Truth about Profits and Costs of Claims
Insurance companies, like all businesses, require a profit if they are going to be sustainable. No one would want to pay insurance premiums for ten years only to find out that the company went out of business.
What makes the insurance industry unique, among other things, is the fact that they do not know their cost of goods (costs of claims) until after they have sold their product.
It is a fact that insurance companies routinely lose money on certain individual insured. For pet health insurance, companies lose money on the "unlucky pets". This is not only reasonable but it is absolutely necessary if the plan is to offer value.
In some cases, insurance companies may even lose money for a period of time on the entire plan or group, though this will always be short term. For example, when hurricane Katrina hit New Orleans, the insurance plans had an increased cost of claims and therefore, the companies lost money that year. In the years that followed, the cost of home insurance increased and the insurance companies made their money back.
In the long run, insurance companies always make a profit. It is the only way to serve their customers.
How do pet insurance companies reduce the "cost of claims"?
- Not paying small claims
- Reducing the average size of a claim
- Not paying large claims
To decrease the number of small claims (insurance companies call them "nuisance claims") they increase the deductible. To decrease the exposure to large claims, the insurance company can place limits or caps on the coverage. These limits generally apply per year or per claim. Lastly, to decrease the severity (portion of the claims paid) insurance companies increase the percentage the customer must pay by altering the coinsurance.
What values should you look for in a pet insurance company?
Choose a company and a plan that spreads the risk equally across all insured pets regardless if the pet ends up being "lucky" or "unlucky".
Choose a company that focuses on maximizing "cost of claims."
What is considered Routine Coverage? Do you cover it?
- Trupanion does not cover routine daily healthcare issues as it is not cost effective for the pet owner.
- If the pet owner chooses, for example, to insure for flea control or vaccinations, the pet health insurance company would know what the pet owner would be using this portion of their coverage for and charge more for it.
- Insuring for the routine is a pre-payment plan, not true insurance.
- To be true insurance, a pet owner is covered for the unexpected things such as an illness or accident that can arise.
- As true pet medical insurance, the pet owner may receive back much more than they paid into the system if their pet is unlucky. A pet owner will pay more than they receive back if their pet is really healthy.