June 2011Pricing Pet Insurance 1 “Going to the Dogs” Or: How a Health Actuary Can Add Value to Pet Insurance Pricing Presented by: Jennifer Dix, FAC June.

June 2011 Pricing Pet Insurance1

“Going to the Dogs”

Or: How a Health Actuary Can Add Value to Pet Insurance Pricing

Presented by:Jennifer Dix, FAC June 2011

June 2011 Pricing Pet Insurance2

Intro quiz:

Which country has the highest % of pet owners with pet insurance?

A. Sweden

B. United States

C. England

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Answer:

% of pet owners with pet insurance:

Sweden: 50%

England: 25%

United States: <1%

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Topics to be covered:

History, competitive environment and plan design

Pricing different plan designs using claim probability distributions

Pricing benefits using actuarial cost method

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History

First offered in US in 1982 Up until 2006 basically just 3 competitors:

VPI, Hartville and Pet Care Since then about 10 new companies entered

the market

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Market Share

60%

12%

8%

6%

4%

10%

VPI

Hartville

Pet Care

Pets Best

Pet First

Other

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Market Growth

As of 2009, about 850,000 million pets insured at total cost of $330 million

Premium has grown about 20% per year for past 5 years

Growth of new sales expected to accelerate once economy rebounds

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Competitive Climate

Emphasis on consumer and customized plans through:– More plan design offerings– Increased reimbursement levels– Greater disclosure

Customer online reviews and increased regulatory scrutiny holding insurers accountable

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Coverage

Pet owner submits vet fees they paid and plan reimburses up to some maximum: – Can be fixed fee schedule, % of vet charges or

some level of R&C determined by insurer

R&C may be based on % of American Animal Hospital Association (Vet fees published every 2 years)

R&C could also be based on company data

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Coverage

Typical coverage levels:– Accident only– Accident and sickness– Accident, sickness and wellness

Pre-existing conditions excluded

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Plan Design

Varying deductible levels and coinsurance Per incident limits Annual maximums Coverage for congenital/hereditary

conditions (?) Continuing Care endorsement

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Pricing – Rating Variables

Species (cats, dogs) Age Breed Geographic area

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Claim Probability Distribution

Can be used to price varying:

– Deductibles (~$100 ~ $500)– Annual maximums (~$1500 ~ $5000)– Coinsurance levels (70%, 80%, 90%)

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Claim Probability Distribution

Separate table for each species, plan design level and area

For each claim, take allowed amounts and trend to pricing period

Sum all claims per pet over 12 month period Bucket into ranges of cost (i.e. $50

increments)

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Sample CPD

Cost per Pet Freq Avg Annual Claim

Annual

Cost

Accum Freq

Accum Annual

Cost

$0 - $50 .65 $0.50 $.33 1.00 $200

$50 - $100 .05 $74 $3.70 .35 $199.67

$100- $150 .03 $126 $3.78 .30 $195.97

… … … … … …

$5000+ .001 $6250 $62.50 .001 $62.50

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Actuarial Cost Model

Useful for pricing wellness benefits, assuming not subject to deductible

Determine projected cost and utilization by service type

Cost for each service may be defined by benefit schedule

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Actuarial Cost Model Sample

Service Type Annual Utilization Rate

Benefit Amount

Per Pet Cost

Annual Physical .8 $50 $40

Dentistry Cleaning .5 $100 $50

Spay/Neuter .2 $75 $15

Total Net Cost $105

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Similarities to human health insurance

Plan design (deductibles lower for pets) Rating variables Levels of coverage Modeling techniques