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With foreign body ingestion, poisoning, and cancer, along with being hit by car, ligament ruptures, and other accidents and illnesses, pet owners need to be prepared for the large unexpected veterinary bills that occur in treating their pet for these events. Pets are considered family members by many of us and require a significant amount of healthcare over the pet’s life, especially as the pet gets older and illnesses are more likely. In recent years, pet health insurance has been gaining in popularity and provides a way for pet owners to better manage the healthcare expenses of their pets.
For providers of pet health insurance, there are a number of ways to help enhance the likelihood of being profitable in the pet health insurance space while providing a valuable product to the pet owner.

Here are the key items that should be at the top of the list for successful programs:

Consider the impact and correlation between pet age / breed / size: While most pet health insurance writers want to focus on very young pets that will on average have better claims experience, the average age of the book of business will eventually increase as the company renews policies and the renewal of these aging pets will eventually outweigh the newer younger pets. Pet age factors are key in helping to achieve a better rate for the risk, but the risk associated with pet age is highly correlated with breed and size of dog. The table below shows an example of how pet health insurance writers are helping to maximize the correlation between these rating variables.

Don’t rely on age at inception alone: Age at inception is a concept similar to whole life insurance, where your premiums do not increase as your age increases. While this may work for life insurance, it generally results in inadequate rates for pet health insurance as the average age of the book increases. Without another rating variable to compensate for the lost premium as the pet ages, the use of age at inception becomes more problematic as time goes on.
Include automatic trend adjustments: Since the annual frequency and severity trend in pet claims is significant (typically ranging from 8% to 15%), a number of Departments of Insurance (“DOIs”) permit a rating factor that includes automatic trend adjustments. This allows premiums to increase over time without filing a rate increase with the state DOI. It is best to take advantage of this rating factor as it can significantly help with maintaining the profitability of the program in the states where this is allowed.

Following are a couple of examples of approved automatic trend adjustments:

Example 1: Due to this being health insurance for dogs and cats, loss costs will be susceptible to veterinary medical trends which we estimate to be compounding at a rate of up to 9% per year. A trend factor of up to (1+0.09)^(x/12), where x is the number of months since the effective date of this filing, may be applied to this base loss cost to account for the aforementioned inflationary effects.”

Example 2: This factor is based on an expected annualized trend of 10.0% to account for the increasing cost of veterinary medical care. The formula for calculating the factor is (1+0.10)^(m/12) where m = the number of months since the base rate went into effect, and the factor in the first month of the proposed effective period equals 1.000 (i.e. m=0).

Take advantage of ranges and flexibilities: Because pet health insurance is a property and casualty product and typically is filed under personal inland marine (only a handful of states are different), the DOIs in many states allow an insurance company to file subjective and experience-based rating variables for group policies, such as ranges of debits of credits, a schedule rating plan and/or an experience rating plan. It is best practice to add these where permitted to enhance rating flexibility.
Don’t forget about forms: It is important to ensure your policy form has standard waiting periods and exclusions for pre-existing conditions, etc. to make sure you are not covering unexpected past injuries or illnesses.

Keep in mind that there are difficult states when it comes to profitability: Unfortunately, the biggest pet health insurance states when it comes to premium volume are also the most difficult ones to make money, such as California, Florida, New York, and Washington. These four states can sometimes make up to 50% of a nationwide book of business and the necessary rate changes to maintain profitability are often difficult to obtain with long approval timelines. While it may be enticing to write in these states due to the high growth potential, be careful as it is rare to be profitable in these states and very difficult to non-renew the business if things go south.
Don’t set and forget: Pet health insurance rates need to be managed over time. A key to maintaining profitability is to take the necessary rate changes to at least achieve the target loss and expense ratio. Too often companies wait a few years before reviewing rates. This makes it very difficult to realize the rate level needed to achieve and maintain profitability.
Monitor, monitor, monitor: It is important to not only understand the profitability of your book of business from an overall standpoint, but also whether your class plan rating variables are appropriately pricing the risk. Whether rating variables (such as state, deductible, coinsurance, pet age, breed, et.) are reviewed individually or with the use of predictive modeling, these analyses should be performed at least once a year to understand where the program is profitable and where rate increases are necessary to improve or maintain that profitability.

Pet health insurance is a fast-growing market with significant growth potential, but there are also a lot of ways to lose money in the process and companies can get themselves into a hole that is sometimes very difficult to dig out of.
About Perr&Knight
Perr&Knight is a leading provider of both actuarial consulting and pet insurance product development services to companies providing pet health insurance. Our consultants have assisted a number of pet health insurers with developing and maintaining a profitable pet health insurance product.

Please contact us with any assistance that is needed with your pet insurance product development.

Carriers who have not been through complete development and implementation of a new system tend to underestimate the time, attention, and project management expertise it takes to smoothly roll out a system that works seamlessly with the other systems already in place. During our decades of providing project management and insurance technology consulting, we find that there are no universal “best practices.” However, there are good practices that everyone should try to follow.
Here are some of the most common mistakes we see and our suggestions for better alternatives.

MISTAKE: Thinking that your in-house staff has the bandwidth to properly oversee your new system rollout.

WHY IT’S A PROBLEM: In-house teams already have full slates and might overlook crucial details that can compromise the project.
BETTER ALTERNATIVE: Partner with insurance experts who can bring a fresh perspective. They will evaluate the details of your system roll-out to spot hiccups before you begin. They can also create achievable timelines and budgets, helping all parties stay on track to meet these expectations.
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MISTAKE: Relying on an inexperienced project manager.

WHY IT’S A PROBLEM: Project management is about more than just watching the schedule and staying organized. Successful project management requires scope management, HR management, and experience in risk, quality and procurement management.
BETTER ALTERNATIVE: Since there are many moving pieces and many specialized disciplines to take into consideration, it’s wise to trust an experienced project manager who has the insurance technology consulting expertise required to successfully implement new systems specifically for insurance companies.
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MISTAKE: Drafting an ambiguous or incomplete scope of work before beginning the project.

WHY IT’S A PROBLEM: Poor planning reveals surprises that must ultimately be sorted out down the line. These can delay deployments and cause budgets to balloon.
BETTER ALTERNATIVE: Carefully define your scope of work before engaging vendors. Make sure that all stakeholders understand what’s in and what’s out of scope before awarding a contract, and encourage them to draw to your attention any gaps or points of confusion.
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MISTAKE: Adopting an ad hoc or informal approach to planning.

WHY IT’S A PROBLEM: Scattered planning results in reacting to problems as they arise, not charting a proactive course of action.
BETTER ALTERNATIVE: Ask your insurance technology consulting expert to give you a realistic picture of what to expect while you draft your scope of work. Make sure you account for all aspects of your current systems that need to be updated before integrating with your new systems.
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MISTAKE: Doing things the way they’ve always been done.

WHY IT’S A PROBLEM: A “business as usual” approach can cause you to overlook important details or blind you to new practices, which can result in the marketplace leaving you behind.
BETTER ALTERNATIVE: To remain both efficient and competitive, insurance companies must maintain the flexibility to adapt to new situations. Simply relying on project management practices that have worked in the past can cause you to miss out on opportunities for greater efficiency or profitability.
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MISTAKE: Jumping to a solution before properly assessing the issue.

WHY IT’S A PROBLEM: Rushed decision making leads to costly oversights that can stall a project or force a complete re-evaluation down the line.
BETTER ALTERNATIVE: Undertake a proper discovery period to correctly assess your project needs and evaluate the costs and benefits associated with project decisions. Create a game plan that makes sense and make sure everyone is on the same page before you start the project.
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MISTAKE: Hastily selecting a vendor.

WHY IT’S A PROBLEM: Partnering with the wrong vendor can cost you time and money. You might end up deep in a project and be forced to throw good money after a bad vendor experience in an effort to get your project back on track.
BETTER ALTERNATIVE: Take the time to properly vet your vendors. Ask them specific questions about their experience in the particular lines of business you are planning to write. Look for areas where they push back. You don’t need a team of yes-men. You need experienced professionals who tell you the truth, no matter what.
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MISTAKE: Remaining with the same vendor.

WHY IT’S A PROBLEM: Legacy partners can also get mired in their own systems and might not stay current with technology changes or industry advancements, causing you to lose out on important opportunities.
BETTER ALTERNATIVE: Ask your current vendor to bid alongside new vendors. If you have a personal relationship with your current vendor, request an unbiased third party from your team to handle the interviews and compare proposals. Take their assessment into strong consideration when deciding if your current vendor measures up or if you should partner with someone new.
There are as many ways to implement a new system as there are individual insurance companies. Use these guiding principles to help you make more thoughtful decisions as you develop new ways of serving your clients.
Need more guidance? Call Perr&Knight at (888)201-5123 Ext. 3 to discuss how we can help your implementation proceed more smoothly.

Insurance Consulting

Pet Health Insurance: Eight Key Ways to Enhance Profitability