The UK Treasury is to launch a probe into travel insurance - and said it would consider new legislation if it found there had been mis-selling.
A bad holiday gets worse if the insurance doesn't cover problems
Travel insurance will be worth more than £650m in 2006, the Treasury said.
However, despite paying out large sums, too many people will find they are not properly covered, it warned.
The worry is that people may be sold travel insurance without having the terms and conditions properly explained to them.
Ed Balls, the new treasury minister for regulation of financial services, said the first step would be to talk to the industry to collect information.
'Without a hitch'
More than 20 million people buy travel insurance every year, and based on consumer research many policies for the same trip offering similar levels of protection can vary in price by more than £200, the Treasury said.
"Millions of British families have worked hard all year to pay for their summer holidays and are hoping they pass off without a hitch," Mr Balls said.
"But thousands of holidaymakers will suffer cancelled flights, lost valuables, and even medical problems," he added.
Should the probe uncover evidence of mis-selling then the Treasury said it would have a number of routes to consider.
One option would be to require stronger self-regulation by the travel industry, while another may be to include it under the regulatory control of the Financial Services Authority (FSA).
Although stand-alone travel insurance providers are regulated by the Financial Services Authority, travel firms selling policies as bolt-ons to their holiday packages are not.
The Treasury said the government was "prepared to introduce new regulation if there is evidence of widespread problems in the selling of these products, which cannot be adequately dealt with by self-regulation".
The consultation process will be launched in early autumn, the Treasury said, adding that it will talk to stakeholders, including travel agents, travel reps, insurers, trade bodies, consumer associations and consumers themselves.
The government last looked at the issue of travel insurance in 2003 but decided against imposing regulation because of concern at the impact on the cost of package holidays.
It also shied away from regulation because travel agents insisted their own industry code was providing sufficient consumer protection, the Treasury said.
"Our investigation will ask whether it's fair to put all the pressure on ordinary families to read the small print and ask the right questions to make sure they are properly covered," Mr Balls said.
"It will ask whether the travel industry should be doing more to ensure families are not left high and dry on their holidays and whether we need to strengthen regulation to protect them," he said.