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Pet market poised for more growth after pandemic boom in ownership

French bulldog at the vet.jpg

The pandemic puppy craze helped drive a leap in pet insurance premiums over the past year, but the uptick barely scratched the potential for growth in the low-penetration market.

Pet ownership in the US swelled in 2020. The ASPCA estimated that 23 million households acquired a pet amid the Covid-19 crisis. The American Pet Products Association says 90.5mn American homes, or 70%, now have at least one pet.

Those adoptions helped drive total pet insurance in force to $2.17bn for 2020, a 26.5% leap from 2019, according to the North American Pet Health Insurance Association (Naphia).

The pandemic gains reflected an acceleration of the growth seen over the last five years, boosting the average annual growth rate to 23.4%.

But while the number of insured US pets topped three million for the first time last year, that still represents just 2% of the potential market, said Naphia executive director Kristen Lynch. Despite years of double-digit premium growth, she said, “we’ve all been kind of waiting for the tipping point” that would increase market penetration.

in force GWP IPCD bar chart november 3 2021.PNG

Rising pet ownership and changing views about relationships with pets were already driving the pre-pandemic growth, said Bob Capobianco, senior vice president, Crum & Forster Pet Insurance Group, a unit which writes coverage under multiple brand names, including ASPCA, Hartville, Petco, Spot and Pumpkin.

A year-plus spent mostly at home with family and pets has helped spark more interest, he said. “It’s created more opportunities for us to have conversations with pet owners about the health of their pets.”

“I think there’s a long runway for the foreseeable future where this kind of growth can be sustained,” he added.

Awareness is a key element in increasing penetration, according to Brian Macias, president of Embrace Pet Insurance, a subsidiary of specialty MGA NSM Insurance Group that markets multiple brands, including USAA, Geico, Allstate, American Family and Bolt.

The challenge for this sliver of the P&C industry is to broaden understanding of the product to convince pet owners of the benefits, he explained. “We do believe that the industry, over the course of the next five years, will continue to see double-digit growth, because of the low penetration rate we have today.”

Pets as family members

Nationwide chief pet officer Heidi Sirota said that the humanization of pets in American households and the broader acceptance of animals in the workplace will drive more owners to buy coverage.

“There’s really a different lens on what it means to bring a pet into your home now than before,” she said. “Increasingly they are real, live fur-members of the family.

“That’s driving people to want to do more to protect their pets.”

Lynch noted that the shift “from the barnyard to the bedroom” in the US came later than in other countries, particularly Europe. Data from market researcher Mintel shows European market penetration is at about 50%. In Sweden, it’s an eye-popping 90%.

One way to draw more customers is to present the product as a way to reduce their pet care expenses, Sirota said, noting that vet care costs have increased 70% in the past decade. “From Nationwide’s perspective, I don’t hang my hat on premium growth, and that’s usually a measure for a pet insurer,” she said. “We want to grow by bringing more pets into the protection fold.”

About 80% of all pets insured are dogs, which tend to need more high-cost veterinary care than cats. One scroll through crowdfunding sites like GoFundMe is all it takes to see panicked pet owners pleading for cash to cover their dog’s surgeries, cancer or accident care, which can easily top $10,000.

When faced with that kind of bill, pet owners often face a wrenching decision, and inevitably, some opt for “economic euthanasia,” or putting a pet down because they can’t afford the care needed.

Tapping into the growing emotional connections with pets can help convince owners to purchase pet coverage to avoid such a crushing choice, Lynch said. “It’s an emotional product, and it’s weird to talk about insurance that way.”

Pets and GWP distribution table IPCD november 3 2021.PNG

Not your typical P&C product

One of the challenges for carriers aiming to improve penetration is getting both brokers and potential customers to understand pet insurance.

The nature of the product causes confusion, Embrace’s Macias said. “It is a P&C product because technically the pet is property,” he said. “Why there’s some cognitive dissonance there is because it feels like health insurance. The book behaves more like an A&H product would than it does a P&C product.”

That’s been a challenge in the industry, Macias continued. “A lot of people who start P&C companies are used to a book that starts out unprofitable,” he explained. “This is more like health, where you see the book profitable up front and then deteriorate from a loss ratio over time.”

Macias wouldn’t providing data on Embrace's underwriting performance, and parent NSM, which itself is a subsidiary of White Mountains Insurance Group, doesn’t break out such data for its divisions.

I can say that many in the industry struggle with rate adequacy, pricing structure, and consequently, profitability from an underwriting perspective
Embrace's Macias

Trupanion, the only public pure-play pet insurer, does not release underwriting data. The Seattle-based company in June reported a first-half operating loss of $22.2mn, reversing a small profit for the first half of 2020. Revenue rose 41% to $323mn as it crossed over a million pets insured. It is slated to report Q3 results Wednesday.

“I can say that many in the industry struggle with rate adequacy, pricing structure, and consequently, profitability from an underwriting perspective,” Macias said.

Both claims frequency and increasing severity due to the veterinary care inflation make the line unique, he said, adding that some state laws make it even more difficult to attain profitability. In California, for instance, the product is considered inland marine, and “the permissible expenses set by the state don’t reflect the true operating cost of this line of business.”

Another unusual factor is that it’s coverage that’s designed to be used, Lynch said. “It’s not like home or auto, where you hope you’ll never have to make a claim. With pet insurance, you want people to make claims.”

In fact, claims frequency is near 100%, Macias said.

A study by Pumpkin found that pets covered by their products visited vets 65% more per year that never-insured pets, and annual spending increased 43% once the coverage was in place. InsurTech Lemonade, which declined to comment for this story, in September began marketing a product that focuses on preventative care, which would likely increase claims frequency even more.

Another unusual aspect of this line is that claims are generally done on a reimbursement basis.

While that means that clients don’t have to navigate networks and other restrictions familiar to health insurance consumers, it’s another a barrier for some customers. “That’s an addressable piece of the puzzle that we all need to work toward and would create a lot of value for the client,” Macias said.

Some companies are shifting to a direct-pay model, more along the lines of the way health insurance generally works. Trupanion, which declined to comment for this story, provides direct payments to vets that use its software.

More carriers entering the market

From InsurTechs like Lemonade to stalwarts like MetLife, more carriers are entering the pet insurance market, Lynch said.

In fact, the number of companies offering pet coverage more than tripled over the past 10 years, she said, reflected by the member companies in the trade group rising to 23 from seven.

In the past five years, a number of the independent start-ups that pioneered coverage in the US were acquired by larger carriers, including MetLife’s purchase of PetFirst Healthcare and Synchrony’s buyout of Pets Best, both in 2019.

“It’s on the radar of these big companies now,” Lynch said. “Now the people sitting around the table are seasoned insurance executives and not people who are just figuring out the marketplace.”

Macias said there’s interest not only from larger P&C carriers, but also from the venture capital and private equity markets.

Among the largest deals in the past two year was private equity giant Warburg Pincus’s purchase of PetPlan in 2019. In February, Pawlicy Advisor, a New York-based pet insurance broker, raised $6.5mn in February in a Series A funding led by and Rho Capital Partners. And last month, German conglomerate JAB Holding Company said its US pet insurance arm, itself acquired in June, would buy Chicago-based Figo Pet Insurance.

“You’re seeing more and more people enter the space,” Macias said. “I think that’s good. I think that kind of competition creates more awareness.”

“What we’re seeing right now is recognition of the upside of the market,” he said.

Capobianco said that interest is likely to expand as technology influences the design and price of products, along with how companies engage with customers from a marketing perspective.

There’s still multiples of opportunity of penetration for the foreseeable future
Crum & Forster's Capobianco

He sees better marketing as a crucial to reaching more potential customers, particularly stronger use of the digital space.

“Understanding customers is a part of it,” he said. Understanding where pet owners consume their information can help carriers engage and have a conversation about the concept of pet insurance.

“It’s not all about initially trying to get them a quote for a policy,” he said. “In the engagement, there’s an exchange of information. Hopefully, it will get them to say, ‘I need to learn more about pet insurance.’”

“I think there’s certainly an opportunity to get to a much higher level,” Capobianco added. “There’s still multiples of opportunity of penetration for the foreseeable future.”

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