The cat's meow?

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The pet insurance market has shown tremendous growth in the past 30 years but is now starting to plateau. Gareth Jones explains how educating the customer is key to continued growth

The concept of animal insurance originated in the 1800s when cover became available for livestock and thoroughbreds. The foundations of what we now recognise as the pet insurance market, however, are considerably more recent.

The launch of the mainstream market began 30 years ago in the UK through Petplan, a business founded on the need for an insurance policy to cover pet owners against the cost of unexpected veterinary bills. In 1996, Cornhill purchased Petplan for £32.6m.

The effect of a major player in the market turning its attention towards pet insurance became a catalyst for others to establish their own products. Royal Bank of Scotland, through Direct Line, NIG and UK Insurance have all gained footholds in the market and, more recently, Axa, Royal and Sun Alliance, and Norwich Union have begun to make inroads (see pie chart).

Pet insurance is considered by most of the industry as 'non-core' business. By its very nature, the insurance of cats, dogs, horses, rabbits and even more exotic animals often raises a smile or is quickly glanced over. But looking at the way the industry has grown so rapidly, can it really be dismissed so lightly?

Growth dynamics

Financial Services Authority returns for pet insurance in 2005 recorded a market that had grown to be worth more than £330m; and Datamonitor's 2006 report put growth in 2005 at 17%, through a combination of higher market penetration and higher premiums.

Estimates given by the Pet Food Manufacturers' Association in 2004 suggested the UK's domestic animal population comprises 6.8 million dogs and 9.6 million cats, with just over 50% of households owning a pet. Industry research has calculated insurance penetration to stand at between 18% and 22% of insurable animals. Bearing in mind the saturation point is thought to be around 30%, the market's growth potential - while still an attractive market for those already in it - will not be the same as experienced in recent years.

During the last five years the introduction of pet insurance policies by major high street and consumer brands has undoubtedly raised the profile and awareness of the concept. Customers know and trust brands such as Tesco and Asda, which have direct access to a huge target market through daily footfall, loyalty schemes and aggressive direct marketing. As these brands flex their advertising muscles in-store and direct to customers, and others like Direct Line and Petplan advertise on terrestrial and non-terrestrial television, further awareness and demand are created.

The traditional routes to market - through the veterinary surgeries, breeders and the re-homing charities - also continue to provide steady flows of new and returning owners to the pet insurance market. Financial Services Authority regulation has, however, redefined the relationship between the insurer and these channels, resulting in two distinct approaches being adopted by the biggest players.

In one camp sits the specialist insurer. Due to the resources required to fulfil the regulatory requirements - such as additional manpower, educational programmes, face-to-face visits and training - many have abandoned their efforts with the traditional channels as being unable to support a low-margin, non-core line of business. However, the larger players in the market have been able to use regulation to get closer to these channels and continue to reach their customers.

The alternative approach is to go direct to the consumer, often cross-selling and perhaps even cross-subsidising between other insurance products within the portfolio.

The overall effect of more companies coming into the market has been largely positive, bringing an increase in availability, awareness and demand, but there are negative issues emerging too.

Pet insurance is now an increasingly commoditised market that is in the hands of many general insurers that try to build business through unsustainably low pricing and introductory gimmicks - such as no excesses on policies - that are withdrawn after gaining an initial foothold in the industry. This can result in confusion for the consumer.

As these new insurers experience a maturing book, claims ratios increase to a level that forces the company to make significant price hikes and employ more stringent underwriting. This can upset customers and influence their view of the pet insurance market - new owners and market customers can be quickly disillusioned, withdraw their business and may not be tempted back.

However, those with an understanding of the nuances of this kind of insurance can continue to look forward to repeat customers and growth in their book. As concluded by Datamonitor in its 2006 pet summary: "Specialist insurers are assisted by the experience they have in their marketplace, particularly when it comes to the maturity of their accounts. Claims costs are likely to be very similar year on year, and they will know how much it costs to run their business."

Plans for the future

So what does the future hold for the pet insurance market? Some companies have already left the market, and further withdrawals or acquisition by specialist players are possible.

The pet insurance industry must look at ways to contain costs and keep premiums affordable in association with the veterinary profession. The cost of average veterinary-fee claims continues to rise year on year as technological advances make many new procedures available.

Adopting the practice from medical insurance of restricting payments to a set amount per condition is one option, as is developing cash plan-style co-insurance products. Equally, the insurers based on the services provided and their costs could rate veterinary practices.

Whatever steps individual players in the market take, the process must involve the continual education of customers to make sure that they understand the type of products they have bought and the level of cover they have.

The industry must treat its customers fairly, and do this by ensuring that the customer buys the product that is right for them and their pet. Only then will it encourage repeat purchases and the growth of pet insurance take-up among animal owners.

- Gareth Jones is general manager of Allianz Cornhill's speciality division.

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