Protecting Pets

Comparing human health insurance to pet insurance

 Philip Wright May 2022

Photo: iStock.com/Pekic

It’s 2 a.m., and Sam is terrified. His tongue acquires a blue tinge as he struggles to breathe. Sam is quickly rushed to the nearest urgent care facility, where health care professionals successfully treat him for an asthma attack. Sam’s guardian is relieved that Sam is safe. This relief is coupled with peace of mind, knowing that Sam’s insurance provider will reimburse most of the treatment cost for the episode.

Sam is ineligible to be enrolled in his guardian’s group health insurance plan, but he has coverage through an insurance product that has recorded record growth over the past decade. This is, of course, because Sam is a cat covered under a pet insurance policy.

This example would require only slight modifications to describe an episode afflicting a member of a human health insurance plan. As pet insurance adoption grows, advances in the veterinary industry continue to evolve pet health care in a direction that is beginning to mirror human health care.

The pet insurance market has grown rapidly in the United States in recent years. The North American Pet Insurance Association reports that the pet health insurance industry has grown at an average annual rate of 23.4% over the past five years.1 Due to this rapid growth, new insurance carriers are entering the market. Figure 1 shows the in-force gross written premium in the United States from 2016–2020. In 2016, gross written premium was approximately $836 million, and it ballooned to nearly $2 billion in 2020.

Figure 1: In-force Gross Written Premium in the United States, 2016–2020

Hover Over Image for Specific Data

Source: Section #1: Gross Written Premium. North American Pet Health Insurance Association (accessed February 28, 2022).

Since there are many similarities between the risks covered by human and pet health insurance, health actuaries have key roles to play in the design, pricing and evolution of pet insurance policies. However, there are many differences between the two products. Actuaries interested in pet insurance should be aware of these distinctions when applying their professional experience to pet insurance.

Product Design

Current pet insurance products resemble early health insurance indemnity products. Pet insurance most commonly provides coverage for dogs and cats. Some carriers cover exotic species like birds and reptiles, but farm animals such as livestock are excluded. Product design varies among products and carriers. In most cases, the policyholder pays the veterinarian directly and receives reimbursement less cost-sharing from the insurance carrier. Basic coverage may include medical and/or accidental coverage, and some policies include coverage for preventive and wellness benefits in conjunction with a benefit or dollar limit. Cost-sharing provisions may include annual or per incident deductibles, copays or coinsurance. An annual benefit limit sometimes applies as well.

Pet insurance is like health insurance—especially health indemnity—in that the allowed amount for medically necessary care is often a percentage of charges or limited by a fee schedule. Exclusions typically are similar as well. Care received from a veterinarian who is related to the pet owner, services related to an act of war and other exclusions like those found in most human health insurance contracts are applicable.

However, pet insurance has two key dynamics that necessitate design differences. The first is that there are few or no managed care elements. The veterinary industry historically has been reluctant to network with pet insurance carriers. The absence of networks results in the pet insurance carrier having little ability to influence the billed amount, control utilization or share any risk related to the cost of care with the veterinary provider. Therefore, most coverage restrictions and exclusions are the insured’s responsibility. Fee schedules, annual benefit limits and member cost-sharing are all levers that can be used to control utilization and cost.

The second key dynamic requiring a different design than human health insurance is that there are greater opportunities for anti-selection at all stages of the pet insurance product when compared to human health insurance. One reason is not every pet owner views their pet in the same way. People who view their pets as family members are more likely to purchase and retain pet insurance. They are also much more likely to seek veterinary care if a perceived issue with their pet arises. Therefore, the pet owner has a substantial impact on pet insurance utilization.

Another anti-selection opportunity that is greater in pet insurance is that policyholders have much more control over when to utilize care since they do not bear the physical symptoms or feel the pain from the ailments that require treatment. Therefore, some pet owners may not want pet insurance or may choose to lapse coverage due to a perceived lack of value. Pet owners who are more likely to utilize care will retain insurance. They also may utilize more care than necessary since they are unable to feel pain or discomfort from the ailments and may see the need for veterinary care when it may not be warranted. Additional diagnostics also may be necessary to successfully diagnose pets—unlike humans, pets can’t verbalize information about their ailments to assist in identifying a diagnosis.

Pet insurance contains some design features that limit impact from adverse selection. One feature is that nearly all pet insurance plans contain preexisting condition coverage exclusions, and plans that provide coverage for preexisting conditions have significantly larger premiums. While the Affordable Care Act (ACA) requires that most human health plans cover preexisting conditions, pet insurance leverages these exclusions to limit external anti-selection from prospective insureds. Some other common features that limit anti-selection are waiting periods (such as for cruciate ligament injuries) and minimum age enrollments (usually eight weeks for puppies and kittens).

Claims and Data

It is helpful to understand expected losses when comparing pet insurance to human health insurance. Like health insurance, most claims for pet insurance are developed approximately three to four months after being incurred. There are similar data elements that can be useful for actuarial analysis on both products. The specific provider, type of service rendered, billed charges for each service, incurred date and patient information (such as breed) can be leveraged for analytics after processing.

Like human health insurance, a relatively small subset of pets are responsible for a disproportionate number of losses. Potential cost savings could be realized by controlling high-risk pets or pets with high utilization. Chronic conditions such as cancer can be especially problematic.

One difference between pet insurance and human health insurance claims is driven by the fact that there is no standardized coding for veterinary billing. In health insurance, claims experience typically includes standardized codes such as Current Procedural Terminology (CPT) and International Classification of Disease (ICD) codes. Not having these kinds of codes in pet insurance increases the chance of claim errors where the actual services rendered are not well-described by data available to the actuary. Actuaries should use care when reviewing pet insurance claims and realize that veterinary billing is not as evolved as human health care billing.

Another key difference in pet claims when compared to human health insurance claims is the distribution of losses per member. Cumulative losses of $3,000 exceed the 90th percentile of losses for pet insurance. For human health insurance, most members have at least one claim. This is in contrast to pet insurance where the majority of members don’t file a claim. Factors that may drive this difference are forgetting about the policy, varying attitudes on the care pets need and the perceived return from time spent filing a small claim. Overall, pet losses are driven by high frequency. On the other hand, in human health insurance, outlying claims such as for specialty drugs or long inpatient stays may lead to especially large claims.

Pricing

Pricing pet insurance is similar to pricing human health insurance. Pet insurance, like health insurance, is a high-inflationary product, where trend may be as high as 10%. However, utilization drives a lot of that increase. Just like in human health insurance, trend in pet insurance does not necessarily result from an increase in a fixed basket of services. Both products are short-term renewable. Additionally, for both products, experience usually is reflective of future losses. Like health insurance, a high-cost pet is likely to remain a high-cost pet in the future.

Typical rating variables for pet insurance are:

  • Age
  • Breed
  • Species
  • Gender
  • Geographic area
  • Deductible/copay/limit factors
  • Preexisting factors (for varying waiting periods or other adjustments)

Pricing variables tend to be like those used in human health insurance, but a key difference is the inclusion of breed. Breed is a significant factor because some breeds are more prone to developing certain conditions. Larger dogs are more likely to incur a cruciate ligament injury, as an example. This can create credibility challenges when conducting a pricing or experience study due to the lack of policies in force for unusual breeds. Additionally, as previously mentioned, another significant difference is that veterinary billing data is not as sophisticated as human health care billing. This results in the absence of risk-scoring at the same level of sophistication as in human health insurance.

Other Considerations

While not discussed in detail in this article, there are other considerations of which actuaries familiar with health products should be mindful when analyzing pet insurance:

  • Market penetration remains low. There are approximately 3.1 million insured cats and dogs in the United States.2 The American Veterinary Medical Association estimates approximately 135.2 million cats and dogs in the United States,3 which means the market penetration is approximately 2.3%.
  • Most of the pet insurance market is through the individual market. If offered through employers, pet insurance is usually a voluntary benefit. Group products are likely to continue to emerge as the market matures.
  • Like human health insurance, the existence of pet insurance may lead to increased utilization. Pet owners with pet insurance tend to utilize care more than pet owners without insurance.4

Conclusion

Actuaries familiar with health insurance concepts can add tremendous value in shaping the future of pet insurance. An understanding of key differences between the products and how health insurance has evolved over time will further enhance an actuary’s ability to design and price pet insurance products. Actuaries should lead the way in the evolution of these products as they continue to enhance the lives of pet owners.

Philip Wright, ASA, MAAA, is an actuarial pricing manager, Pet Insurance, at Lemonade.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2022 by the Society of Actuaries, Chicago, Illinois.