ISK if V is between 1 and 2 billion ISK
Max(4% - 2%*(V-2 billion ISK)/3 billion ISK, 2%) if V is above 2 billion ISK

The security amount T is calculated T = a(V)*GT.

The results from the preceding year and the current year shall be compared and the higher figure shall be the amount of the security.

The minimum security amount is ISK 500.000.

Travel agencies that are subject to increased security are those with working capital ratio below 1,2 and/or equity ratio below 5% according to their annual financial report for the preceding year. Travel agencies with annual turnover subject to package travel security below 20 million ISK in the year the package travel security is based on are excempt from surcharge on the security based on financial standing.

Customer credits that do not result from current, regular operations and will not be delivered or reimbursed during the current year must be fully secured.

Security amounts are decided on the documents submitted by the travel agencies.

It is important that the information provided is correct so that security amounts are determined on the correct premises.

According to the Administrative Procedures Act - No. 37/1993, a party to a case has the right to have the case reviewed if the decision was based on insufficient or wrong information.

It is possible to apply for a revision of the security amount if the financial situation of a travel agency has changed, the information provided was incorrect or credits have been delivered or refunded etc.

Further information regarding revision of package travel security can be found here.

If the amount of the security increases during regular annual reassessment a new security must be provided no later than September 1st each year. If a revision done at another time of the year leads to a higher security the deadline for providing the higher security is in general set at two weeks.

The due date of annual premiums is September 1st each year.