LICENSING & REPORTING IN THE U.S. PET INSURANCE MARKET

IMPORTANCE Concerns surrounding producer licensing and reporting have arisen as the pet insurance market in the U.S.

continues to grow.

OBJECTIVES In this study, we discuss the pet insurance market and oer recommendations regarding licensing and reporting

that we believe will better serve consumers and improve market transparency.

EVIDENCE Premiums written for pet insurance have more than doubled for the period from 2013–2018. Most states in the U.S.

and Washington, DC currently require that producers hold a property and/or casualty insurance license for the purpose of selling

pet insurance. Pet health insurance consists of unique features and coverages that are not addressed through the property and/or

casualty licensing process.

FINDINGS Pet ownership has become increasingly widespread in the U.S., with a recent survey nding that 67% of all U.S.

households have at least one pet. While pet ownership continues to rise in the U.S., pet owners are faced with potentially signicant

medical costs to care for their pets. To reduce the nancial strain associated with these medical expenses, owners have the option

to purchase pet insurance, which covers medical costs associated with illness and accidents (with some covering wellness and

preventative care as well). Although the market for pet insurance has experienced dramatic growth, only 2% of households with

pets had pet insurance in 2017, which suggests that signicant opportunity exists in this ever-evolving market.

The current nature of licensing for those selling pet insurance results in a situation in which agents may be unable to properly advise

and educate consumers, which can adversely aect both insurance purchasers and the insurers oering this coverage.

Although pet insurance is currently included as one component of inland marine, there is reason to believe that it should be

reported separately. An examination of U.S. property and casualty premiums written in 2018 (excluding accident and health)

suggests that seven reported lines of business—burglary and theft, commercial auto no-fault, excess workers’ compensation,

delity, nancial guaranty, private crop, and private ood—had premiums written that were lower than the $1.3 billion in premiums

written for pet insurance coverage.

CONCLUSION & RELEVANCE We recommend that limited lines licensing replace the current property or casualty license

requirement as this would serve to better educate producers, protect consumers, and may expand the availability of pet insurance.

States could require a licensing exam testing coverage specic to pet insurance and the insurance laws of the specic state. This

would ensure that those oering pet insurance have training that is more directly related to the product that is being oered.

We also propose modications in the reporting requirements for pet insurance. In particular, we recommend more robust reporting

of pet insurance premiums through either the addition of a separate line item for pet insurance on insurers’ nancial statements or

the creation of a new coverage supplement to the annual statements.

American Pet Products Association, 2019. “Pet Industry Market Size & Ownership Statistics,” accessed online at

https://www.americanpetproducts.org/press_industrytrends.asp.

Jenks, S., 2017. “Pet Insurance is the Latest Work Perk,” The New York Times, accessed online at

https://www.nytimes.com/2017/06/07/well/family/pet-insurance-is-the-latest-work-perk.html.

LICENSING & REPORTING IN THE

U.S. PET INSURANCE MARKET

Jill M. Bisco, Ph.D. | stePhen G. Fier, Ph.D.

Journal of Insurance Regulation 2020 V. 1

Journal of Insurance Regulation

Cassandra Cole and Kathleen McCullough

Co-Editors

Vol. 39, No. 2

Licensing and Reporting in the U.S. Pet

Insurance Market

Jill M. Bisco, Ph.D.

Stephen G. Fier, Ph.D.

JIR-ZA-39-02

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Editorial Staff of the

Journal of Insurance Regulation

Co-Editors Case Law Review Editor

Cassandra Cole and Kathleen McCullough Jennifer McAdam, J.D.

Florida State University NAIC Legal Counsel II

Tallahassee, FL

Editorial Review Board

Cassandra Cole, Florida State University, Tallahassee, FL

Lee Covington, Insured Retirement Institute, Arlington, VA

Brenda Cude, University of Georgia, Athens, GA

Robert Detlefsen, National Association of Mutual Insurance Companies,

Indianapolis, IN

Bruce Ferguson, American Council of Life Insurers, Washington, DC

Stephen Fier, University of Mississippi, University, MS

Kevin Fitzgerald, Foley & Lardner, Milwaukee, WI

Robert Hoyt, University of Georgia, Athens, GA

Alessandro Iuppa, Zurich North America, Washington, DC

Robert Klein, Georgia State University, Atlanta, GA

J. Tyler Leverty, University of Iowa, Iowa City, IA

Andre Liebenberg, University of Mississippi, Oxford, MS

David Marlett, Appalachian State University, Boone, NC

Kathleen McCullough, Florida State University, Tallahassee, FL

Charles Nyce, Florida State University, Tallahassee, FL

Mike Pickens, The Goldwater Taplin Group, Little Rock, AR

David Sommer, St. Mary’s University, San Antonio, TX

Sharon Tennyson, Cornell University, Ithaca, NY

Charles C. Yang, Florida Atlantic University, Boca Raton, FL

Purpose

The Journal of Insurance Regulation is sponsored by the National Association

of Insurance Commissioners. The objectives of the NAIC in sponsoring the

Journal of Insurance Regulation are:

1. To provide a forum for opinion and discussion on major insurance

regulatory issues;

2. To provide wide distribution of rigorous, high-quality research

regarding insurance regulatory issues;

3. To make state insurance departments more aware of insurance

regulatory research efforts;

4. To increase the rigor, quality and quantity of the research efforts on

insurance regulatory issues; and

5. To be an important force for the overall improvement of insurance

regulation.

To meet these objectives, the NAIC will provide an open forum for the

discussion of a broad spectrum of ideas. However, the ideas expressed in the

Journal are not endorsed by the NAIC, the Journal’s editorial staff, or the

Journal’s board.

* Assistant Professor of Finance, University of Akron; jbisco@uakron.edu.

** Associate Professor of Finance, University of Mississippi; [email protected].

Licensing and

Reporting in the U.S. Pet

Insurance Market

Jill M. Bisco, Ph.D.*

Stephen G. Fier, Ph.D.**

Abstract

Pet in

surance has been in existence for over a century; but over time, it has

become increasingly prevalent in the U.S. market, with premiums written more than

doubling for the period from 2013–2018. While pet insurance continues to gain

traction in the U.S., regulatory questions regarding the sale of pet insurance remain,

and we contend that these outstanding issues may have the effect of harming

consumers, the insurance market, and other stakeholders. In this study, we discuss

the pet insurance market and offer recommendations regarding both state insurance

licensing requirements and reporting requirements that we believe will better serve

consumers and improve market transparency. In particular, we advocate for the use

of limited lines licensing for pet insurance, which we believe will enhance producer

and consumer knowledge and increase the availability of coverage, which ultimately

benefits the industry and consumers. Furthermore, we recommend more detailed

reporting requirements as they relate to the pet insurance line of business to allow

for a better understanding of both the market and the market’s participants.

Journal of Insurance Regulation

Introduction

The presence of pets in U.S. households has become increasingly widespread,

with a recent survey finding that 67% of all U.S. households have at least one pet

(American Pet Products Association, 2019).

While pet ownership continues to rise

in the U.S., pet owners are faced with potentially significant medical costs to care

for their pets. The American Pet Products Association (APPA) (2019) reports that

in 2018 a total of $72.56 billion was spent on pets in the U.S, and roughly 25% of

those expenses were attributed to veterinary care. It has also been estimated that the

cost of medical care over the course of a pet’s lifetime could range from $9,000 to

$13,000 (Animal Health Institute, 2019). The 2018 Cost of Pet Health Care Report

issued by Healthy Paws Pet Insurance states that some procedures can cost upwards

of $30,000,

representing a potentially devastating financial loss for pet owners

(Healthy Paws Pet Insurance, 2018).

As evidence of the potential financial

ramifications associated with pet-related medical expenditures, 24% of respondents

to a 2019 survey of pet owners in the U.S. indicated that they had gone into debt as

a result of medical services for their pets (Kuehner-Hebert, 2019).

As detailed above, the cost to maintain the health of a pet over the course of its

lifetime can be non-trivial and at times can prove to be more costly than that of its

owner (Marcus, 2016). One product, which has been available to pet owners for

decades, that can be used to transfer potentially substantial pet medical care costs is

pet insurance, which is simply a form of health insurance for pets.

While policies

can vary significantly from one another, they often cover expenses that arise from

illness or accidents, and they may even provide coverage for wellness and

preventative care. Over a recent six-year period, the market for pet insurance has

seen substantial growth in the U.S., with premiums written equal to roughly $1.3

billion in 2018 and more than doubling for the period from 2013–2018.

Although

the market for pet insurance in the U.S. has experienced dramatic growth, only 2%

1. The American Pet Products Association (APPA) classifies the following as “pets”: birds,

cats, dogs, horses, fish (freshwater and saltwater), reptiles, and “small animals.”

2. The report states that the highest covered claim for dog “stomach issues” was

approximately $28,000.

3. Coe, Adams and Bonnett (2007) conducted a study on perceptions related to the financial

cost of veterinary services using a focus group approach. As part of their discussion, the authors

note that “when pet owners were considering the health and well-being of their own pets, emotions

often appeared to drive their decisions, with monetary considerations put on hold.” This finding

reinforces the idea that pet owners may place such a great value on the health of their pets that they

are willing to incur substantial costs, which could adversely affect an owner’s finances.

4. According to the NAIC Property & Casualty Coding system, a pet insurance plan is defined

as a “veterinary care plan insurance policy providing care for a pet animal (e.g., dog or cat) of the

insured owner in the event of its illness or accident” (NAIC, 2019d) while the NAIC State

Licensing Handbook defined the term “pet insurance” to mean “…health insurance coverage,

including but not limited to, coverage for injury, illness and wellness, for pets, such as birds, cats,

dogs and rabbits” (NAIC, 2018).

5. Values reported are obtained from the North American Pet Health Insurance Association

(NAPHIA) annual State of the Industry reports.

Licensing and Reporting in the U.S. Pet Insurance Market

of households with pets had pet insurance in 2017 (Jenks, 2017), which suggests

that there is significant room for growth in this ever-evolving market.

The pet insurance market in the U.S. continues to grow, but as it does so,

regulatory concerns surrounding producer licensing have arisen (NAIC, 2017). As

it currently stands, most states in the U.S. and the Washington, DC require that

insurance producers hold a property and/or casualty insurance license for the

purpose of selling pet insurance. While many states have settled on the use of

property and/or casualty licenses for pet insurance producers, we question whether

these licenses are most appropriate for pet insurance. Pet health insurance consists

of unique features and coverages that are not addressed through the property and/or

casualty licensing process. The current nature of licensing for those selling pet

insurance results in a situation in which agents may be unable to properly advise

and educate consumers, which can adversely affect both insurance purchasers and

the insurers offering this coverage.

To address this issue, we argue that the use of

limited lines licensing to replace the current property or casualty license requirement

would both further serve to protect and educate consumers, as well as improve the

current availability of pet insurance. Furthermore, with the increased prevalence of

pet insurance in the U.S., we recommend more robust reporting of pet insurance

premiums through either the addition of a separate line item for pet insurance on

insurers’ financial statements or the creation of a new coverage supplement to the

annual statements. This enhanced disclosure would allow for a better understanding

of the state of the pet insurance market and the firms participating within this

market.

This study is organized as follows. First, we provide an overview of the history

of pet insurance, the common features found in pet insurance policies, and the

current state of the market in the U.S. Next, we discuss the challenges associated

with licensing as it pertains to the pet insurance market and propose a solution,

which we contend addresses many of the shortcomings that currently exist.

Following our argument in favor of what we believe to be a more reasonable

approach to pet insurance licensing, we then discuss the need for greater

transparency and financial reporting in the U.S. pet insurance market and offer a

conclusion.

6. As of 2019, California is the only state that currently has laws related to pet insurance and

the use of “clear language” in the policies (Lau, 2019). The general absence of these types of laws

can create further confusion among consumers and a lack of understanding of the coverages

afforded by these policies.

7. Note that the purpose of this study is neither to advocate for nor against the purchase of pet

insurance. Rather, our intent is simply to examine two important aspects of insurance regulation

that we contend warrant additional consideration as the pet insurance market continues to grow.

The decision to purchase coverage is often based on a variety of factors, including the cost of

insurance, the breadth of coverage, the type of pet, the financial position of the consumer, etc. A

general recommendation regarding the purchasing decision is both beyond the scope of this article

and highly dependent on the aforementioned factors.

Journal of Insurance Regulation

History and Status of Pet Insurance

Pet insurance has a rich history that spans over 125 years, back to when the first

pet insurance policy was issued for horses and livestock in 1890 (NAPHIA, 2019a).

Over 30 years after the issuance of the first pet insurance policy, a policy was issued

for a dog in Sweden, which was then followed by similar coverage in Britain in

1947. In 1982, the first pet insurance policy was underwritten in the U.S. for the dog

appearing on the TV show “Lassie.” Since the policy issued for Lassie, the

popularity of pets and pet health insurance has grown significantly in the U.S. The

percentage of U.S. households with pets is estimated to be somewhere between 50%

and 68% (Brulliard and Clement, 2019), and the pet health insurance market now

boasts premiums written in excess of $1.4 billion (NAPHIA, 2019b).

While the coverage that is afforded by pet insurance varies by insurer, the North

American Pet Health Insurance Association (NAPHIA) reports that in 2018, “98

percent of insured pets were covered either through accident and illness insurance

or an Insurance with Embedded Wellness plan” (NAPHIA, 2019b). Accident

coverage may cover costs associated with events such as a pet being struck by a

vehicle, broken bones, and snake bites while illness coverage may include arthritis,

cancer and allergies (Walker, 2016; PetInsuranceQuotes.com, 2019). Covered

expenses associated with accidents and/or illness can include the cost for x-rays,

surgery, medication and hospitalization (PetInsuranceQuotes.com, 2019). Wellness

and preventative plans also exist and may cover expenses associated with annual

exams, various tests (heartworm, blood, etc.), teeth cleanings, and vaccinations

(Jones, 2019). Finally, some insurers also offer accident-only policies, which are

significantly less expensive than accident and illness policies. The NAIC reports

that accident-only policies can cost 60% less than policies that cover both accident

and illness (NAIC, 2019a).

A variety of policy provisions and features are commonly found in pet

insurance, including deductibles (per incident or annual), copayments, waiting

periods, limits (per incident and/or policy aggregate), and exclusions for pre-

existing and “breed-specific” conditions (Walker, 2016; NAIC, 2019a).

The

policies are generally one-year policies and rates are based on factors such as the

type of pet (cats tend to be less expensive than dogs); the breed, age and health of

the pet; the cost of veterinary care where the insured lives; the deductible; policy

limits; and coinsurance (Carns, 2019; Insurance Information Institute, 2019; NAIC,

8. The discussion of the history of pet insurance is based on information obtained from

NAPHIA, which can be accessed at https://naphia.org/industry/history/.

9. As discussed by Brulliard and Clement (2019), estimates for the percentage of U.S.

households with pets vary dramatically across different surveys. The statistics that we include are

based on the sources referenced, which vary, but it appears reasonable to assume that the number

of households with pets is somewhere between 50% and 70%.

10. For example, in 2011 the Veterinary Pet Insurance Company excluded spinal muscular

atrophy for Rottweilers and bloodhounds and histiocytic ulcerative colitis for French bulldogs

(Veterinary Pet Insurance Company, 2011).

Licensing and Reporting in the U.S. Pet Insurance Market

2019a). While there may be some similarities in terminology when comparing pet

insurance to the health insurance individuals purchase, one significant way in which

they commonly differ is the method of reimbursement. In particular, while health

insurance policies generally pay the medical care provider directly for medical

services, many pet insurance policies require the insured to pay the medical care

provider—i.e., veterinarian—and then request reimbursement from the insurer

(Juliff, 2014). This difference is important, as it requires a pet’s owner to initially

bear the financial burden of potentially large medical expenses for their pet, which

could cause substantial financial strain on the insured.

The market for pet insurance has been steadily increasing since its arrival in the

U.S., which is driven in-part by the increased prevalence of pets in U.S. homes, as

well as the increasing costs associated with veterinary services.

According to

Zurich (2019), other reasons for the increasing demand for pet insurance beyond the

increasing costs of veterinary care include: 1) “an increase in the family-like status

of pets in households”; and 2) the increased use of pet insurance as an employee

benefit (discussed below). One way to capture the growth of this market is through

an examination of gross premiums written, which are presented in Figure 1. As

illustrated in Figure 1, during the period from 2013–2018, there has been a steady

increase in premiums written, from a low of almost $500 million in 2013 to a high

of $1.3 billion in 2018, suggesting that premiums have more than doubled over this

6-year period.

Consistent with the growth in premiums, as evidenced by Figure 2,

there has also been an increase in the number of pets that are insured by pet

insurance, with a total of 1.42 million pets insured in 2018. Both Figures 1 and 2

suggest that not only is the market growing, but opportunities for further growth

exist.

While the market for pet insurance continues to grow, in 2017 it was estimated

that only 1–2% of dogs and cats were insured in the U.S. (Jenks, 2017).

Taken

together with the previously discussed figures, it seems that while there is plenty of

opportunity for growth in the market, consumers remain hesitant to purchase this

coverage. Commonly cited reasons for the relatively low take-up rate include high

premiums, questions regarding whether such coverage is necessary, and a lack of

awareness regarding the coverage.

While there is often speculation as to why

consumers choose to purchase (or not purchase) pet insurance, there is limited

11. The 2019–2020 APPA survey reports that 67% of U.S. households own a pet, which

represents an increase of nearly 20% since 1988 when the survey was first administered (American

Pet Products Association, 2019).

12. Values reported in both Figures 1 and 2 are obtained from the NAPHIA annual State of

the Industry reports.

13. While some data are available, which allows us to track premium growth rates, little data

is available regarding the number of insurers participating in the pet insurance market. However, a

recent report estimates that the market consisted of at least 11 insurers as of 2017 (Jenks, 2017).

14. While the take-up rate is relatively low in the U.S., the NAIC recently reported that

approximately 25% of pet owners in the United Kingdom (UK) had pet insurance (NAIC, 2019a).

15. A survey by Lendedu.com found that 44% of respondents did not know that pet insurance

coverage existed (Today’s Veterinary Business, 2019).

Journal of Insurance Regulation

academic research into the factors that may drive demand for this product. Using a

sample of U.S. pet owners, Williams et al. (2016) conduct a study that investigates

the factors associated with pet insurance demand and find that cost, reimbursement

level, and the availability of unlimited benefits and wellness plans offered through

the policy each affect consumer demand.

The authors also show that expectations

regarding the future health of consumers’ pets affects the decision to purchase

coverage. These results suggest that both financial and non-financial factors can

influence the purchasing decision.

Figure 1:

Pet Insurance Premiums Written in the U.S., 2013–2018

Source: Data for the creation of Figure 1 are obtained from the North American Pet Health Insurance

Association’s (NAPHIA’s) annual State of the Industry reports. Values reported on the primary (left-

hand side) vertical axis represent total pet insurance premiums written in billions. Values on the

secondary (right-hand side) vertical axis represent the percentage change in the pet insurance premiums

written from year t-1 to year t.

Another factor that affects the demand for pet insurance is knowledge about the

existence of this coverage. Using a focus group approach, Coe, Adams and Bonnett

(2007) study consumer perceptions regarding the cost of veterinary services and

report that many of the focus group participants “received little information about

pet insurance in terms of a possible solution to the costs of veterinary care.” While

the group of consumers that participated in the study indicated that they had little

knowledge of pet insurance as a solution to the cost of pet health services,

veterinarians that participated in the study noted that they were “apprehensive”

16. While the authors report that factors such as price and reimbursement percentage affect

consumer purchasing habits, they find that the size of the deductible is not significantly related to

demand.

Licensing and Reporting in the U.S. Pet Insurance Market

about pet insurance because insurers could change coverages afforded by the

insurance, and such changes could affect the care provided by the veterinarian.

Finally, another factor that could influence demand is the consumers’ perception

regarding the cost of veterinary care. As noted by Coe, Adams and Bonnett (2007),

some veterinary care is offered at a price that is far below the appropriate cost, which

causes consumers to believe that services may be less expensive than they actually

are.

If this is the case, pet owners may choose to avoid the purchase of pet

insurance because they do not fully appreciate the potential financial ramifications

of costly veterinary services.

Figure 2:

Total Insured Pets in the U.S., 2013–2018

Source: Data for the creation of Figure 2 are obtained from the NAPHIA annual State of the Industry

reports. Values on the primary (left-hand side) vertical axis represent the total number of insured pets in

the U.S. in millions. Values on the secondary (right-hand side) vertical axis represent the percentage

change in the total number of insured pets in the U.S. from year t-1 to year t.

In addition to the work of Coe, Adams and Bonnett (2007), Gates et al. (2019)

study the factors associated with the utilization of veterinary services in New

Zealand. As part of the survey used in their study, the authors ask respondents about

their feelings toward pet insurance. Among the findings from their survey, the

authors note that the most common reasons for not having coverage included the

coverage being too expensive and consumers not seeing the value in having the

coverage. The authors also find that roughly 24% of respondents “don’t know much

17. Coe, Adams, and Bonnett (2007) indicate that veterinary service costs are lowered to

encourage the well-being of the pet or due to guilt placed on the veterinarian by the pet owner. One

of the focus group’s veterinarian participants stated, “Our vaccine visits are undercharged, our spay

and neuters are grossly undercharged, and then we’ve trained them [pet owners] that they don’t

need pet insurance because veterinary medicine is so cheap.”

Journal of Insurance Regulation

about it,” while approximately 8% “didn’t know it was available.”

Taken together,

the results suggest that various aspects associated with cost and product knowledge

are significant factors that influence pet insurance demand.

Although there are clearly financial and non-financial impediments to growth

in the pet insurance market, the fact remains that the market has continued to grow

over the past six years. Given the continued growth of this market, it is important to

understand how exactly the product is marketed to consumers. While differences

will clearly exist across insurers, the product is commonly marketed through animal

shelters, pet stores, veterinary clinics, and word of mouth (NAIC, 2019a). Since

those selling pet insurance are currently required to carry an insurance license for

property, casualty or both, these entities are likely unable to sell the policies, and

sales are limited to licensed representatives of the insurer. For instance, a veterinary

clinic may have brochures for one or more pet insurers, but it is unable to sell the

product because it has no licensed producers. In this case, those desiring pet

insurance would need to find a producer or contact the insurer directly, potentially

online.

One of the more unique ways in which the product is sold is through offering

pet insurance as a form of employee benefit. Employers in tight competition for

employees are able to offer the coverage to employees as a way to differentiate

themselves. While once uncommon (Hoyman and Duer, 2004), it was reported in

2016 that at least 5,000 companies in the U.S. were offering such a benefit, including

well-known firms such as Microsoft, Hewlett-Packard and T-Mobile (Fisher,

2016).

The Society for Human Resource Management (SHRM) states that 15% of

U.S. employers now offer pet insurance as a benefit. In 2019, it was noted that pet

insurance is “one of the fastest-growing areas of coverage out there” (Dickler, 2019;

Schiavo, 2019).

One could argue that the appropriate way to market and sell pet insurance is to

mirror that used in the individual health insurance market. Individuals and families

have historically obtained their health insurance through an employer as a benefit

by purchasing it from an insurance agent that maintains a health insurance sales

license, or through Medicaid (Kaiser Family Foundation, 2018; LaVito, 2018).

More recently, with the implementation of the federal Affordable Care Act (ACA),

individual and family health insurance policies can also be purchased through the

Health Insurance Marketplace. The distribution channels to purchase or obtain pet

insurance are similar to these options for individual and family health insurance. We

do not argue a change in the methods used as part of the distribution channel for pet

insurance; however, we believe that a change in the licensing for those that sell pet

insurance and the financial reporting for this market would allow for an expansion

in the sale of pet insurance.

18. The stated percentages represent weighted averages calculated by the authors based on

values reported in the study.

19. As evidence of the growing importance of pet insurance as an employee benefit, MetLife

acquired PetFirst Healthcare in 2019, which will allow MetLife to “add the policies to its menu for

employers’ group-benefits programs” (Scism, 2019).

Licensing and Reporting in the U.S. Pet Insurance Market

As detailed above, pet insurance coverage has a long history and the market

continues to grow and evolve, as do the products. However, as insurers offering pet

insurance seemingly continue to make progress in terms of market development,

there are two important regulatory issues related to pet insurance that have received

little attention and we contend warrant further examination. First, while licensing

requirements are determined at the state level, most states have required that

producers possess a property and/or casualty license for the purpose of selling pet

health insurance products. If the purpose of requiring insurance producers to hold

licenses is to ensure some minimal understanding of the products that are being

offered and to ultimately protect the consumer,

then requiring a license, which

does not touch on topics that are relevant to the sale of pet insurance, such as

coinsurance for health products or the typical features found in health insurance

policies, seems inconsistent with the goal of consumer protection. Furthermore, it is

argued that the current approach to licensing for pet insurance reduces the

availability of coverage and removes key moments for purchasing, such as when

purchasing the pet or seeking veterinary services. As discussed below, we argue that

the requirement of a limited lines license would both further serve to protect and

educate consumers and improve the current market in a number of ways. Second, as

it currently stands, insurers offering pet insurance are not required to disclose

information concerning pet insurance in a manner that can be used to more fully

ascertain the state of the market. Rather, insurers are currently required to record pet

insurance data as a component of inland marine, resulting in situations in which data

for pet insurance is combined with data for other coverages such as jewelry, fine art,

property in transit, event cancellation, and travel coverage (NAIC, 2019d). Given

the expectation that premiums written in the U.S. could climb to $2 billion in 2022

(Smith, 2018), we believe that a separate line-item for pet insurance should be

introduced into the annual statement or that the completion of a new coverage

supplement be required. In the next sections, we discuss licensing in the pet

insurance market, as well as reporting requirements for this unique line of business.

Pet Insurance and Licensing

Insurance is regulated at the state-level in the U.S., and each state regulates the

licensing categories for insurance producers in that state. While each state has

discretion regarding the categorization of insurance licenses, the most common

categories (NAIC, 2005) are as follows:

1. Accident and health or sickness – Insurance coverage for sickness, bodily

injury or accidental death, and may include benefits for disability income.

20. The NAIC (2019c) states, “State insurance departments oversee producer activities as part

of a comprehensive regulatory framework designed to protect insurance consumer interests in

insurance transactions.”

Journal of Insurance Regulation

2. Casualty – Insurance coverage against legal liability, including that for

death, injury or disability, or damage to real or personal property.

3. Life – Insurance coverage on human lives, including benefits of

endowment and annuities, and may include benefits in the event of death

or dismemberment by accident and benefits for disability income.

4. Other – Any other line of insurance permitted under state laws or

regulations; i.e., limited lines.

5. Personal lines – Property and casualty insurance coverage sold to

individuals and families for primarily noncommercial purposes.

6. Property – Insurance coverage for the direct or consequential loss or

damage to property of every kind.

7. Variable life and variable annuity products – Insurance coverage provided

under variable life insurance contracts and variable annuities.

There does not appear to be any question as to whether a producer selling pet

insurance should be licensed, but questions do arise regarding the type of license

that should be held by the insurance professional. In Table 1, we present state-by-

state licensing requirements for producers selling pet insurance.

As evidenced by

Table 1, the states generally require producers to hold a property license, a casualty

license, or both. The problem that arises when most producers are required to hold

property or casualty insurance licenses stems from the fact that pet insurance is a

form of health insurance. If insurance professionals are charged with educating

potential consumers regarding health-related topics but are licensed and trained to

understand and sell products related to issues such as property damage and legal

liability, one must question whether they are in fact well-positioned to assist

consumers. As discussed previously, a true understanding of pet insurance requires

a sales professional to understand potentially complex topics, such as coinsurance

(as it relates to health and not property), waiting periods, pre-existing conditions,

exclusions, deductibles, and benefits. While these concepts should be familiar to

any insurance professional, the way they apply to a pet health insurance policy may

be vastly different than what a property or casualty producer is familiar with. This

is of particular importance given that consumers often do not understand common

conditions, such as coinsurance, in their health insurance policies. For instance,

Loewenstein et al. (2013) find that only 34% of survey respondents understood the

concept of coinsurance, while only 14% of respondents could correctly answer four

questions related to health insurance deductibles, copays, coinsurance, and out-of-

pocket maximums. Even more worrisome is the fact that while consumers could not

correctly answer questions about the various provisions affecting the costs

associated with health insurance, most respondents believed that they understood

the aforementioned concepts; therefore, greater education regarding these

provisions is necessary. If consumers lack knowledge regarding these provisions in

21. The information contained in Table 1 was obtained through correspondence with each

state’s insurance regulatory agency.

Licensing and Reporting in the U.S. Pet Insurance Market

their own health insurance policies, presumably this lack of knowledge also carries

over to their understanding of pet insurance.

Table 1:

Pet Insurance Licensing Requirements by State

Note: Data were hand-collected based on correspondence with each state’s department of insurance

(DOI). The column titled “Limited Line” identifies states that use limited line licensing for pet insurance.

P = Property, C = Casualty, H = Health, L = Life, and LL = Limited Line.

Given the potential challenges that exist due to requiring property and/or

casualty licenses for the purpose of pet insurance sales and that such license

requirements may create an unnecessary barrier to entry, therefore reducing the

market for pet insurance sales, we support the idea that states should consider the

use of a limited lines license that would be specific only to those individuals that

sell pet insurance. As detailed by the NAIC (2018), “[a] limited line of insurance is

a line of insurance that covers only a specific subject matter.”

As of 2018, the

NAIC recognized four core limited lines, including car rental insurance, credit

insurance, crop insurance, and travel insurance. While pet insurance is not among

one of the four core limited lines, states have the authority to create non-core limited

lines, which could include pet insurance.

22. According to NAIC Producer Licensing Model Act (#218), a limited line of insurance

means those lines that are defined by state statute or those lines that the insurance commissioner

recognizes as a limited line.

23. Pet insurance is given as an example of a potential non-core limited line in the NAIC’s

2018 State Licensing Handbook.

Journal of Insurance Regulation

Limited line licenses generally have simpler licensing requirements than those

required by the major lines; i.e., property, casualty, life, and accident and health. For

instance, Idaho, New Jersey, Rhode Island and Virginia do not require an

examination for limited lines producers that sell pet insurance. Although this is an

option for states, we are not advocating this in place of the property and/or casualty

license for those states currently requiring one or both. Instead, these states could

require a licensing exam testing coverage specific to pet insurance and the insurance

laws of the specific state. This compromise would ensure that those offering pet

insurance have training that is more directly related to the product that is being

offered. This recommendation is consistent with the NAIC guidelines for the states

to issue insurance producer licenses. These guidelines state that although

examinations are not generally required for limited lines, it is acceptable for

examinations to be required for specific areas (NAIC 2018).

Additionally, fees associated with limited lines licenses may be the same or

lower than licensing fees associated with the major lines, meaning states would have

the ability to set fees at a level that does not result in a reduction in licensing-related

revenue while also encouraging greater participation in the market. For instance,

Rhode Island charges the same licensing fees for pet insurance limited lines as it

does for major lines; however, in New Jersey, the licensing fee is half of what is

charged for major lines (National Insurance Producer Registry, 2019). Those states

requiring the property and/or casualty exam could continue to charge the same

licensing fee for the limited lines licensing or reduce the charge. An increase in the

number of producers may occur due to the reduced barrier to entry (e.g., new

licenses held by veterinarians and pet shelters), and this might offset any reduction

in fees.

Beyond improving consumer understanding of the pet insurance product, which

we believe will result from producer training that is specific to pet insurance, the

use of limited lines licenses could also increase competition in the market, as well

as the availability of pet insurance coverage. By replacing the need to obtain a

property and/or casualty license to sell pet insurance with the less restrictive

requirements that can come with limited lines licenses, consumers would be able to

purchase this coverage directly from veterinarians, animal shelters, pet shops, etc.

that choose to acquire a license.

Assuming that the general relationship between

supply and demand holds for the pet insurance marketplace, greater competition and

availability of coverage in the market could result in a reduction in premiums, which

is a primary reason given as to why individuals do not purchase the coverage, and

potentially result in greater product innovation. From the insurer’s perspective, this

approach also represents even greater opportunities to reach potential consumers

and increase overall sales. In all, we believe that the use of a limited lines licensing

24. We acknowledge that a potential conflict of interest may occur if veterinarians sell pet

insurance for the purpose of receiving commission or selling additional services. Other such cases

exist in limited lines (e.g., gap insurance sold by auto dealers, car rental insurance sold by rental

agencies, and credit insurance sold by bank representatives).

Licensing and Reporting in the U.S. Pet Insurance Market

approach to pet insurance could potentially benefit consumers, producers, insurers

and other stakeholders.

Pet Insurance Reporting

U.S. insurers are required to complete mandatory annual statutory reports that

provide detailed insight into each firm’s operations. Relative to many industries, the

U.S. property/casualty (P/C) insurance industry is one that requires a significant

amount of disclosure, and the disclosed information affords state insurance

regulators, consumers, ratings agencies, and other stakeholders the ability to assess

various facets of the industry. However, while insurers are required to provide a

voluminous amount of detail regarding firm operations each year, the manner in

which data are reported and aggregated can reduce the transparency, which is

necessary for a more complete evaluation of the market. In the case of pet insurance,

while insurers are required to report data pertaining to pet insurance, the data are

ultimately included as part of the inland marine line-item that is found in the NAIC

annual statement, and it is not reported on its own (NAIC, 2018).

25,26

The NAIC

defines “inland marine” to mean:

Coverage for property that may be in transit, held by a bailee, at a

fixed location, or movable goods that are often at different

locations (e.g., off-road constructions equipment), or scheduled

property (e.g., Homeowners Personal Property Floater), including

items such as live animals, property with antique or collector’s

value, etc. These lines also include instrumentalities of

transportation and communication, such as bridges, tunnels, piers,

wharves, docks, pipelines, power and phone lines, and radio and

television towers. This does not include motor vehicles licensed

for use on public roads. (NAIC, 2019d)

Although pet insurance is currently included as one component of inland

marine, there is reason to believe that it should be reported separately. An

examination of U.S. P/C premiums written in 2018 (excluding accident and health)

suggests that of the over $666 billion premiums written, seven reported lines of

business—burglary and theft, commercial auto no-fault, excess workers’

25. The Uniform Property & Casualty Product Coding Matrix requires that pet insurance

plans be considered inland marine for reporting purposes (Code 9.0004, “Pet Insurance Plans”).

26. Although it is possible that an insurer will only write pet insurance, as is the case with

American Pet Insurance Co., many insurers—i.e., Nationwide and Farmers Insurance—selling pet

insurance write additional inland marine coverage. In this case, with the current reporting structure,

it is not possible to determine how much of the reported inland marine insurance is directly

attributable to pet insurance. We also believe that this will become a greater problem as the market

continues to grow and additional insurers begin to enter this market.

Journal of Insurance Regulation

compensation, fidelity, financial guaranty, private crop, and private flood—had

premiums written that were lower than the $1.3 billion in premiums written for pet

insurance coverage.

While we certainly do not argue that the seven lines of

business mentioned above should not be reported on by insurers, we do believe that

erring on the side of transparency is important, particularly for a line of business

that continues to grow. Although recommending greater disclosure for a specific

line of business may seem extreme, such measures have been taken in the recent

past. For example, the NAIC began to require separate disclosure for private flood

insurance beginning in 2016 in the annual statement’s “States Pages.”

The NAIC

stated that disclosure of private flood insurance was done “[i]n recognition of this

growing market” (NAIC, 2019b). At the time of the new disclosure, the total amount

of direct premiums written attributed to private flood insurance by U.S. insurers was

approximately $376 million. As of 2018, direct premiums written attributed to

private flood insurance was roughly $643.8 million, which is far less than the current

premiums written by pet insurers. Furthermore, the NAIC began to require U.S. P/C

insurers to disclose information about cyber insurance through the Cybersecurity

and Identity Theft Insurance Coverage Supplement, starting with the 2015 annual

statements. The NAIC (2016) stated that the purpose of the new supplement was

“…to gain information and understanding about the cybersecurity insurance

markets…” This new supplement provides valuable information about these

increasingly important lines of business, including data pertaining to the number of

policies in force, premiums written and earned, and incurred losses and loss

adjustment expenses. A similar mandatory supplement appeared in NAIC annual

statements in 2011, which required insurers to report information regarding

directors’ and officers’ insurance. The NAIC and state insurance regulators have

clearly demonstrated a willingness and ability to develop and require new

supplements to insurer statutory filings to increase transparency and understanding

of growing markets. We believe the cost of data collection and disclosure should be

minimal for insurers, and the potential benefits of these additional disclosures

should easily exceed costs.

If new reporting requirements for the pet insurance line of business were to be

required, we believe that it could occur in one of two ways. One approach could be

to add a new line-item to the annual statements that specifically breaks out the pet

insurance line of business. The statutory NAIC annual statements completed by U.S.

insurers require detailed information at the line-of-business level, including

premiums written (direct and net), premiums earned, reinsurance assumed and

ceded, and losses incurred. This information is provided both at the aggregate level

and the state-level.

Furthermore, insurers are required to complete an “Insurance

27. Authors’ calculation based on “Grant Total” data obtained from the “States Pages” using

the NAIC InfoPro database. Total premiums are calculated, excluding accident and health lines 13,

14, and 15.1 through 15.8.

28. Prior to 2016 private flood insurance was included as part of “Allied Lines” (NAIC,

2019b).

29. These data are largely located in the various “Underwriting and Investment Exhibits”

located in the NAIC annual statements. State-level line of business data is located in the annual

Licensing and Reporting in the U.S. Pet Insurance Market

Expense Exhibit,” which further breaks out line-specific data, including loss

adjustment expenses, agents’ balances, other underwriting expenses, and profit/loss

values. All of this information can be used by consumers, state insurance regulators,

intermediaries (brokers and agents), and researchers to evaluate individual insurers,

as well as the market as a whole. This data allows one to ascertain the market’s

financial performance, the size and growth of the market, and more explicitly

evaluate the firms that are offering this coverage. This additional disclosure would

increase transparency for the aforementioned stakeholders and allow for more data-

driven decision-making.

Although a significant amount of data is captured at the line-of-business level

in the insurer statutory filings, we do recognize that while pet insurance is a rapidly

growing market, it still consists of a relatively low number of insurers. Given that

few insurers currently participate in the U.S. pet insurance market, an alternative to

adding a line-item in the NAIC annual statements for the pet insurance line of

business would be to require a supplemental disclosure regarding this particular line.

As noted previously, the NAIC has required separate disclosure of line-specific

information through the required completion of supplements to the annual

statements. While not as detailed as some of the information that is contained in the

annual statements, these supplements can still provide details on premiums written

and earned, direct losses paid and incurred, and in the case of pet insurance, the

number and type of pets insured. It could also ask additional questions, such as

whether the pet insurance is offered as part of a group; i.e., as an employee benefit.

Although the information on a supplement may be limited, it would still provide

greater transparency about the state of the pet insurance market.

Conclusion

Pet ownership in the U.S. has grown by over 20% over the past three decades,

with reports suggesting that over half of all households have at least one pet

(Kestenbaum, 2018). As pet ownership rises in the U.S., there has also been an

increase in the demand for pet insurance, with total premiums exceeding $1.3 billion

in 2018 and expectations that pet insurance premiums will surpass $2 billion by

2022 (Smith, 2018).

While the pet insurance market and the products that are

offered continue to evolve over time, concerns have arisen regarding consumer

education and ultimately the most appropriate approach to licensing those

individuals selling these products.

statement’s “States Pages,” and this section includes detail for both the U.S., its territories and its

possessions.

30. It is currently estimated that only approximately 2% of pets in the U.S. are insured by pet

insurance (Jenks, 2017). Expectations regarding future market growth are attributed to a variety of

factors, including increases in the cost of pet medical care, pet ownership, and awareness of the pet

insurance product.

Journal of Insurance Regulation

Because insurance is regulated at the state-level, there is no single licensing

approach that is employed, but in general, most states require that producers either

hold a property license, casualty license or both. However, we contend that a

property and/or casualty license is inappropriate if a primary objective of licensing

is to educate producers, thereby protecting consumers. The features of pet insurance,

such as coinsurance, copays, deductibles, preexisting conditions, etc., are much

more similar in nature to health insurance than they are to P/C insurance. Evidence

suggests that many consumers lack basic knowledge regarding these different

provisions in the health insurance market (Loewenstein et al., 2013). Given the

unique characteristics of health insurance provisions, we contend that the required

property and casualty licensing exams do not ensure that agents are properly

prepared to sell pet insurance in a knowledgeable manner.

Given the aforementioned concerns, we advocate for the use of limited lines

licensing rather than property and/or casualty licensing for the purpose of selling pet

insurance. This is an approach that has already been adopted by five states, and we

believe it best serves both consumers and the industry. In particular, we propose that

producers must carry a limited lines license and that earning a license requires the

completion of an examination that focuses more explicitly on standard features of

the pet insurance product. This would increase the likelihood that the insurance sales

professional has a more complete understanding of the product and can share that

knowledge with consumers. We believe this approach would also increase the

availability of coverage in the market and potentially reduce the price of insurance,

both of which would ultimately benefit both the industry and the increasing number

of pet owners.

In addition to advocating for the use of limited lines licensing for pet insurance,

we also suggest greater reporting requirements as they relate to pet insurance. As it

currently stands, information regarding pet insurance is reported in the NAIC’s

annual statutory filings as a component of inland marine insurance. The aggregation

of data does not allow for a clear understanding of the current state of the pet

insurance market or of its participants. Additionally, given the continued growth of

the pet insurance market, we argue that it is important to increase its level of

transparency. We propose that more detailed reporting could be achieved either

through the addition of a separate line-item for pet insurance in the annual

statements or through the use of a supplemental disclosure, similar to those recently

used for directors’ and officers’ insurance and cyber and identity theft insurance.

Taken together, we believe that the use of limited lines licensing and increased

disclosure of the pet insurance line of business will benefit state insurance

regulators, consumers, and other stakeholders as more pet owners rely on this

potentially important coverage.

Licensing and Reporting in the U.S. Pet Insurance Market

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Journal of Insurance Regulation

Guidelines for Authors

Submissions should relate to the regulation of insurance. They may include

empirical work, theory, and institutional or policy analysis. We seek papers that

advance research or analytical techniques, particularly papers that make new

research more understandable to regulators.

Submissions must be original work and not being considered for publication

elsewhere; papers from presentations should note the meeting. Discussion,

opinions, and controversial matters are welcome, provided the paper clearly

documents the sources of information and distinguishes opinions or judgment

from empirical or factual information. The paper should recognize contrary views,

rebuttals, and opposing positions.

References to published literature should be inserted into the text using the

“author, date” format. Examples are: (1) “Manders et al. (1994) have shown. . .”

and (2) “Interstate compacts have been researched extensively (Manders et al.,

1994).” Cited literature should be shown in a “References” section, containing an

alphabetical list of authors as shown below.

Cummins, J. David and Richard A. Derrig, eds., 1989. Financial Models of

Insurance Solvency, Norwell, Mass.: Kluwer Academic Publishers.

Manders, John M., Therese M. Vaughan and Robert H. Myers, Jr., 1994.

“Insurance Regulation in the Public Interest: Where Do We Go from Here?”

Journal of Insurance Regulation, 12: 285.

National Association of Insurance Commissioners, 1992. An Update of the NAIC

Solvency Agenda, Jan. 7, Kansas City, Mo.: NAIC.

“Spreading Disaster Risk,” 1994. Business Insurance, Feb. 28, p. 1.

Footnotes should be used to supply useful background or technical

information that might distract or disinterest the general readership of insurance

professionals. Footnotes should not simply cite published literature — use instead

the “author, date” format above.

Tables and charts should be used only if needed to directly support the thesis

of the paper. They should have descriptive titles and helpful explanatory notes

included at the foot of the exhibit.

Journal of Insurance Regulation

Papers, including exhibits and appendices, should be limited to 45 double-

spaced pages. Manuscripts are sent to reviewers anonymously; author(s) and

affiliation(s) should appear only on a separate title page. The first page should

include an abstract of no more than 200 words. Manuscripts should be sent by

email in a Microsoft Word file to:

Cassandra Cole and Kathleen McCullough

[email protected]

The first named author will receive acknowledgement of receipt and the

editor’s decision on whether the document will be accepted for further review. If

declined for review, the manuscript will be destroyed. For reviewed manuscripts,

the process will generally be completed and the first named author notified in eight

to 10 weeks of receipt.

Published papers will become the copyrighted property of the Journal of

Insurance Regulation. It is the author’s responsibility to secure permission to

reprint copyrighted material contained in the manuscript and make the proper

acknowledgement.

NAIC publications are subject to copyright protection. If you would like to

reprint an NAIC publication, please submit a request for permission via the NAIC

Web site at www.naic.org. (Click on the “Copyright & Reprint Info” link at the

bottom of the home page.) The NAIC will review your request.