PRA Policy Statement 1/22: Insurance business transfers
We review the key amendments to the PRA’s Policy Statement 1/22 on insurance business transfers and consider the potential implications.
There’s been a lot of barking lately about pet insurance, particularly in the employee benefits space. Pet insurance has been a hot topic at recent employee benefit conferences, and a number of benefit providers are expressing interest in the product. A look at the market size, past growth, and future potential makes it clear why. A recent study by the American Pet Products Association (APPA) stated that 70% of households in the United States, or 90.5 million households, own a pet.1 The APPA provides a breakdown of pet owners by generation, which shows that the majority of pet owners tend to be Millennials (32%), but Baby Boomers (27%) and Gen X (24%) aren’t far behind. Many households own more than one pet, as the total number of cats and dogs in the United States is estimated to be about 152.1 million.2 Many people consider pets to be part of the family, so one might assume that a large number of these pets are insured. However, according to the most recent North American Pet Health Insurance Association (NAPHIA) State of the Industry Report, only 3.1 million of these pets are covered by insurance.3 That amounts to roughly 2% market penetration, significantly lower than other markets like the United Kingdom or Sweden, which see 25% to 40% of pets insured.4
While the pet insurance market is small compared to the markets of more established products like dental or vision, insurers are drawn to it due to high growth and the perception that it remains an untapped market. It’s true that NAPHIA’s latest report points to a low penetration rate, but the number of pets insured has grown an average of 18.9% per year from 2016 to 2020.5 Growth in gross written premium has been even greater. From 2016 to 2020, written premiums have more than doubled in North America, from $940 million in 2016 to over $2.1 billion in 2020. The growth seen in the past five years has been impressive, but it seems to be only the start. A recent study by Global Market Insights, Inc. estimates that the U.S. pet insurance market could experience 12% annual growth through 2025.6 Further, some estimates of the market potential in North America are over $33 billion, more than 10 times the current market size, assuming that pet insurance in North America grows to the same popularity seen in the United Kingdom or Sweden.7
Growth is important, but without profitability it would be for naught. A look at a recent investor presentation illustrates just how profitable pet insurance can be.8 Trupanion states its target internal rate of return as 30% to 40%. It reported a 52% rate of return in Q2 2020, and 34% in Q2 2021. The possibility of substantial growth combined with high rates of return has not only lured traditional property and casualty (P&C) insurers into the market, but has also started to catch the attention of insurers in the supplemental benefits industry, most notably MetLife and Aflac. In 2020, MetLife acquired PetFirst Healthcare. MetLife’s CEO stated that “Pet insurance has become an increasingly important voluntary benefit, and this transaction allows us to capitalize on this rapidly growing market opportunity.”9 Also in 2020, Aflac announced a distribution alliance with Trupanion, and acquired a 9% stake in the company.10 Similar to MetLife, Aflac hopes to be part of the growing market. “With pet ownership on the rise and more Americans working from home, we see the opportunity for growth in what we view as a large, underpenetrated market,” said Aflac's chief operating officer (COO).
Numerous sources do in fact point to increased demand by employers and employees for pet insurance to be offered as a voluntary benefit. The number of employers offering pet insurance as a benefit varies by source, but a 2019 survey by the Society of Human Resource Management estimated that about 15% of employers offer some form of insurance coverage for pets.11 Demand is clearly increasing though, as a 2021 Willis Towers Watson survey of employers indicated that 69% of employers expect to offer the benefit12 by 2022 or beyond. Another recent survey of over 800 full-time employees found that pet insurance is the second-most desired benefit of employees, after only health insurance.13
Offering pet insurance is also seen as a way for employers to lure and retain top talent, with Millennials, who own the largest share of pets, now making up the majority of the workforce. This changing demographic and demand for pet insurance isn’t going unnoticed by insurers. An internal Milliman survey found that just over 50% of group voluntary benefits carriers have witnessed demand from brokers, employers, or employees to offer pet insurance as a group voluntary benefit. Roughly one-third of survey respondents expressed interest in entering the market, either by developing their own product or by white labeling a current product in the market. In addition, a review of insurer rating manuals revealed that nearly all pet insurance carriers are offering discounts of up to 10% for employee groups, with some carriers specifically designing products for ease of integration with benefit administration systems.
High demand and potential growth may have benefit providers licking their chops, but there are a few challenges that will need to be thought through before taking a bite out of the market. Among those are regulatory concerns, product design, and pricing.
One of the biggest challenges that supplemental insurance carriers have when entering the pet insurance market is the fact that pet insurance is regulated as property insurance.14 Supplemental insurers generally have life or health authority, but do not have authority to write property insurance. As a result, before they even enter the market, supplemental insurers need to decide whether to amend their certificates of authority to add the appropriate line of business, to acquire a P&C carrier that can write the business, or to partner with a P&C carrier. Insurers also need to find producers that are both familiar with the worksite market and able to sell this coverage.
Insurers that have expertise in life and health insurance regulation will also need to learn about P&C regulation, which can differ significantly. For example, product filings will include not only forms and rates in all states, but may also include rating and underwriting rules applicable to the product. P&C forms and actuarial materials are very different from life and health forms, and it is very common for insurers to copy or “me too” their competitors’ filings. In addition, pet insurance tends to have fewer state-specific variations, when compared to insurance products such as hospital indemnity or critical illness, resulting in more uniformity in plan design.
From a plan design perspective, most pet insurance products generally have the same broad categories of coverage—accident and illness, accident-only, and wellness. Wellness policies can be offered as a standalone product, or can be combined with either accident and illness or accident-only. Some of the crucial design decisions involved with this product can be:
As has been seen with other products sold in the workplace, the competitive nature of this market seems to spur innovation. As this product category migrates more substantially into the group benefits space, it too may see innovation in the way benefits are presented. Consumer research and more creative ideation has made its way into the voluntary benefits space over the years, but how do you survey the customer when the customer … can’t speak to you? Successful insurers will need to create products that evolve with advances in veterinary medicine or new treatment protocols and medications. Carriers that want to stand out in the market with a different story to tell will need to educate themselves on the veterinary space and look for opportunities to provide benefits that matter to pet owners. The data indicates this market is growing and poised to continue. Initially, it may be an effective strategy to simply have a product to offer, but it won’t be long before customer feedback begins to drive design ideas.
Similar to the ways in which the voluntary market has shifted more toward a group enrollment and ownership mentality, the pet insurance market is looking to borrow some of those concepts. A great start is by waiving preexisting condition limitations. When preexisting condition limitations are included on individual products, this allows some protection for the carrier from anti-selection at enrollment. But in the group world, this is seen by brokers as a barrier and a deterrent to making the sale. Waiving preexisting conditions helps the customer better understand coverage timing and what is and is not covered. It also saves headaches on the claims side, so a claims representative doesn’t need to determine whether something was preexisting or not. This is tough to do with humans, and can be even more difficult with pets who may not have robust medical records or searchable records of prescription drug purchases.
Pet insurance moving into the group space can also lean on concepts like guaranteed issue underwriting, limited pet census information, benefit administration ease, and simpler rating structures. It also allows the carrier some flexibility in rating, so that making these concessions at initial offering doesn’t adversely impact the carrier long-term. With group rating, you can revisit the rates on an annual basis and adjust rates based on poor claims experience, without adjusting rates for the entire book of business. The individual insurance world doesn’t typically allow for this amount of flexibility. This is important to keep in mind when thinking through pricing in general with this product, which presents its own challenges.
Insurers looking to enter the pet insurance market will obviously need to determine rates. New entrants won’t have historical data, but would be able to utilize competitor rating structures in order to establish initial rates. The challenge is determining which insurer and rating structure to select. An understanding of the rating structures of current market participants, and the policy coverages offered in each structure is critical.
Rating structures in the market today vary by insurer; however, most insurers currently rate policies based on some, or all, of the following characteristics:
The type of policy offered (accident and illness, accident-only, or wellness) has an impact on the number of variables above that are used in the rating structure. Accident and illness policies will utilize most, if not all, of the above characteristics, whereas an accident-only policy is more likely to use a rating structure that excludes certain characteristics, such as breed. Wellness policies may be based on the above characteristics, or may be priced in a way such that the rate considers only utilization and no specific pet characteristics.
Integrating rating structures that include many of these variables, with the ease of use favored in worksite benefit systems, can present another obstacle for those looking to price coverage to be offered at the worksite. It is possible to condense the rating variables in a manner that integrates well with benefits systems, but when doing so, measures should be in place to monitor for any signs of adverse selection as a result of a less intricate rating structure. It’s important that the pricing of policies is not so high that it dissuades good risks from purchasing coverage.
Pet insurance is a fast-growing market for a reason. Employers continue to search for new opportunities to retain employees. Employee demand is growing as veterinary costs increase, and employees seek ways to protect pets that they see as family members. Pet insurance also provides insurers with favorable profitability, while remaining relatively inexpensive compared to other workplace benefits, with average premiums of $40 to $50 per month, compared to average premiums for hospital indemnity or critical illness insurance, which might be twice as expensive. It’s true that challenges to entering the market exist, but they aren’t insurmountable, and the opportunity for growth is substantial. It may be the time to give pet insurance a sniff.
1APPA. Pet Industry Market Size, Trends & Ownership Statistics. Retrieved September 23, 2021, from https://www.americanpetproducts.org/press_industrytrends.asp.
2Your Pet Insurance Guide (May 11, 2021). Pet Insurance 2021 – 3 Takeaways From NAPHIA's State of the Industry Report. Retrieved September 23, 2021, from https://www.petinsuranceguideus.com/2021/05/pet-insurance-2021-3-takeaways-from-naphias-state-of-the-industry-report.html.
3NAPHIA. Section #2: Total Pets Insured. Retrieved September 23, 2021, from https://naphia.org/industry-data/section-2-total-pets-insured/.
4Trupanion (August 2021). Investor Presentation. Retrieved September 23, 2021, from https://s21.q4cdn.com/119804282/files/doc_presentations/2021/08/TRUP-Investor-Presentation-August-2021.pdf.
6Global Market Insights, Inc. (October 7, 2020). Pet Insurance Market Revenue to Cross US$10 Bn by 2025. PR Newswire. Retrieved September 23, 2021, from https://www.prnewswire.com/news-releases/pet-insurance-market-revenue-to-cross-us10-bn-by-2025-global-market-insights-inc-301147212.html.
9Insurance Journal (December 5, 2019). MetLife to Enter Pet Insurance Market With Acquisition of PetFirst Program. Retrieved September 23, 2021, from https://www.insurancejournal.com/news/national/2019/12/05/550391.htm.
10Jha, K. (October 30, 2020). Aflac bets on Trupanion to target US pet insurance market. Life Insurance International. Retrieved September 23, 2021, from https://www.lifeinsuranceinternational.com/news/aflac-bets-on-trupanion-to-target-us-pet-insurance-market/.
11SHRM (2019). Programs and Services: SHRM Employee Benefits 2019. Retrieved September 23, 2021, from https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/SHRM%20Employee%20Benefits%202019%20Programs%20and%20Services.pdf.
12Willis Towers Watson (May 13, 2021). Pandemic accelerates employer voluntary benefit offerings, Willis Towers Watson survey finds. Press release. Retrieved September 23, 2021, from https://www.willistowerswatson.com/en-US/News/2021/05/pandemic-accelerates-employer-voluntary-benefit-offerings-wtw-survey-finds.
13Isolved (May 11, 2021). Survey: Employees Want More Comprehensive Wellness Programs, Conversational Assistants, and Customizable Benefits. PR Newswire. Retrieved September 23, 2021, from https://www.prnewswire.com/news-releases/survey-employees-want-more-comprehensive-wellness-programs-conversational-assistants-and-customizable-benefits-301288125.html.