Pet insurance - The potential is being underestimated

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Pet insurance: The potential is being underestimated
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20 September 2013 | Property, Risk management

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The potential is being underestimated
Critics view pet insurance business as not terribly lucrative. But given the right strategy, there is a lot of potential in this niche market. Munich Re supports its clients in the areas of product design and cost efficiency, and with the development of innovative sales concepts.
Pet insurance - Munich Re
Is it possible to build up a lucrative line of business with pet insurance? Critics argue that, since it is a niche product, the premium volume is limited, the costs for marketing and administration relatively high, and the operating ratio poor. And, indeed, they are not entirely wrong. In the past, a lack of experience and too little statistical data resulted in errors with product design and on the marketing side. Product designs were too complicated and the products themselves were frequently inadequately rated. Policies only covered treatment phases that did not extend beyond one year and there were high fluctuation rates. In the main, price was generally the deciding factor on the market, rather than the benefits provided. Clients eventually became disappointed and confidence began to crumble.
High risk of antiselection
Special factors influence the profitability of pet insurance. Insured pet owners tend to pay more frequent visits to the vet. Some practices report that their waiting rooms are always well filled in wet weather. Even vets themselves tend to give insured animals a more thorough, and therefore more expensive, check-up and treatment. In certain cases, claims were alleged to have been made on a single policy for several animals of the same breed. Business results were not satisfactory. Because of rapidly expanding portfolios and unsuitable run-off projections, poor results were not recognised in time, with the result that any measures implemented did not make a sufficient impact. Operating ratios were sometimes as much as 250%. Again and again, premiums had to be sharply adjusted, with the result that pet insurances became unattractive for clients with good risks, in other words owners of younger and less susceptible dogs and cats. In many instances, this led to the good risks cancelling their policies, triggering a downward spiral of declining portfolio quality and premium increases.

But things can be done differently. Successful markets like the USA, the United Kingdom, or Sweden illustrate the potential from pet insurance – provided you choose the right strategy.
Business with our furry friends is booming
People have been keeping pets purely for pleasure – dogs and cats in particular – since the middle of the 19th century. The Facts & Figures 2010 study, carried out by the European Pet Food Industry Federation (FEDIAF), estimates that around 120 million cats and dogs are kept as pets in the EU. In the USA, the figure is approximately 140 million. What's more, according to a 2012 Harris poll, 94 percent of dog owners and 91 percent of cat owners in the United States consider their pet as full members of the family. Current lifestyle trends, the uncertain economic situation and shrinking households are all expected to have a slightly negative impact on the number of pets in the future. Yet for all that, business with our four-legged friends is booming. There are accessories and services of every imaginable kind available, ranging from gourmet menus, jewellery, fashion, and wellness hotels, to regular visits to the hairdresser – the range of items and services for pets is growing and growing. With 3.9 billion euros in 2012, sales of pet supplies in Germany have increased by 7.3 percent since 2009, according to the Industrial Association of Pet Care Producers (IVH).

Dogs and cats can now get the best of medical care as well. According to a study carried out by the Clinic for Animal Medicine at Munich University, helped by the use of modern medical technology, life expectancy for dogs increased by around 30 percent between 1967 and 1997, while the improvement in feline mortality was well over 30 percent. As a result, an increasing number of animals suffer from age-related illnesses like diabetes or cancer. Good food is also a factor. PDSA, a veterinary charity in the United Kingdom, has established that 45-50 percent of all dogs in the UK are presently overweight. In 2003 the figure was just 17 percent. Generally speaking, animals can contract the same illnesses as their masters and mistresses, but, of course, they have a much shorter lifespan.
Model market UK
Traditional markets like the United Kingdom illustrate how successful pet insurance should operate under market conditions like these. Current premium volume: approximately €850m. Sales increase in the last 5 years: over €300m. Or again there is Sweden, where the first pet insurance policy for a dog was written back in 1924. Today, with over €100m in premium income, Sweden is the second biggest market in Europe, and has the highest market penetration in the world. With current sales of around €330m, the USA is witnessing almost double-digit growth rates in its market. In 1982, it saw the first pet insurance policy issued for a dog. The dog's name was Lassie.

The secret to the success enjoyed in the UK, Sweden and the USA is having the right strategy. After a consolidation phase, well-known brands became established in these markets that clients were familiar with. More extensive marketing measures consolidated this trend. In the United Kingdom, around €8m was spent on product promotion in 2009. By 2011, the figure had risen to almost €14m.

Attractive lifetime products cover illnesses that have already occurred during a previous policy period for insurance cover in the future. This means the policies are better tailored to meet the needs of customers, and are replacing contract formats where, once an illness occurs, it is then excluded from cover in subsequent insurance periods. Lifetime products lead to long-term client relationships. Nowadays, when designing the product, it is best to forgo providing cover for routine treatments such as vaccinations or dental care. Individual risk assessments based on breed, age, address and the weight of the animal make it possible to set attractively priced premiums. This makes the products interesting again for those clients with good risks. By boosting the number of new acceptances, the risk can be diminished of ending up with an aging portfolio, with animals that require medical assistance more and more frequently. This, too, can have a positive impact on premium trends.
Market penetration for pet insurance 2012

Mouse click the countries marked.

There is substantial market potential for pet insurances in many European countries. However, up to now, only a very small number of insurers have managed to tap into it. In order to do so, you need to have a precise knowledge of insurance requirements, and gradually build up the necessary reputation as a specialist insurer assisting pet owners. In the past, this process sometimes took several decades before substantial market penetration could be achieved. Based on the data and experience available today, however, this period can be substantially reduced.
Optimum online product
In terms of sales and marketing, the internet is becoming an increasingly important sales channel. The number of contracts concluded via price comparison portals and automated underwriting is on the rise. In addition, breeders' associations, pet shop owners, the pet food and accessories trades, vets and animal charities are all suitable for use as new sales channels. Bundled offers, for example in combination with liability insurance, are extremely popular, especially in countries where insurance is mandatory.
The service we offer
Munich Re has been involved with pet insurance since the 1980s, and has comprehensive experience in the world's leading markets. Over the last few years in particular, we have made systematic use of developments in information technology to achieve substantial improvements in terms of risk assessment. On this basis, we can advise our clients on matters such as process optimisation, risk modelling, product development and rating. Our primary insurance partners are generally managing general agencies that specialise in pet insurance. We license their business via in-house fronting facilities and finally provide reinsurance as well. By making a detailed comparison of data with the primary insurer, we can reliably project the claims development at any point, thereby facilitating more attractive product and premium design.

Dr. Stephan Haverkamp, Senior Underwriter Special and Financial Risks - Agricultural Reinsurance, is upbeat about the prospects for the future: "In many countries, pets are increasingly assuming social functions too, as friends, leisure time partners and members of the family. Given this degree of appreciation, it goes without saying that people need high-quality health protection for their beloved four-legged friends. If this need is met in the form of innovative product and marketing strategies, pet insurance can become an automatic provision for man's best friend.

For that reason, we have built up a level of expertise and developed comprehensive tools for our clients, so that together we can exploit and expand the steadily growing business potential offered by this segment."
Stephan Haverkamp - Munich Re

Munich Re

Our expert
Senior Underwriter Dr. Stephan Haverkamp advises on developing new approaches to the design and marketing of pet insurance.
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