Imagine your pet has been diagnosed with a serious medical condition that will cost thousands of dollars to treat -- money you don't have lying around. What would you do?
That's a problem many Americans face. One alternative that has gained increasing appeal is purchasing pet health insurance. First introduced in the U.S. in 1982, pet insurance has become a big business.
What it covers
Pet health insurance is similar to human health insurance in many ways. Customers pay a monthly premium and a deductible with most plans. Some plans also have co-pays. The insurance kicks in for paying costs once the deductible has been met.
Basic plans typically cover only veterinary care for accidents or illness. However, other plans reimburse for preventive services, including annual checkups and vaccinations. The most generous pet health insurance plans cover prescription drugs, genetic and hereditary conditions, dental care, acupuncture, chiropractic care, and physical rehabilitation.
While similar to human health insurance, pet insurance is actually a form of property insurance. Customers pay the full amount of any services provided up front and then submit a claim for reimbursement. As is the case with other forms of insurance, caps and limitations can apply. Reading the fine print is a must with any benefit plan to see exactly what it will and won't cover.
Booming business
Health insurance for pets is projected to generate revenue of more than $750 million by next year, according to market research firm Packaged Facts. In 2009, revenue for pet insurance policies totaled just over $300 million.
The market for pet insurance is booming for three primary reasons. One is the rapid rise in veterinary care costs. Americans will spend an estimated $14.2 billion on vet care in 2013, according to the American Pet Products Association. That's a 40% jump from 2007.
These costs have risen largely because more advanced treatments are now available for pets. For example, in the past, chemotherapy and organ transplants were available only to humans. Now, these treatment options are available for animals.
The second factor driving growth in sales of pet insurance policies is the affection of pet owners for their animals. According to the American Veterinary Medicine Association, more than 60% of pet owners consider their pets to be family members. Another survey by Harris Interactive in 2011 found that nine out of 10 pet owners thought of their pets as a family members.
Whichever statistic is more accurate, it's clear that Americans love their pets. And they're willing to spend to make sure their pets' health problems are addressed.
That brings us to the third factor -- economics. Pet health insurance is actually pretty inexpensive. Basic plans can cost as little as $15 per month, while more comprehensive plans can cost upwards of $100 per month.
Many families want insurance for their pets for the same reason they want health insurance for themselves. They don't want to be wiped out financially to make sure that a loved one receives needed medical care.
Investing angle
With growing business and a wide open market (less than 1% of America's pets are insured), pet health insurance sounds like a possible investment opportunity. There's good news and bad news on the investing front, though.
The bad news is that several major players in the industry aren't publicly traded. Veterinary Pet Insurance, or VPI, claims a market share of over 60%. VPI is owned by Nationwide Insurance, which used to be publicly traded but is now privately held.
The good news is that there are a few options available for investors, especially with some developments this year. Hartville Group, which is the sole supplier of pet insurance for the American Society for the Prevention of Cruelty to Animals, has around 10% of the market. Fairfax Financial Holdings Limited (FRFHF 0.22%) bought Hartville in May.
A newer entrant to the market is Wal-Mart (WMT -1.75%). The giant retailer began offering pet insurance at select stores in Canada earlier this year. There's no word yet whether the company plans to expand the new product to the United States.
There also are at least a couple of public companies that offer health insurance but don't really have their own insurance products. Petsmart (PETM), for example, sells pet insurance from privately held Banfield. Outdoor merchandise chain Cabela's (CAB) began offering pet insurance in 2011. However, the company actually sells insurance managed by Embrace Pet Insurance, one of the top privately held industry players.
Wal-Mart could emerge as a major player, but the revenue generated would be a drop in the bucket for the massive company. Petsmart and Cabela's could gain from the pet insurance trend, but only incrementally, since they're resellers. However, Petsmart looks to be a good way to profit from the general trend in pet ownership.
Probably the best way to profit from the growth in pet insurance is with Fairfax. If the company's Hartville segment captures a nice chunk of the expanding pet insurance market, it could be enough to make a material difference for Fairfax's bottom line.
