Travel insurance sold with flights and holidays will be regulated by the UK's chief financial watchdog, the Financial Services Authority (FSA), from 2009.
Travel insurance can come in useful
The FSA already regulates stand-alone travel insurance, as well as general insurance such as home, motor or life.
Consumer groups have criticised travel insurance "bundled" together with flights and holidays by tour operators and airlines as being expensive.
In addition, critics say the policies do not cover holidaymakers adequately.
According to the Treasury Select Committee about 10 million Britons who travelled abroad last year were not adequately insured for medical expenses or for terrorist attack.
About a third of travel insurance sold is bundled in with holiday packages, usually by flight companies and tour operators.
Bringing bundled travel insurance into the same regulatory regime as stand-alone travel insurance would create a level playing field and improve customer protection, the Treasury said.
"Evidence shows that companies regulated by the FSA are better at getting consumers to make an informed choice because they are better at explaining the key features and exclusions of the product," said Ed Balls, Treasury Minister.
The Treasury decision follows an eight-month investigation.