Insurance Post

What's up, vet?

New entrants have been hopping into the pet insurance sector, helping boost the number of products offered by 50%. Sam Barrett investigates the effect this has had on products

Pet Insurance is one of the fastest growing areas of the personal insurance market, with both existing players and new entrants keen to launch products that will appeal to the nation's pet lovers.

During the past couple of years, new entrants have included Legal and General, Kwik-Fit, Marks and Spencer and even the News of the World. Additionally, Norwich Union Direct relaunched its pet insurance product for cats and dogs.

This flurry of activity means the number of products has increased substantially.

"When Defaqto surveyed the market last April there were 116 cat policies and 117 dog policies," says David Pickett, product manager at Sainsbury's Bank. "At the beginning of this year, these figures had increased by more than 50% to 178 cat policies and 199 dog policies and are likely to increase further in the next few years."

He believes that some insurers are turning to the pet insurance market as profits dry up in the more commoditised personal lines markets, such as motor and household. "It's quite hard to make a profit in these areas so they are looking for more lucrative revenue streams," he adds.

Growth spurt

Predictions about the value of the market may also be helping to spur this growth. In its most recent report into pet insurance, Datamonitor predicted that gross written premiums would increase by 52% over a five-year period. This means the value of the market could grow from an estimated £233.6m in 2003 to almost £355m in 2008.

"People do see it as an untapped market," confirms Chris Price, head of pet insurance at Direct Line. "Only around 15% of pets are insured, which offers huge potential for growth. This means some players are, unfortunately and incorrectly, seeing it as a get-rich-quick market."

Established pet insurers see it differently, however. Many point to premium inflation as one of the problems that has dogged the market and its profitability.

According to insurers, a large proportion of this is due to rising vets' bills but the rate at which insurers say the cost of veterinary treatment has increased varies from a fairly conservative 8% to more than double this. "We would put the average veterinary inflation around 11%," says Mr Pickett, "although we have seen some areas increase by more than this. For example, initial consultations are increasing by around 15%."

Location also affects the rate of inflation, with cities experiencing much steeper increases than rural areas. Figures from Axa show that in London the rate of inflation is between 12% and 15%, while in other parts of the country the figure is between 6% and 8%.

As well as instances of vets simply putting their prices up, the types of treatment available to pets is increasing dramatically. Advances in veterinary practices mean pets can now benefit from many of the technologies commonly used on humans. For example, for around £500 a dog can receive an MRI scan rather than the standard X-ray, costing £60.

Treatment trends

More unusual procedures, such as organ transplants, which are already carried out in the US, are expected to be introduced to the UK in the next few years.

Additionally, pet owners can now insure their animals for a range of complementary treatment and alternative therapies, including hydrotherapy, physiotherapy, behavioural treatment, acupuncture and herbal remedies.

Attitudes towards the product also mean claims costs are high. For example, at Sainsbury's Bank, one in three customers make a claim in any year, which is much higher than any other form of personal lines business.

As a result of these inflationary pressures, insurers see a real danger that premiums will rise too quickly and prevent the product reaching its potential. "We predict that by 2008 the average pet insurance premium will be on a par with the average household premium," says Mr Price. "When this happens, I believe people will start questioning its value."

There are several solutions to this, one of which is to shift towards the cheaper products that offer more restricted cover. "Many of the newer entrants have focused on these cheap and cheerful products," says Paul Shackleton, managing director of Pet Protect. "But I'm not sure this is always in the best interests of the animal or its owner."

David Keel, head of marketing at Petplan, agrees: "To gain market entry, many of these companies have set low premium levels that we believe are ultimately unsustainable; or the policies feature unexpected restrictions," he says. "Many customers are buying purely on price and are, therefore, happy with the policy at point of sale but dissatisfied when it comes to making a claim."

One of the more common ways to keep premiums down is to offer a 12-month policy. These pay for treatment of any condition for up to 12 months; after that, treatment for the condition is excluded and the policyholder has to pick up the tab for any further related vets' bills.

Time scales

While this approach is fine for smaller problems that can be treated quickly, many insurers report that a fairly substantial proportion of claims run beyond 12 months. At More Than, 35% of claims are for conditions that last longer than a year, and at Sainsbury's Bank this figure is as high as 48%.

Offering a lifelong policy leaves the insurer open to a greater number of claims but some argue that this does not mean premiums need to be disproportionately higher. Sarah Gaskin, business development manager at Pinnacle Insurance, says: "A comparative quote between one of our policies and a leading 12-month provider shows that our policy is 36% more expensive. This isn't really a vast amount of difference when you take into account the extra peace of mind and security."

She also believes that the more restricted products, whether the 12-month ones or others, could damage the industry as a whole. "The sting from these exclusions could be causing policyholders to cancel and simply not bother to reinsure because they feel let down by the pet insurance industry as a whole," she adds.

Making the switch

The nature of pet insurance also makes switching difficult. As with medical insurance, pre-existing conditions are excluded so once an animal has been treated for something, moving to another insurer automatically means more restricted cover.

While some insurers insist that a full product is the best option, others believe there is room in the market for the more restrictive, and cheaper, products.

Norwich Union offers a lifelong policy and a 12-month policy, as well as monthly premiums for a cat from £5.14 and £4.70, respectively, and £9.42 and £8.40 for a dog. Its pet insurance product manager, Isabel Baumber, says: "It is important that the customer understands what they are buying - the introduction of Financial Services Authority regulation has helped ensure this happens." Perhaps due to this understanding, its lifelong policy tends to be more popular.

As well as the tried and tested products, some insurers believe there is room in the market to launch new products to help expand the market while monitoring premium increases.

Many of these developments mirror the way the medical insurance market has evolved. Mel Everest, pet product manager at More Than, says a cash-plan-style product could work well in the pet insurance market. "These are well understood and the limited payment would be attractive to insurers," he explains. It could also cover some of the maintenance areas such as annual vaccinations that are not generally picked up by insurance.

The introduction of cash plans would also sidestep the issue of veterinary inflation pushing up premiums, as the insurer could maintain the limit on what it pays towards treatment, regardless of how much the cost of treatment increases.

Another option is a more cut-down policy, although this could be more difficult. Veterinary fees account for around 95% of claims, with the remaining 5% taken up with areas such as public liability, hospitalisation benefits, marketing and rewards for lost pets. There is, therefore, little room to trim back benefits although there is room to refine the current products. "I think the market will develop more sophisticated pricing structures," says Steve Wilcox, product manager at Axa Insurance.

Like other areas of insurance before it, the underwriting employed on pet insurance is still relatively simplistic. The location of the animal is usually the biggest determinant of premium, with its age and breed also coming into play.

"Pet insurance is at the same stage as household insurance was 20 years ago when premiums were determined by where the property was located," Mr Wilcox explains. "Pet insurers are beginning to collect more data on areas such as breed, as this plays such a huge role in the types of illness they are likely to contract."

As well as shaping the products, in order to help them address rising claims costs, pet insurers are looking at the way they deal with vets.

Mr Price believes there needs to be significant changes in this area: "A responsible insurer should have some control over the supplier. This happens in household and motor, where the insurer can set up approved supplier networks, but it's not the case with pet insurance."

At the moment, insurers are limited to controlling veterinary fees at the point of claim. Veterinary nurses are usually included on claims teams and they will challenge any bills they believe are unusual from either a cost or a procedure perspective.

For example, Mr Price says sometimes, for greater accuracy, a vet may use an MRI scan to detect a problem where they would previously have relied on X-rays. He cautions, however: "In some cases, it only increases the chance of detection by a few percentage points, so you have to question whether the vet would have gone straight to the MRI scan if the animal hadn't been insured. You can get into potentially deep water ethically when you have to argue along these lines."

Claims control

Because of this, insurers are keen to introduce greater control at an early stage in the claims process. "It would be good to establish networks of veterinary practices and to be able to set prices for procedures," explains Mr Wilcox.

This won't be easy, however. There are few chains of veterinary practices, so establishing networks is problematic. Additionally, the insurers have come up against considerable resistance from the vets.

"The pet insurers, through the Association of British Insurers' Pet Insurance Forum, have had a number of meetings with the Royal College of Veterinary Surgeons; however, it has not been very co-operative with our ideas on cost containment," admits Mr Wilcox.

In the future, economic factors may change this, as Mr Price explains: "The statistic that is often bandied around is that an insured pet is worth twice as much to a vet as an uninsured pet. At the moment, that means our 15% market penetration represents around a third of vets' income.

If we had 30% market penetration - equivalent to 60% of vets' income - this would give us the critical mass to tackle the vets."

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