Animal instincts

Once it was a niche area of insurance, aimed mainly at breeders of animals like Siamese cats and Cavalier King Charles Spaniels. Today, however, pet insurance is the UK's fastest growing insurance industry sector, with a diverse - and some times eyebrow-raising - range of players entering the market, from Kwik-Fit to the News of the World.

The sector is becoming increasingly competitive and suffering from heavy premium inflation. On the other hand it has huge growth potential, so there could be considerable rewards for those prepared to tough it out.

Pet insurance has seen spectacular growth in the last seven years. It started off as a niche product launched in 1976 by Petplan, which was soon joined by another specialist, Pet Protect. Both companies insured cats and dogs, used vets to sell their products and had what appeared to be a small market sewn up.

Chris Price, head of pet insurance at Direct Line, says: "Suddenly General Electric bought Pet Protect in the mid-1990s. That told the market that a big company realised that pet insurance could be worth going into."

The sector went mainstream in 1997 when Direct Line entered the business, followed by a number of other direct insurance players. Mintel now values the pet insurance sector at £245m.

Tesco, number two in the market behind the leader Petplan, according to Datamonitor, recently announced it has 250,000 pet insurance policies in force and claims to have insured over 1.3 million pets since it launched its pet product in 1999.

Customer awareness

The pet insurance market looks set to mushroom, with Mintel predicting that it will reach over £400m in 2007. The research group says that only 12% of pet owners currently insure their pets. The growth is being spurred by increased customer awareness of the product through advertising campaigns from providers like Direct Line.

"We are not known for the subtlety of our marketing," quips Price. The internet is also helping to sell pet insurance. Price says that customers view the product as a commodity, in a similar vein to travel cover, and they are therefore happy to buy it with the minimum of advice.

The most important cause of the growth in pet insurance seems to be that a wider variety of products are now available.

A version of the product is now affordable for those who simply want to cover the costs of Rover's broken leg, as opposed to anything from major injuries to aromatherapy for their brood of Chihuahuas.

The product range can be split roughly into two types, according to James Greenwell, insurance analyst at Datamonitor: "There are capped 12-month policies, such as those offered by Direct Line, which are quite cheap and will cover medical treatment of a condition for one year only.

Then there are more expensive open-ended cover, offered by providers like Petplan, which will cover you indefinitely."

The latter type extends to exotic treatments such as acupuncture, herbal remedies and hydrotherapy. "If a vet recommends it, we'll cover it", says Gyles Haverty, spokesman for Petplan.

Graham Smith, group product manager at Legal & General (L&G), believes there will be a "natural ceiling" to growth of UK pet insurance at 30% of cats and dogs.

"Although there will be increasing awareness of the product, it's not compulsory. There will always be those who believe - mostly wrongly - that if their pet gets ill it will be cheap to treat."

Even if he is right, this represents a significant swathe of new customers.

So it's no surprise that new providers are going into pet insurance all the time. Accordingly, competition is getting tough.

There are now about 50 companies offering the product in the UK. Some of them have little obvious connection with pets, such as Virgin. Many have got into the market through pet insurance affinity deals underwritten by operators such as BDML, which supports Kwik-Fit.

BDML chief executive Sandy Dunn says the idea is that, although retailers have no in-house expertise in the product, they can use their trusted household name to sell it.

Brokers, however, are not generally playing a big part in the pet insurance boom. Key Note recently found that the market share of brokers has declined from 59% in 1992 to 41% in 2001. L&G is typical of the other pet insurance players in that it has opted to sell its product - at least so far - through direct channels.

Smith says: "My gut feeling is that this will be an area dominated by direct sales. We're talking about something that costs £10 a month, so as long as people relate to the brand, they don't feel they need advice."

Mel Everest, senior technical consultant, pet, at More Than, adds: "Intermediaries aren't interested because the premiums are too low."

Premiums are under particular pressure in pet insurance. "It's a difficult business to go into. It used to be easy, but now most people are experiencing 20% increases in premiums a year. There is money to be made, but you have to have scale," says Everest.

For the first few years new entrants to the market see few claims, according to Direct Line's Price. "Later, as their pets get older and less fit, people start claiming."

Also, vets' fees are going up by an average of 10% a year. "We have absolutely no control over this at all, which is very unusual in insurance," says Price.

He adds: "There are lots of vets over-treating insured animals and others operating dual pricing policies, under which higher prices are charged to customers who have cover."

Organ transplants

Meanwhile, vets are undertaking more technical procedures, such as organ transplants, due to scientific advances and from insurance funding. The ABI is in ongoing discussions with the Royal College of Veterinary Surgeons in the hope of addressing these issues, but so far nothing has changed.

If pet insurance is such a tricky market, why do so many people want to be in it? Allan Burns, head of insurance at Tesco, admits that it is about "offering the full range of services", suggesting that pet cover is important for the company's image, even if it is not the most profitable business line.

There is also the prospect of all those pet owners - Mintel estimates 88% - who have not yet taken out cover. More Than's Everest predicts that market segmentation will create even more opportunities: "You could just cover dogs or cats, specific breeds, certain ages or parts of the country."

The potential is undeniable, but the successful players in pet insurance will need the scale and strength to fight intense premium inflation and stiff competition.