Contents:

CHAPTER 1 EXECUTIVE SUMMARY 3. Market context 3 Penetration growth is starting to slow 3 Claims inflation is still an issue 3 Customer focus 4 The distribution landscape is changing rapidly 4 Online selling will drive future customer acquisition 4 Competitive dynamics 4 The market is polarized, with composites and retailers eroding the market share of established specialist providers 4 Each provider type must play to its strengths 5 The future decoded 5 Claims inflation threatens future market profitability 5 CHAPTER 2 INTRODUCTION 14. What is this report about? 14 CHAPTER 3 MARKET CONTEXT 15. Introduction 15 The UK cat and dog insurance market was worth over £250 million in 2004 15 The number of cats and dogs totaled almost 15 million in 2004 17 Product penetration is around 15 per cent 19 Average premiums differ between animal breeds and species 20 To achieve profitability, insurers must first tackle claims inflation 22 The market is barely generating a underwriting profit 22 Claims costs are rising due to veterinary fee inflation 23 Claims frequencies are extremely high 27 Premiums are barely keeping track of claims inflation 29 Insurers are seeking methods of managing claims inflation 29 The UK equine insurance market was worth £132 million in 2004 33 There are almost one million horses in the UK 33 Premium increases have driven market growth 33 Penetration and average premiums are higher than in the feline and canine insurance markets 35 There is little scope for growth outside of cats, dogs and horses 35 Exotic pet insurance market is dominated by specialists 35 Rabbits, chinchillas and guinea pigs will not be growth areas 36 CHAPTER 4 CUSTOMER FOCUS 38. Introduction 38 The distribution power of the veterinary channel is waning 38 Retailers have challenged players selling through vets 38 Regulation will inflate distribution costs for vet-focused players 40 Retailers have raised the profile of pet cover and made it more accessible 40 Opportunities exist to acquire new business 40 Online distribution is vital for future customer acquisition 40 Block cover would appeal to consumers with more than one pet 42 Insurers must tailor marketing strategies to reach their core audience 43 CHAPTER 5 COMPETITIVE DYNAMICS 48. Introduction 48 Incumbents have been challenged by new entrants 48 Petplan and Petprotect have lost market share 48 UKI, Direct Line and More Th>n have been the main beneficiaries 48 Third-party administrators have profited from the growth in sales through retailers and affinity groups 49 The successful retail model is being copied by others 51 Growth potential has attracted these players 52 Two types of product provider characterize the market 52 Established providers specialize in pet insurance 52 Non-specialist composites and retailers have mass market appeal 53 SWOT analysis – Petprotect and Tesco 53 CHAPTER 6 THE FUTURE DECODED 60. Introduction 60 Neutral scenario – Penetration stabilizes 61 Under the neutral scenario, penetration is constant and rate rises drive GWP growth 61 GWP rises to £368 million by 2009 62 Optimistic scenario – Penetration continues to increase 63 Under the optimistic scenario, increasing penetration coupled with rate rises drive GWP growth 63 GWP rises to £409 million by 2009 64 Penetration may struggle to rise at historic rates 66 The industry will have to face up to an image problem 66 Certain consumer types will never purchase pet insurance 67 The growing range of exclusions will further prevent consumers entering the market 67 Unprofitability may lead to industry consolidation 67 Profitability will worsen if penetration stabilizes 67 CHAPTER 7 APPENDIX 70. Supplementary data 70 Market context 70 Customer focus 71 Definitions 72 Current publications 73 Future publications 73 Relevant links 73 Do you need more information? 74 SPP writing team 75 LIST OF TABLES Table 1: UK cat and dog insurance market, 2000-2004 16 Table 2: UK cat and dog population, 1995-2004e 19 Table 3: UK canine population by size, 2004 21 Table 4: Estimated UK cat and dog insurance gross claims ratio, 2004 23 Table 5: Most common sources of feline and canine insurance claims by volume in the UK since 2000 26 Table 6: Most common sources of feline and canine insurance claims by total claims cost in the UK since 2000 27 Table 7: Canine and feline breeds at greatest risk of theft, 2005 28 Table 8: Common health problems associated with the 10 most common UK canine breeds, 2005 31 Table 9: UK equine insurance market, 2001-4 34 Table 10: Estimated pet insurance distribution channel splits, 2004 39 Table 11: Top 10 pet insurance advertisers by medium, 2004 45 Table 12: Total pet insurance advertising spend by media, 2003-4 47 Table 13: Estimated competitor market share by premium income, 2004 51 Table 14: Selected partnerships between retailers and insurers or underwriting agencies 52 Table 15: Neutral scenario, UK cat and dog insurance GWP, 2000-9f 63 Table 16: Optimistic scenario, UK cat and dog insurance GWP, 2000-9f 66 Table 17: Estimated cat and dog insurance gross claims ratio, 2004-9f 69 Table 18: UK average regional veterinary fees, 2002 71 Table 19: Household Internet access by gross income decile group, 1999-2004 71 Table 20: Household Internet access by region, 1999-2004 72 LIST OF FIGURES Figure 1: The cat and dog insurance markets in the UK were worth over a quarter of a billion pounds in 2004 16 Figure 2: The UK cat population has risen steadily in the past two years 18 Figure 3: The gross claims ratio for the UK cat and dog insurance market was estimated to be around 60 per cent in 2004 22 Figure 4: Steady increases in average horse insurance premiums have driven robust market growth 34 Figure 5: Direct players and retailers dominate the sale of pet insurance 39 Figure 6: Almost half of UK households now have Internet access 41 Figure 7: The two major direct players have the biggest advertising budgets 44 Figure 8: Pet insurers advertise almost exclusively through three media 46 Figure 9: Petplan, UKI and Petprotect accounted for more than half the market in 2004 50 Figure 10: Specialist players and retailers face a different set of challenges in the competitive arena 59 Figure 11: Key to relative importance of qualitative forecast variables 60 Figure 12: The neutral scenario assumes that penetration levels will stay constant 61 Figure 13: Under the neutral scenario, the cat and dog insurance market reaches £368 million 62 Figure 14: The optimistic scenario involves a rise in penetration levels in both feline and canine sectors 64 Figure 15: In the optimistic scenario, product penetration and rising premiums drive market growth 65 Figure 16: Under the neutral scenario, claims ratios are forecast to worsen 68 Figure 17: Large regional variations in veterinary fees are evident in the UK 70 Figure 18: Our core consulting capabilities 75