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One of the interesting trends during the COVID-19 quarantine was the dramatic increase in pet adoptions. Furry, four-legged family members require financial investment in their daily care. Typically, the costs of food, toys and grooming are well understood by first-time pet owners. Owners may be less aware, however, of veterinary expenses and liability claims that can costs thousands of dollars. They should understand these often unforeseen and potentially costly pet expenses to understand how risk can be mitigated through pet insurance.
A surprising statistic we discovered in our research was that in recent years, dog bites and other dog-related injuries accounted for around one-third of all homeowners liability claim dollars paid, with $797 million incurred in 2019 for dog related injuries. The average cost per dog bite liability claim has increased over the last 15 years, in part due to rising medical costs.
About 4.5 million people are bitten by a dog each year, according to an estimate by the Centers for Disease Control and Prevention, with a subset of these bites requiring medical attention. State laws relating to dog bite liability typically fall into three categories: automatic liability, one-bite rule (instances when an owner is not liable for the first dog bite) and negligence requirement which requires an owner to be proven careless in controlling the dog. Thankfully, pet owners often have a layer of protection from this potential liability under their homeowners or renters policies.
Some insurers deny coverage for certain dog breeds, however. Other insurers consider factors such as whether or not the dog has been sterilized or received behavior training. Some companies have chosen not to consider breed as a factor when determining liability coverage due to the popularity of mixed breed dogs, impact of socialization on a dog’s temperament and the risk of driving away certain customers for discriminating against specific breeds.1
Similar to health insurance, pet insurance provides coverage for expenses incurred from a pet’s illness or injury. However, for pet insurance, preventative care such as wellness exams and vaccines are often not covered. Additional common exclusions include: pre-existing conditions, special diets, elective procedures and behavioral training. Most companies set a minimum and maximum age for a pet to be insured. There is some variation among pet insurers with respect to what is covered and how hereditary conditions are defined.
Pet insurance is commonly priced with a simple rating formula using a base premium and several rating factors. To gauge the pet’s inherent health risk level, an age and breed factor is often used. To help price premiums commensurate to local veterinary costs, a zip code factor is also typically applied to the base premium. Similar to other insurance coverages, there are also factors for policy limit, co-insurance level, deductible amount and potential discounts. The final premium is the base premium multiplied by the appropriate rating factors, often with a flat administrative fee added at the end.2
In the U.S., pet insurance is currently classified as a limited line for accounting and regulatory purposes, resulting in reduced licensing requirements. This classification is due to how pet insurance is sold relative to other property/casualty coverages.
Normally, licensed insurance agents are required to sell insurance. In contrast, veterinary offices, pet training facilities and even pet stores can legally sell pet insurance, which is an incidental product to their standard services. We may expect, however, that pet insurance will likely face increased future oversight. The National Association of Insurance Commissioners (NAIC) produced a 2019 whitepaper analyzing the history, pricing and regulatory concerns of pet insurance.
The paper was produced in response to concerns over the limited lines classification and market conduct complaints as reports noted issues such as unlicensed sales, illegal rebating and improper use of rates. The paper will likely be referenced in upcoming meetings discussing better regulation of the pet insurance industry.2 A working group under the NAIC has produced a draft model law that would establish appropriate regulatory standards for the pet insurance industry and provide better uniformity across the nation.3
Pet owners concerned about the risk of unexpected, possibly high expenses should consider:
The future of the pet insurance industry will likely see greater popularity of coverage as well as increased oversight to regulate the pet insurance industry with more uniformity and guidance to protect pet owners. As of 2017, only about two percent of pets owned in the U.S. were insured, so it shouldn’t take a dog’s nose to smell the significant potential for market growth.2
Kristen Marshall is an Actuarial Analyst with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois office. She holds a Bachelor of Science degree in Actuarial Science from Illinois State University. Kristen has experience in assignments involving Loss Reserving, Loss Cost Projections, Enterprise Risk Captives, and Group Captives. She is an Associate of the Casualty Actuarial Society (ACAS) and a Member of the American Academy of Actuaries (MAAA).
Joe Alberts recently graduated from Illinois Wesleyan University with a Bachelor of Arts degree in Mathematics. He has actuarial internship experience at Pinnacle Actuarial Resources, Inc. Joe is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.
Karolina Hrehorowicz is a rising senior at Illinois State University, studying Actuarial Science. She is currently gaining actuarial experience during a summer internship. Karolina is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.
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