A small sick dog named Buffy that was euthanized without a chance due to economics, and a brief encounter in a grocery isle lead to the start of pet health insurance in the United States.
Dr. Jack Stephens, a veterinarian, had a life-changing encounter while shopping in a grocery store with his wife. Turning down the aisle, Dr. Stephens met a client and her daughter that set him on a completely different career path in his life. It seems the daughter blamed him for the euthanasia of her beloved pet. Upon greeting, the client said to her daughter, “Honey, you remember Dr. Stephens don’t you?” Her reply was, “Yes, he’s the man who killed my dog.”
Some weeks previously Dr. Stephens euthanized their pet, at the mother’s insistence, because the family was unwilling or unable to spend the necessary funds to diagnose and treat the ill pet.
Shocked at the response from his client’s daughter, Dr. Stephens resolved then and there to do something about “Economic Euthanasia.” He thereupon started a lifelong quest to provide pet owners with a method to always be able to afford their pet’s care. This goal ultimately changed the landscape for pet insurance from repeated failures to success. He founded and operated until mid 2004 the first successful and still largest pet insurer. In 2005 he founded another pet insurance provider, Pets Best Insurance, where he serves as President of the company.
In 1979, after the episode with Buffy’s owner, Jack urged the Southern California Veterinary Medical Association (SCVMA) to explore finding an insurance company willing to provide a pet insurance option, with the help of the veterinary profession. As a result he was appointed Chairman of a Pet Health Insurance committee.
The committee searched for two years trying to find an insurance company that would have an interest in offering pet health insurance. In return the veterinary association would provide expert advice and assistance in product development. No company was interested, citing: adverse selection (only sick pets would be enrolled), no actuarial data to set premiums, lack of existing market, low cost for most veterinary expenditures and the ability to identify insured pets receiving benefits.
Not accepting defeat, Dr. Stephens, on his own time and with his own funds initially, set about seeking interest from veterinarians throughout California to fund a start up pet insurance company.
Interest was high, as all veterinarians experience daily pet owners not prepared financially for unexpected care -- a problem that far too often leads to euthanasia of the pet. Dr. Stephens termed it “Economic Euthanasia” in contrast to humane euthanasia for terminally ill pets. Throughout his travels to gain support for the concept, veterinarians said they would support and consider investing in a start up company, dedicated to pet health insurance.
Non-insurance pre paid plans; HMO-type concepts and traditional insurance were explored. From those initial explorations, it was decided to form a pet health insurance company in California. Through unyielding determination, Dr. Stephens convinced over 900 veterinarians and friends to invest on average $2,000 each to fund the start-up insurance company which was incorporated in September 1981. On April 7, 1982 Veterinary Pet Insurance (VPI) was licensed and approved to sell polices. Then Mayor of Los Angeles, Tom Bradley, was present at the press conference launch along with Lassie, the first insured pet.
Dr. Stephens plan was to raise the necessary capital to provide for the required reserve funds for an insurance company, set up the systems, hire staff and set the direction. He thought once completed, he would serve on the Board of Directors, as a very minor shareholder and would return to his small animal practice. It was not meant to be, however, because investors looked to him to protect their investment and regulators came to trust him. Challenges for survival began to surface immediately, but he became obsessed with the concept of helping pet owners financially afford veterinary care.
In the 1980’s there were many other attempts to provide pet health insurance. All other attempts ceased operations, citing adverse selection, high loss ratios (claims paid vs. earned premium) and lack of sufficient sales as the cause of their demise. Only VPI plodded on. Despite many setbacks and challenges, Dr. Stephens doggedly pursued making pet health insurance a reality for pet owners.
In December of 1990, after repeated periods of financial difficulty, VPI was seized by the Sate of California Department of Insurance due to inadequate reserves to meet minimum requirements. Scheduled for liquidation, he was in court on Christmas Eve after undergoing chemotherapy for his own personal fight with cancer. The Court gave Dr. Stephens some additional time to raise the required capital to meet State requirements. In March 1991 the Company was granted a workout program with new capital added from an “angel investor” and placed under State supervision until 1996.
Jack's vision of pet health insurance was “before its time” in that the cost of veterinary care was not sufficiently high enough to warrant the cost of the insurance coverage. While it took fifteen years (1982-1997) for VPI to reach $8 million in revenues, it took only six more years for the company to reach over $100 million in annual revenues.
The tremendous explosion in revenues was due to many factors, not the least of which was the attitude of pet owners towards their pets as part of the family. Other contributing factors were the rise of specialist in veterinary medicine, sophisticated and expensive diagnostics and the ability for pet owners to pay premiums on a monthly basis automatically.
Finally, in 1996 and 1997 two more companies, PetsHealth (Hartville Group) and Pet Care, started selling pet insurance nationwide -- both of which have continued to grow. Since 2005 there have been numerous new pet insurance providers. There are now 15 or more providers of pet insurance in the United Sates and Canada.
The history of pet health insurance in the United States to some extent has mirrored the growth in the United Kingdom, which had only one company early on, then three dominant players which exploded to 60 providers and over 100 generic plans in 2005. Since then there has been some consolidation and mergers, but fully 19% of pets in Great Britain are insured.
U. S. HISTORY OF PET HEALTH INSURANCE
* 1960-1970’s -- several attempts: Midwest Mutual, Guardian and Republic Insurance Companies & a host of non-licensed entrepreneurial efforts.
* 1980-1996 -- Veterinary Pet Insurance, Virginia Surety, Frontier, Fireman’s Fund, American Bankers to name a few insurance company attempts while only VPI succeeded. There were many more non-insurance (non licensed) attempts. In fact, over 60 attempts from insurance companies and entrepreneurial efforts to provide pet health insurance have failed in the United States.
OBSTACLES
Pet health insurance has several obstacles to overcome, some of which are not as prevalent in the United Kingdom and Europe.
- Highly regulated -- pet insurance requires individual state licensing in all 50 states and the District of Columbia. Adherence to all the regulations as any property casualty coverage, such as auto or homeowners insurance is required.
- High Capital – as a regulated class of insurance, pet health insurance must meet stringent reserve requirements for claims, claims incurred but not reported (IBNR) & unearned premium. Statutory accounting principals that are stricter than Generally Accepted Accounting Principals (GAAP) must be followed.
- Actuarial Data- Until recently there was no availability of actuarial data to set rates. Even today, the data is proprietary and not reported to public agencies as with other classes of insurance. The lack of data impedes start-ups in determining adequate rates and caused the demise of many attempts because they had inadequate rates.
- Adverse Selection-Claims for uninsured pets from multiple pet households was an issue. An even greater issue was and still remains claims for pre existing conditions, which are pets presented for coverage after symptoms develop, leading to increased investigation and higher cost.
- Risk Transfer - Until the advent of specialists in veterinary medicine and the Human-Animal bond that increased the demand for high tech, high quality care, the risk of financial loss was not sufficient for the average pet owner to consider pet insurance. Veterinary cost, even for severely injured or sick pets, was covered by most credit card lines. Today, the cost can exceed most credit card limits.
- Economy of Scale- Sufficient volume of sales is necessary to sustain the basic operational fundamentals of an insurance business. The growth of the internet and enhanced software has been a huge advantage for those able to take advantage of the internet in sales and service efficiencies.
AGENCY OR INSURANCE COMPANY
Most pet health providers are agents who have developed a business plan and engaged an insurance company to “underwrite” their proposal. The agency markets and administers the plan. The insurance company underwrites or assumes the risk, typically pays the claims, files the product with the State, provides the necessary reserves and files necessary reports to the States where business is conducted.
Providers of Pet Insurance (2008 Year End)
Company Underwriter
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1. Pets Best Insurance……………Aetna Insurance Co of Connecticut
2. Veterinary Pet Insurance……...CA only & National Casualty all others
3. Pets Health……………………..United States Fire Insurance Co.
4. ASPCA…………………………...(included in Pets Health)
5. Pet Care………………………….Praetorian Insurance Co.
6. AKC Companion Care…………National Specialty Insurance Co.
7. Embrace………………………….Lloyds underwriter
8. Pet Plan US……………………...American National Property & Casualty
9. PetFirst Healthcare……………..State National Insurance Co
10. Purina Pet Care………………...New Hampshire Insurance Co. (AIG)
11. Trupanion………………………..American Pet Insurance Co.
12. EnsureAPet ……………………..currently without an underwriter
Estimated 1,000,000 insured pets in Canada and United States year end 2008.
** I want to personally thank Dr. Jack Stephens and Pets Best insurance company for providing this article for my blog. I thought it would be of interest to anyone considering pet insurance to learn about the history of pet health insurance as well as what it takes to establish a company and then for it to be successful. The pet insurance industry surely owes a big debt of gratitude to Dr. Jack Stephens for his persistent pursuit of making pet insurance a viable option for pet owners.
I want to know more about the new trends in pet insurance industry. From where can I get stats? Do Dr. Jack Stephens has any website?
- Mathew J
Research Student
Penn State
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