ISO Emerging Issues Perspective
Burgeoning pet ownership signals opportunity for new insurance category
Proud “parents” of a pet understand the many potential benefits that having an animal companion can provide. Research shows that pets can reduce symptoms of stress, depression, and other mood disorders; lower blood pressure and cholesterol; and increase socialization. Compared with other countries, the United States has the highest dog, cat, and fish populations—and Americans aren’t shy about loving and embracing these pets. About 90% of pet owners say they consider a pet to be part of their family; half admit to talking to pets regularly; 36% give their dogs a birthday gift; and 27% admit to having professional photographs taken of pets. And yet relatively few pet owners think to buy them insurance coverage. Insurers and agents can play a critical role in solving this problem.
Veterinary cost increases in the United States have outpaced inflation for years, and owners may welcome the peace of mind of knowing they can afford the medical and wellness care provided by insurance.
According to the National Pet Owners Survey conducted by the American Pet Products Association (APPA) for 2017–2018, 68% of U.S. households, or about 85 million families, now own a pet. Millennials, currently the largest generation and a key demographic target for insurers, are in the lead. While Millennials have delayed buying homes, cars, and having children, they have passed Baby Boomers when it comes to pet ownership. Millennials now own roughly 35% of all pets, compared with Boomers, who own 32% or so. Even so,this nearly universal love of pets is perhaps nowhere more evident than in expenditures.
Pet ownership accounted for more than $66 billion in domestic economic activity in 2016, rising from $36 billion in 2005. This figure includes costs such as food and supplies, veterinary care, grooming, and boarding services. Baby Boomers spend more on pet supplies and services than any other age group, 15% more than Generation X and Millennials combined. But when it comes to insurance, younger generations are helping drive demand. According to a recent ISO survey of Millennial attitudes toward insurance, pet insurance ranks among the top three coverages desired among the survey participants. Since pets are valued as family members and represent a significant financial commitment, pet insurance should be a “no-brainer” for their owners.
Veterinary cost increases in the United States have outpaced inflation for years, and owners may welcome the peace of mind of knowing they can afford the medical and wellness care provided by insurance. According to an insurance trade group, accident and illness coverage averages $473 per year for dogs and $285 for cats; and accident-only policies averaged $158 for dogs and $132 for cats annually. Pet insurance plans can be economical and can bring greater cost certainty for pet owners.
The pet insurance products mentioned above are also quite comprehensive, depending on the type of insurance purchased. Accident and illness policies often cover those dreaded emergency treatment costs, typically on a reimbursement basis, if a pet has an accident that results in fracture or other trauma, ingests a foreign object, or has certain genetic conditions or cancers (costs for surgery, hospitalization, medication, etc.). Some policies even reimburse for advertising costs and monetary rewards to recover a lost or stolen pet. Wellness plans typically cover routine veterinary visits and other services such as spaying/neutering, dental cleanings, training, and grooming. Costs for those coverages vary, depending on a pet’s age, breed, and the chosen deductible.
Challenge for insurers
Given all the potential benefits of pet insurance, one may wonder why insurers continue chasing their tails on renters and historically stagnant lines—as opposed to testing the pet insurance market—to reach Generation Y and others. Millennials are the most likely generation to rent their homes, and yet two-thirds of those who do decline to purchase renters insurance. Uptake rates for pet insurance make uptake for renters look robust, with adoption languishing in the 1%–2% range (compared with 40%–60% adoption in some European countries), showing clear and significant growth potential. Missed opportunities for education about pet insurance’s benefits may be the largest driver of low adoption rates in this market. Awareness of the potential risks and available solutions can help policyholders take advantage of the peace of mind and monetary benefits that pet insurance coverage can provide.
Consumers aren’t the only ones who struggle to understand the opportunity presented by pet insurance coverage. For insurers, pet policies reside in the gray area between resembling health insurance and being considered a part of property/casualty insurance (for the latter it’s classified as personal inland marine on many insurers’ annual statements)—in terms of the nature of the coverage ranging from preemption to indemnification, and claims being all but certain at some point during the life of a policy. The seeming inevitability of some sort of pet health event may require a rethink by insurers, although an observer could argue that a similar inevitability may exist for equipment breakdown or long-term care coverage.
From an underwriting perspective, relative lack of verification regarding petages, breeds, and pre-existing conditions may lead to excess conservatism. Inefficiencies associated with any nascent line bring expense pressure from diseconomies of scale—and such inefficiencies potentially present opportunities for claims fraudsters. The resulting frictional costs are typically passed through to policyholders, potentially contributing to driving up costs. Lack of availability and choice also create inconvenience for interested parties. Yet these problems are solvable through greater experience and scale.
Insurers deterred by fear of dogs (or cats) are missing an opportunity to grow their businesses by solving a problem near to their policyholders’ hearts. Where traditional players may be lagging behind, start-ups are beginning to provide novel solutions. For example, one cloud-based pet insurer offers digital distribution and an app that the policyholder can use to manage pet insurance and other important data such as vaccinations and checkups. Another start-up allows pet owners to connect with each other through broker-group discounts.
Such approaches reflect a larger movement in property/casualty insurance to become “warmer and fuzzier” by providing an experience that better integrates with ordinary aspects of policyholders’ lives. Agents play a unique role in unleashing the potential of pet insurance because they’re one of the few conduits routinely connecting consumers (and, perhaps, even their pets) and insurers seeking to meet critical coverage needs.
Meghan Alpert is product development lead at ISO Solutions, a Verisk Analytics (Nasdaq:VRSK) business. Jim Weiss, FCAS, MAAA, CPCU, is director of analytic solutions at ISO.