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Insurance Abstract
A method for reducing the lapse rate of a first insurance policy
comprises the step of offering to sell a rider to said first insurance
policy, said rider comprising benefit features, said benefit features
configured such that the combination of said rider and said first
insurance policy has a higher switching cost than the switching
cost of said first insurance policy alone and said rider is constructively
attached to said first insurance policy, whereby said step of offering
to sell is at least in part performed by technological means. The
first insurance policy may be a homeowner's policy. The rider may
be a pet health insurance rider.
Insurance Claims
1. A method for reducing the lapse rate of a first insurance policy,
said first insurance policy documenting insurance coverage provided
by a first insurance company to an insured entity, said insurance
coverage comprising at least one of homeowner, auto, human health,
or life insurance coverage, said method comprising the steps of:
a) offering to sell to said insured entity a rider to said first
insurance policy, said rider comprising benefit features, said benefit
features configured such that: i. said rider provides pet health
insurance coverage which covers a pet of said insured entity, said
pet being a given type of pet, ii. the combination of said rider
and said first insurance policy has a higher monetary switching
cost than the monetary switching cost of said first insurance policy
alone; and iii. said rider is constructively attached to said first
insurance policy such that said rider is only in force if said first
insurance policy is in force, b) accepting an application from said
insured entity for said rider, said application comprising sufficient
information so that said rider may be underwritten; c) underwriting
said rider such that said application may be accepted or rejected
by an insurance company providing the pet health insurance coverage
described in said rider; d) providing to said insured entity a quotation
for the premium for said rider, said premium to cover a term for
said rider, said premium being based at least in part on an anticipated
reduction in said lapse rate of said first insurance policy, said
term being a period of time that said rider is in force; wherein
at least one of said steps is at least in part performed by an information
system comprising at least one of a computer, telecommunications
device, printer, automated telephone answering system, or monitor.
5. The method of claim 1 wherein said premium is in the range of
1 to 10 times the average health care cost of said type of pet,
said average health care cost being for said term of said rider.
6. The method of claim 1 wherein said rider pays a benefit equal
to the difference between the actual covered medical costs of said
pet and a deductible, said deductible is being at least twice the
average health care cost of said type of pet for said term of said
rider.)
9. The method of claim 1 which further comprises the step of administering
a multiplicity of said riders using a general purpose computer.
10. The method of claim 9 whereby said step of administering a
multiplicity of riders comprises processing or tracking claims against
said multiplicity of riders or premium payments for said multiplicity
of riders.
12. The method of claim 1 wherein at least one of said steps is
performed by a web site.
13. The method of claim 1 which further comprises the step of issuing
a pet health insurance ID card to said insured entity.
14. The method of claim 1 wherein said rider comprises a deductible
corresponding to said premium and wherein said premium for said
rider is greater than or equal to a reference premium, said reference
premium corresponding to a reference deductible, said reference
deductible being greater than or equal to said deductible of said
rider, said reference premium and said reference deductible belonging
to a set of reference premiums versus reference deductibles, said
set of reference premiums versus reference deductibles being calculated
by the steps of: a) identifying a class of pets comprising said
type of pet to be insured; b) estimating the distribution of average
annual veterinary expenses for said class of pets, said average
annual veterinary expenses occurring within a first geographic region,
occurring to pet owners in a first demographic category or occurring
during a first time period; c) adjusting said distribution of average
annual veterinary expenses to account for the extent to which the
pets in said class of pets were covered by pet health insurance
policies, said adjusting yielding an adjusted distribution of average
annual veterinary expenses; d) adding a provision for expenses to
said adjusted distribution, said expenses being those that would
be incurred by said first insurance company in order to provide
said rider, said adding of said provision for expenses yielding
a set of average premiums versus deductibles; e) adjusting said
set of average premiums versus deductibles to account for inflation
from a point in time during said first time period to a subsequent
point in time during said term of said rider, said adjusting yielding
a set of inflation corrected premiums; f) adjusting said set of
inflation corrected premiums to account for a difference between
said pet to be insured and the average pet of said class of pets,
said difference being with respect to at least one of the age of
said pet to be insured, the size of said pet to be insured or the
breed of said pet to be insured, said adjusting of said set of inflation
corrected premiums yielding a set of actual premiums to be charged
for said pet to be insured; g) discounting said set of actual premiums
by an amount governed by the vaccination frequency of said pet to
be insured, said discounting being larger for lower vaccination
frequencies, said discounting of said set of actual premiums yielding
a set of discounted premiums versus deductibles; h) adjusting said
set of discounted premiums to account for the fact that said term
for said rider may be different than a year, said adjusting of said
set of discounted premiums yielding a set of term-adjusted premiums
versus deductibles; and i) reducing said term-adjusted premiums
by the savings per rider anticipated by said first insurance company
due to said anticipated reduction in lapse rate of said first insurance
policy, said reducing yielding said set of reference premiums versus
reference deductibles.
15. The method of claim 1 wherein said first insurance policy and
said rider are a single insurance policy.
16. The method of claim 1 wherein said first insurance policy and
said rider are separate insurance policies.
17. The method of claim 1 wherein said anticipated reduction in
lapse rate is 3% or more.
18. The method of claim 1 wherein said anticipated reduction in
lapse rate is equal to or greater than the reduction in lapse rate
observed with other insured entities who have added said rider to
said first insurance policy.
19. The method of claim 1 wherein said increase in monetary switching
costs has the potential for being more than said premium for said
rider.
20. The method of claim 1 wherein the monetary switching cost of
said combination of said first insurance policy and said rider has
the potential for being more than 80 times greater than the switching
cost of said first insurance policy alone.
21. The method of claim 1 wherein said entity is a natural person.
22. The method of claim 1 wherein said entity is a legal entity.
23. The method of claim 14 wherein said amount of said premium
discount governed by the vaccination frequency of said pet to be
insured is greater than or equal to 6% if said vaccination frequency
is less than or equal to once every three years.
Insurance Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] This application claims the benefit of U.S. provisional
patent application Ser. No. 60/612,821, filed Sep. 24, 2004, and
entitled "Method and Apparatus for Bundling Insurance Coverages
in Order to Gain a Pricing Advantage". Said provisional application
is incorporated herein by reference.
Reference Table Submitted on Compact Disk
FIELD OF THE INVENTION
[0002] The invention is in the field of insurance.
BACKGROUND
[0003] One of the factors that increases the cost of certain types
of insurance coverage is voluntary lapse of a first insurance policy
by the policy owner. An insurance company incurs a certain sales
and start up expense when it sells a new policy. This expense is
typically recovered, or amortized, in subsequent premium payments.
If a policy owner lapses his policy before the initial sales and
start up expense is recovered, then the insurance company may lose
money on that policy.
[0004] Insurance companies measure lapse rates and factor the expected
losses into their pricing. If an insurance company can lower its
lapse rate, then it can potentially reduce its premiums for certain
types of insurance policies.
[0005] Insurance policies that may have a lower cost impact in
pricing due to lower lapse rates include homeowner's, auto, mortgage,
and life insurance.
[0006] Known methods for reducing lapse rates include offering
discounts upon renewal of a first insurance policy and increasing
the attention paid by an insurance agent to an owner of a first
insurance policy.
[0007] There is a long felt need, however, for additional effective
means for reducing lapse rates of certain insurance coverages.
SUMMARY OF THE INVENTION
[0008] The Summary of the Invention is provided as a guide to understanding
the invention. It does not necessarily describe the most generic
embodiment of the invention or all species of the invention disclosed
herein.
[0009] The present invention is, in part, a method and apparatus
for reducing lapse rates of certain types of insurance coverage.
[0010] The method of the invention may comprise providing a rider
to a first insurance policy. The rider provides insurance coverage
for a contingent event in exchange for a premium Some aspect of
the rider will reduce the anticipated lapse rate of the first insurance
policy. Said aspect may include contingent events covered by the
rider, benefit structure, continuance of coverage, eligibility for
benefits, or combinations thereof.
[0011] The first insurance policy may be a homeowner's policy,
auto insurance policy or other insurance policy that would have
lower costs or improved profitability if its lapse rate were reduced.
[0012] The contingent event covered by the rider may be a medical
expense associated with a pet. This type of coverage is termed "pet
health insurance", or the like.
[0013] The apparatus of the invention may comprise a computer.
The computer may comprise software for administering, pricing, underwriting
or offering said rider for sale.
[0014] The apparatus of the invention may comprise a computer readable
medium with software encoded thereon. The computer readable medium
might be a CD, disk drive, or data transmission apparatus.
[0015] The invention may comprise software. The software may be
embodied as data transmitted to a computer, said computer operating
at least in part under the direction of the data in order to carry
out at least a portion of the method of the invention.
Definitions
[0016] As used herein unless specifically indicated otherwise or
clearly indicated otherwise by context, the term "rider"
refers to a second insurance coverage which is only in force if
a first insurance coverage is in force. The second insurance coverage
may be attached to the first insurance coverage such that the combination
of the first and second insurance coverage is a single insurance
policy. Alternatively, the second insurance coverage may be constructively
attached to the first insurance coverage such that the second insurance
coverage is a second insurance policy and the first insurance coverage
is a first insurance policy.
[0017] As used herein unless specifically indicated otherwise or
clearly indicated otherwise by context, the term "Constructively
attached" means a second insurance policy by its terms can
remain in force for only so long as a first insurance policy remains
in force.
[0018] As used herein unless specifically indicated otherwise or
clearly indicated otherwise by context, the terms "pet"
or "companion animal" refer to an animal which may be
owned or cared for by one or more people. For example, a companion
animal may be a dog or a cat. "One or more people" might
be an individual person or a family.
[0019] As used herein unless specifically indicated otherwise or
clearly indicated otherwise by context, the term "benefit"
refers to money or other consideration provided by an insurance
company to the owner of an insurance policy if a contingent event
covered by the insurance policy occurs. For example, a benefit of
$2,000 might be paid to the owner of a pet health insurance policy
in the event that a pet covered by the insurance policy incurs a
covered medical expense of $2,000.
BRIEF DESCRIPTION OF THE DRAWINGS
DETAILED DESCRIPTION
[0020] The following detailed description discloses various embodiments
and features of the invention. These embodiments and features are
meant to be exemplary and not limiting.
Method for Bundling Coverages in Order to Reduce the Impact of
Adverse Lapse Rates for a First Insurance Policy
[0021] One embodiment of the invention is a method for reducing
the anticipated lapse rate of a first insurance policy, said first
insurance policy having an increased profitability, higher income
or lower cost when the lapse rate is reduced.
[0022] The method comprises offering to sell a rider to said first
insurance policy, said rider comprising benefit features, said benefit
features configured such that the combination of said rider and
said first insurance policy has a higher switching cost than the
switching cost of said first insurance policy alone and said rider
is constructively attached to said first insurance policy, whereby
said step of offering to sell is at least in part performed by technological
means.
[0023] The method may alternatively comprise offering to sell a
rider to a first insurance policy. The rider comprises benefit features.
The benefit features are such that it is possible to price a combined
rider and insurance policy using a lower lapse rate assumption than
would otherwise be used for pricing the first insurance policy without
the rider.
[0024] The first insurance policy may be a property or casualty
policy, such as a homeowner's policy, or auto policy.
[0025] The first insurance policy may be a health care policy for
one or more persons. The first insurance policy may be a life insurance
policy for one or more persons.
[0026] A suitable rider is one in which the combination of the
rider and the first insurance policy has a higher switching cost
than the switching cost of the first insurance policy alone. "Switching
cost" may refer to both monetary and non-monetary costs which
would be incurred by the owner of a given insurance policy or given
insurance policy and rider combination to replace said insurance
policy, rider, or both with another insurance policy or policies
providing the same or similar benefits.
[0027] Monetary switching costs include any net increase in expense
for a given insurance coverage that an insured would incur due to
switching from one insurance company to another. Examples of monetary
switching costs include increases in premium for the same or similar
coverage, loss of premium discounts, loss of accumulations towards
a deductible, loss of coverage for preexisting conditions, or unavailability
of similar coverage.
[0028] Non-monetary switching costs include any net increase in
non-monetary expenses of a given insurance coverage that an insured
would incur due to switching from one insurance company to another.
Examples of non-monetary switching costs include any net increases
in time, aggravation, and emotional distress spent or incurred by
an insured in shopping for alternative insurance companies for the
same or similar insurance coverage.
[0029] Examples of an increase in both monetary and non-monetary
switching costs are presented in Example 1 of the present invention.
[0030] The rider may be a pet health insurance rider. The pet health
insurance rider may cover losses due to medical care required for
a companion animal.
[0031] The pet health insurance rider may be an inventive major
medical pet health insurance rider as disclosed herein.
[0032] The method of the invention may comprise underwriting one
or more proposed insureds for said rider. The method may comprise
underwriting one or more proposed insureds for said combined rider
and first insurance policy.
[0033] The method may comprise pricing said rider. The method may
comprise pricing said combined rider and first insurance policy.
[0034] The method may comprise administering said rider. The method
may comprise administering said combined rider and first insurance
policy.
[0035] The method may comprise adjudicating claims against said
rider. The method may comprise adjudicating claims against said
combined rider and first insurance policy.
[0036] The method may comprise paying benefits against claims to
said rider. The method may comprise paying benefits against claims
to said combined rider and first insurance policy.
[0037] For insurance policies which would benefit from reduced
lapse rates, a reduction in the lapse rate of a multiplicity of
first insurance policies will result in improved profitability of
said policies because premium revenue obtained from said policies
would be increased. This would allow a more rapid amortization of
the sales and administrative expenses of said policies.
[0038] A decrease of 1% in the lapse rate of a set of policies
such as homeowner's policies, for example, might result in a 4%
increase in the present value of the total premium collected from
said policies. The increase in the present value of the total premium
would result in increased profitability of the set of policies.
[0039] The additional profitability resulting from reduced lapse
rates of a first insurance policy and rider may be used to increase
the benefits of either the first insurance policy or the rider,
reduce the premium of the first insurance policy or the rider, increase
the profits to the insurance company, fund capital expenses of the
insurance company, find promotional discounts or coupons or a combination
thereof.
Major Medical Pet Health Insurance
[0040] A suitable rider for the present invention may be a pet
health insurance rider which provides health care coverage for a
pet in exchange for a premium. A preferred rider is one that provides
major medical coverage for a pet. A method for providing major medical
coverage comprises providing a relatively high deductible, such
as $1,000 per year. The rider would cover medical costs incurred
by the pet that were in excess of $1,000 in a given year.
[0041] A suitable annual deductible for major medical pet health
insurance covering pets with average annual medical costs of $150
to $300 per year is in the range of $150 to $3,000 per year. Suitable
annual deductibles for classes of pets with different average annual
medical costs will be in the range of 1 to 10 times said average
annual medical costs for said pets. A preferred range would be 1.5
to 7 times said average annual medical costs. A more preferred range
would be 3 to 5 times said average annual medical costs.
[0042] All dollar values herein represent US currency as of 2001.
Equivalent currency values for other jurisdictions and times may
be computed by standard means. Said means might employ published
exchange rates and inflation factors.
[0043] The rider of the present invention may have a cap of benefits
over the lifetime of an insured pet. A suitable cap is $15,000 for
a type of pet with an average medical cost in the range of $150
to $300 per year.
[0044] The rider would require the payment of a premium in order
to be in force. A suitable premium might be in the range of $50
to $600 per year for a type of pet with average medical costs in
the range of $150 to $300 per year. The premium would be suitable
for a $500 deductible. The premium and deductible may be proportionally
higher or lower for classes of pets with higher or lower average
annual medical costs.
[0045] The inventive major medical pet health insurance rider disclosed
herein may be offered as a stand-alone policy that is not contingent
upon the maintenance of a first insurance policy.
Premium Calculation for Major Medical Pet Health Insurance
[0046] A suitable premium for a major medical pet health insurance
stand alone policy or rider may be calculated by projecting the
present value of the expected claims for the insured pet using a
reasonable set of pricing assumptions. Reasonable assumptions for
the insured pet may be based on the age of the pet, type of pet,
breed of pet, species of pet, geographic location of pet, demographic
characteristics of the owner of the pet, prior medical history of
the pet and frequency of vaccinations of the pet. Other underwriting
characteristics relevant to the frequency or severity of claims
may also be used.
[0047] A suitable source of data for pricing major medical pet
health insurance is the US. Pet Ownership & Demographics Sourcebook--2002
Edition (Sourcebook) published by the American Veterinary Medical
Association. Said Sourcebook is incorporated herein by reference.
The Sourcebook provides basic demographic data on pet ownership
and information on veterinary expenditures with principal emphasis
on dogs and cats.
[0048] A suitable method for estimating a premium for a major medical
pet health insurance policy comprises the steps of: [0049] identifying
a class of pets to be insured; [0050] estimating the distribution
of annual veterinary expenses for the average pet of the species
of said class of pet, said annual veterinary expenses optionally
occurring within a first geographic region, occurring to pet owners
in a first demographic category or occurring during a first time
period; [0051] optionally adjusting said distribution of annual
veterinary expenses to account for the extent to which said average
pets were covered by major medical health insurance policies; [0052]
adding the expected non-benefit related expenses to said distribution
of annual veterinary expenses that be incurred by a first insurance
company in order to provide said rider, said adding of said non-benefit
related expenses yielding a set of average premiums versus deductibles;
[0053] optionally adjusting said set of average premiums versus
deductibles to account for inflation from a point in time during
said first time period to a subsequent point in time, said adjusting
yielding a set of an inflation corrected premium; [0054] optionally
adjusting said set of inflation corrected premium to account for
the difference between a particular pet to be insured and said average
pet with respect to at least one of the age of said pet to be insured,
the size of said pet to be insured or the breed of said pet to be
insured, said optionally adjusting said set of inflation corrected
premiums yielding a set of actual premiums to be charged for said
particular pet to be insured; and [0055] optionally discounting
said set of actual premiums by an amount governed by the vaccination
frequency of said particular pet to be insured, said optionally
discounting said set of actual premiums yielding said set of required
premiums versus deductibles; and [0056] presenting said set of required
premiums versus deductibles to a potential customer of said rider
whereby at least one of said steps for calculating and presenting
said set of required premiums versus deductibles is performed at
least in part by technological means. Distribution of Annual Veterinary
Expenses
[0057] An exemplary estimated claim distribution table for veterinary
expenses for the class of pets of dogs, for the geographic region
of the United States, for the pet owner demographic category of
residents of the United States, and for the time period of the year
of 2001, can be derived from data provided in table 13 of page 95
of the Sourcebook. Table 13 provides survey data of dog health costs
for dogs in the United States in 2001. An exemplary estimated claim
distribution table derived from table 13 of the Sourcebook is shown
in Table 1. TABLE-US-00001 TABLE 1 Estimated Claim Distribution
Table (Dogs) - Per Dog Experience for year 2001 (5) (6) Accumu-
Accumu- (1) (3) (4) lated lated Range of Annual (2) Average Annual
Frequen- Annual Vet Charges Frequency Charge Cost cy Cost $0 25%
$0 $0.00 100% $178.40 $1-$49 12% $25 $3.00 75% $178.40 $50-$99 15%
$70 $10.50 63% $175.40 $100-$199 20% $140 $28.00 48% $164.90 $200-$499
20% $325 $65.00 28% $136.90 $500-$999 6% $700 $42.00 8% $71.90 $1,000-$15,000
2% $1,495 $29.90 2% $29.90
[0058] Table 1 is in the form of a "claims probability distribution"
or "claims continuance" table of the type typically used
to price indemnity type plans providing major medical benefits to
humans with deductibles. Similar tables can be generated for veterinary
charge data for particular geographic regions, demographic classes
of pet owners and time periods.
[0059] Column 1 (Range of Annual Vet Charges) shows ranges of annual
veterinary charges experienced by dogs in the US in 2001.
[0060] Column 2 (Frequency) shows the percent of all dogs in the
US in 2001 that have annual veterinary charges in a given range.
[0061] Column 3 (Average Charge) shows the estimated average annual
veterinary charges of the dogs in the US in 2001 with annual charges
in a given range.
[0062] Column 4 (Annual Cost) shows the product of columns 2 and
columns 3.
[0063] Column 5 (Accumulated Frequency) shows the percent of dogs
in the US in 2001 with annual charges in a given range or greater.
[0064] Column 6 (Accumulated Annual Cost) shows the total annual
veterinary charges of dogs in the US in 2001 with annual charges
in a given range or greater, said annual veterinary charges having
been divided by the total number of dogs to the give the charges
on a per dog basis.
[0065] For example, referring to the row of Table 1 labeled "$50-$99":
[0066] 15% of the dogs in the US in 2001 had annual veterinary charges
in the range of $50 to $99. [0067] This 15% of dogs had average
annual veterinary charges of $70. [0068] The product of 15% and
$70 is $10.50. [0069] 63% of all dogs had annual veterinary charges
of $50 or greater. [0070] The total annual veterinary charges on
a per dog basis for dogs with annual veterinary charges of $50 or
greater was $175.40. Adjusting claims Distribution for Coverage
by Major Medical Pet Heath Insurance
[0071] It is anticipated that the average annual veterinary charges
for dogs covered by major medical pet health insurance will be higher
than for the average dogs described in Table 1 since only a few
percent of dogs in the US were covered by any form of pet health
insurance in 2001.
[0072] Dog owners that have their dogs covered by major medical
pet health insurance will be more likely choose more expensive treatments
to prolong the lives of their dogs rather than euthanize their dogs
because they can't afford treatment. Table 2 illustrates a suitable
adjustment to the distribution of annual veterinary expenses to
account for the extent to which said average pets were covered by
major medical pet health insurance policies. Adjustment was made
to frequency (column 2) to account for this effect and then the
table was recalculated. TABLE-US-00002 TABLE 2 Expected Claim Distribution
Table (Dogs) - Per Dog Covered by Major Medical Heatlh Insurance
Experience for Year 2001 (5) (6) Accumu- Accumu- (1) (3) (4) lated
lated Range of (2) Average Annual Frequen- Annual Charges Frequency
Charge Cost cy Cost $0 25% $0 $0.00 100% $214.10 $1-$49 10% $25
$2.50 75% $214.10 $50-$99 14% $70 $9.80 65% $211.60 $100-$199 20%
$140 $28.00 51% $201.80 $200-$499 20% $325 $65.00 31% $173.80 $500-$999
7% $700 $49.00 11% $108.80 $1,000-$15,000 4% $1,495 $59.80 4% $59.80
[0073] The expected frequency of dogs with annual veterinary bills
in the range of $500-$900 has been increased from 6% in Table 1
to 7% in Table 2. The expected frequency of dogs with annual veterinary
bills in the range of $1,000-$15,000 has been increased from 2%
in Table 1 to 4% in Table 2. The frequencies of dogs in the lower
ranges have been adjusted down to keep the total frequency of all
dogs to 100%. This shift in frequency results in anticipated average
annual medical expenses for dogs with pet health insurance to be
$214.10 (row $0, column 6, Table 2) versus $178.40 (row $0, column
6, Table 1) for average dogs.
[0074] An appropriate shift in frequency of high annual medical
costs for pets of a given type due to the purchase of major medical
pet health insurance may be based on data on euthanasia rates for
average pets of said given type. One can expect that a certain percentage
of euthanasias will be deferred in favor of more expensive medical
treatment to prolong the life of the pet since said medical treatment
is now covered by said pet health insurance. Said percentage of
deferred euthanasias might be in the range of 20% to 70%. When an
insurance company wished to estimate an appropriate shift in frequency
of higher annual medical costs, therefore, they might assume that
said percentage of euthanasias of average pets will become higher
medical costs.
[0075] When an insurance company first prices said major medical
pet health insurance coverages, however, it would be prudent for
them to estimate that said percentage of deferred euthanasias is
100%. This would give them an extra margin of safety to cover future
claims. As said insurance company develops experience with their
policies, they might reduce said percentage without increasing their
financial risk.
[0076] For dogs, for example, data from the Sourcebook indicates
that between 2-3% of the veterinary visits by dog owning households
during the period 1991-2001 were for the purchase of euthanasia
services. If these dog owning households had major medical pet health
insurance, many of them might have chosen higher cost medical treatments
instead of euthanasia. A conservative estimate for the purpose of
projecting an upper limit to anticipated claims against said major
medical pet health insurance would be to assume that 100 percent
of all of the households would have chosen medical treatment as
opposed to euthanasia Hence the frequency of higher cost treatments
(e.g. $500-$999 and $1,000-$15,000) can be increased by 2-3% (i.e.
the percent of veterinary visits for euthanasia services) to estimate
the higher benefits costs for dog owners with major medical pet
health insurance.
Average Premiums versus Deductibles
[0077] The expected claim distribution table for dogs with major
medical pet health insurance (Table 2) can be used to estimate of
the relationship between expected claims against a major medical
pet health insurance policy and various deductible levels for dogs
covered by said policy. This is illustrated in Table 3.
[0078] Table 3 is the same as Table 2, but with columns 7 and 8
added. TABLE-US-00003 TABLE 3 Relationship Between Deductible and
Claims for Dogs Covered by Major Medical Pet Health Insurance Experience
Year 2001 (8) (1) (3) (4) (5) (6) Claims in Range of (2) Average
Annual Accumulated Accumulated (7) Excess of Charges Frequency Charge
Cost Frequency Annual Cost Deductible Deductible $0 25% $0 $0.00
100% $214.10 $0 $214.10 $1-$49 10% $25 $2.50 75% $214.10 $0 $214.10
$50-$99 14% $70 $9.80 65% $211.60 $50 $179.10 $100-$199 20% $140
$28.00 51% $201.80 $100 $150.80 $200-$499 20% $325 $65.00 31% $173.80
$200 $111.80 $500-$999 7% $700 $49.00 11% $108.80 $500 $53.80 $1,000-$15,000
4% $1,495 $59.80 4% $59.80 $1,000 $19.80
[0079] Column 7 (Deductible) shows the deductible for a major medical
pet health insurance policy. It is equal to the low limit of the
range of column 1.
[0080] Column 8 (claims in Excess of Deductible) shows the expected
claims against a major medical pet health insurance policy for policies
with a given deductible. Column 8 is the same as column 6 less the
Accumulated Frequency (Column 5) multiplied by the deductible. This
would represent the cost of claims paid in excess of the deductible.
[0081] For example, if a deductible were $1,000 per year, then
the expected claims against a major medical pet health insurance
policy would have an average of $19.80 per dog (row $1000-$15,000,
column 8, Table 3). The claim cost would be lower than the Accumulated
Annual Cost (column 6) because only the cost of claims in excess
of the $1,000 deductible would be paid as a benefit.
[0082] A suitable average premium versus deductible for a major
medical pet health insurance policy can be estimated from the data
in columns 7 and 8 of Table 3. The premium is equal to the expected
claims in excess of the deductible against a major medical pet health
insurance policy (column 8) plus a provision for expenses, such
as sales, administrative, claims processing, and profit, associated
with providing the pet health insurance policy. These other expenses
can be estimated by assuming that they are 40% of the premium. This
is the same as saying that the loss ratio is 60%.
[0083] A loss ratio of 60% is typical for insurance policies in
the property and casualty category. Loss ratios in the range of
50-70% might be considered reasonable. Loss ratios as low as 30%
or as high as 80% might be considered acceptable. Pets are regarded
as property in the United States, hence pet health insurance is
categorized as property and casualty insurance.
[0084] A suitable average premium for a given deductible, therefore,
for major medical pet health insurance would be the claims in excess
of the deductible (column 8, Table 3) divided by the loss ratio.
Table 4 shows suitable premiums versus deductibles for a major medical
pet health insurance policy covering dogs in the US in 2001. The
policy provides 100% coverage for annual veterinary expenses greater
than the deductible and less than $15,000. TABLE-US-00004 TABLE
4 for Dogs Covered by Major Medical Pet Health Insurance Experience
Year 2001 (1) (2) Deductible Annual Premium $0 $356.83 $50 $298.50
$100 $251.33 $200 $186.33 $500 $89.67 $1,000 $33.00
[0085] Column 1 (Deductible) is the annual deductible per dog.
The policy pays all approved pet health care costs in excess of
the deductible in a given policy year.
[0086] Column 2 (Annual Premium) is the annual premium that would
be charged to insure a dog in the US in 2001. The premium would
be due before the beginning of a given policy year.
[0087] The low premium relative to the maximum pet health care
cost possible makes the insurance attractively priced.
[0088] A low premium relative to the maximum possible annual pet
health care cost can be related to commonly purchased items, such
as "a lunch a month in a restaurant", thus indicating
to a potential consumer that the coverage is inexpensive. This will
help improve the mass marketing of the insurance.
[0089] A high upper limit of benefits (e.g. $15,000) relative to
the average annual health care costs of a pet helps promote the
utility of the insurance policy for covering major medical pet health
care costs.
[0090] Deductibles in the range of $500 to $1,000 also help promote
the utility of reduced need for economic euthanasia Surveys have
indicated that 30% of pet owners would euthanize their pet if the
medical costs exceeded $1,000. Hence, by providing low cost major
medical coverage for pets that cover expenses of $500 or greater,
pet owners would be less inclined to euthanize their pets due to
high medical expenses.
Inflation of Premiums
[0091] The average premiums versus deductibles charged for major
medical pet health insurance can be adjusted for inflation of average
pet health care costs to yield a set of inflation corrected premiums
versus deductibles.
[0092] A reasonable inflation factor for dog veterinary expenses
for the United States as of 2001 is about 7% per year. This inflation
factor is based on the growth in average veterinary expenses for
dogs per household from $131.80 to $186.80 to $261.30 for the years
1991 1996 and 2001 respectively. Inflation factors for other time
periods can be similarly estimated.
[0093] An annual premium for 2006, for example, can be estimated
from the premium schedule for 2001 as shown in Table 4. A premium
suitable for 2001 would be by multiplied by a 5 year (2001 to 2006)
inflation factor, such as (1.07.sup.5) or 1.40255. If a premium
suitable for 2001 for a $500 deductible were $89.67 (row $500, column
2, Table 4), the corresponding premium for 2006 would be (1.4*$89.67)
or $125.77.
Level Premiums
[0094] Major medical pet health insurance may be offered with a
level premium for a given period of time. A suitable level premium
for a given period may be estimated using an inflation factor for
1/2 the period of the level premium. If a level premium were to
be offered for a period of four years, for example, then the premium
would be adjusted for two years of inflation. If a policy had an
annual premium of $89.67 per year at the beginning of a time period
and the inflation factor were 7% per year, then a suitable annual
level premium for four years would be (1.07.sup.2*$89.67) or $102.66
per year.
[0095] The premium charged for a period of level premium may also
take into account the anticipated growth in pet health expenses
due to the aging of the pet. The anticipated growth in pet health
expenses due to the aging of a pet in discussed in more detail below.
Premium Adjustments for Size and Age of Pets
[0096] A set of inflation corrected premiums versus deductibles
can be adjusted for at least one of the age, size or breed of a
particular pet to give a set of actual premiums to be charged for
said particular pet. The premiums for major medical pet health insurance
can be adjusted based on the size and age of a pet at the time the
pet health insurance policy is issued. Older and larger dogs tend
to have higher annual health care costs. Table 5 below shows how
premiums can be adjusted for dogs of a given size and age at issue.
The methods described below for dogs can be similarly applied to
other species of pets. TABLE-US-00005 TABLE 5 Annual Premiums for
Different Age and Size Dogs Puppy Young Adult Middle Age Old Very
Old <2 years 2-5 years 6-8 years 9-10 years >10 years 0.9
age factor 1 age factor 1.2 age factor 1.5 age factor 2.5 age factor
Small 0.8 size factor $64.56 $71.73 $86.08 $107.60 $179.33 <25
lbs Medium 1 size factor $80.70 $89.67 $107.60 $134.50 $224.17 25-50
lbs Large 1.2 size factor $96.84 $107.60 $129.12 $161.40 $269.00
>50 lbs
[0097] The columns "Puppy", "Young Adult",
"Middle Age", "Old" and "Very Old"
refer to dogs in the age ranges of <2, 2-5, 68, 9-10, and >10
years respectively.
[0098] The rows "Small", "Medium", and "Large",
refer to the dogs in the weight ranges of <25 lbs, 25-50 lbs,
and >50 lbs respectively.
[0099] Premiums for dogs in a given age range may be calculated
using an appropriate "age factor". The age factors for
"Puppy", "Young Adult", "Middle Age",
"Old" and "Very Old" are 0.9, 1, 1.2, 1.5 and
2.5 respectively. These are shown below the column titles in Table
5. To calculate an appropriate annual premium for a given dog in
a given age range, the estimated premium for an average dog (e.g.
premiums of Table 4, $500 deductible) are multiplied by the age
factor of the dog being insured.
[0100] Premiums for dogs in a given size range would be calculated
using an appropriate "size factor". The size factors for
"Small", "Medium", and "Large", are
0.8, 1, and 1.2 respectively. These are shown to the right of the
row titles in Table 5. To calculate an appropriate annual premium
for a given dog in a given size range, the estimated premium for
an average dog (e.g. premiums of Table 4, $500 deductible) are multiplied
by the size factor of the dog being insured.
[0101] A person skilled in the art will understand that the particular
groupings of age and size can be modified for different ranges of
ages and sizes. Also, there may be interactions between size and
age that would lead to the use of combined size--age factors. Large
dogs, for example might age more rapidly that small dogs and combined
size--age factors could take this into account.
[0102] Similarly, there may be special factors to be used for individual
breeds of dogs. A person skilled in the art will recognize that
breed may be a characteristic used in place of size or in addition
to size. A large purebred dog, for example, might age at a different
rate than a large mixed breed dog. Similarly, two similarly sized
breeds of dogs may also age at different rates or suffer different
health problems. Similar considerations would apply to other species
of pets, such as cats.
Vaccination Frequency
[0103] The premium for a conventional pet health insurance policy
or the inventive major medical pet health insurance policy disclosed
herein may be reduced if the frequency of rabies vaccinations and
other vaccinations is reduced to the minimum required to both satisfy
legal requirements governing a pet and comply with the recommendations
of veterinarian professional organizations or veterinarian school
protocols. If a set of actual premiums versus deductibles is adjusted,
it yields a set of required premiums.
[0104] A common frequency for vaccination of cats and dogs against
rabies in the United States has been once per year. This is a higher
frequency than what is required to protect a cat or dog from disease
and safeguard public health. Different jurisdictions within the
United States, therefore, allow for less frequent vaccinations.
The State of Colorado, for example, allows for a rate of vaccination
for rabies of once every three years or less frequently with approval
of a veterinarian as allowed by law. Many types of pet vaccinations
are given at a greater frequency than what is required to provide
adequate duration of immunity as reflected in studies done by the
American Animal Hospital Association. Adverse reaction which can
impair the health of companion animals is noted from over-vaccination
and vaccinations that combine a number of different vaccines.
[0105] Adverse reaction rates within 45 days of vaccination can
be in the range of 7% to 12% of treated animals. A lower frequency
of vaccination will expose a companion animal to fewer opportunities
of adverse health reactions due to vaccinations.
[0106] These adverse reactions might include autoimmune hemolytic
disease. Medical treatment for autoimmune hemolytic can be in the
range of $3,000 to $15,000. Despite this treatment, autoimmune hemolytic
can be 70% fatal.
[0107] Hence, by reducing vaccination rate to the minimum allowed
by law but still greater than what is required to safeguard pet
and public health, the anticipated average health care costs and,
in particular, major medical health care costs of a pet can be reduced.
Hence reduced premiums or increased coverage can be offered for
pets that have their vaccination frequency reduced from once per
year to once per three years or lower frequency.
[0108] Reduced premiums for a preferred vaccination frequency can
be offered for pet health insurance policies irrespective of whether
or not the policies are major medical policies as described herein
or not. Similarly, reduced premiums can be offered irrespective
of whether or not pet health insurance is offered as a rider to
a first insurance policy as describe herein.
[0109] A suitable discount for optimized vaccination frequency
for a major medical pet health insurance policy is in the range
of 5%-15%.
Presenting Premiums
[0110] A set of required premiums versus deductibles can be presented
to a potential purchaser of a major medical pet health insurance
rider by paper means, phone means or web means, such as a web page.
A web page of premiums may be presented after an potential purchaser
has input information necessary to determine the appropriate premiums.
An example is presented in Example 1.
Computer Implementation
[0111] The calculations of the premiums for a first insurance policy,
rider or combination of both may be performed on a general purpose
computer, electronic calculator, or other calculating device.
[0112] A multiplicity of riders may be administered using a general
purpose computer running appropriate software. The general purpose
computer, for example, would process and track claims and premium
payments.
[0113] A general purpose computer or other computing means may
be used to perform underwriting calculations.
[0114] An information system comprising computers, telecommunications
equipment, printers and monitors may be used to offer the rider
to the market place.
[0115] A web site may be set up to present sales information to
the general public. Portions of the web site may also be available
to select people, such as policyowners of a first insurance policy.
The web site may be configured to accept input information from
a user and provide calculated results to the user. The calculated
results may be a quote for a premium.
[0116] The web site may be set up to accept payment from a user
for purchasing a rider. The web site may provide confirmation to
the user for said purchase.
[0117] The rider may be elicited via advertising, direct response,
agent solicitations on existing policies or combinations thereof.
The rider may be sufficiently attractive to incent current policy
holders to switch coverage from their current insurance company
to the company offering it the rider.
[0118] A claims adjudication system may be set up with one or more
providers of health care services to a pet. The providers may include
veterinarians as well as alternative heath care providers under
the supervision of a veterinarian. Alternative health care providers
may comprise acupuncturists, homeopaths, osteopaths, massage therapists
or other providers covered by the rider.
[0119] The health care providers would submit claims to the claims
adjudication system and the system would provide appropriate payment
to the providers, receipts to the providers and receipts to the
insured.
[0120] Information obtained from claims processing may be used
to influence laws in such a way as to increase companion animal
health and longevity, thereby lowering risk factors and claim frequency.
[0121] An insurance ID card may be issued to the owner on behalf
of the covered pet. The insurance ID card may be made at least in
part from plastic. The insurance ID card may comprise an identifying
number for the policy of the insured pet. The insurance ID card
may comprise a magnetic strip or other data recording device to
record information regarding the rider.
EXAMPLE 1
[0122] A homeowner has a first insurance policy in force to cover
losses to their home. The first insurance policy is provided by
a first insurance company. The coverage for the policy is $250,000.
The annual premium for the policy is $1,000. The expected rate of
claims for the policy is $600 per year. The expected rate of claims
is fairly constant over the next 10 years.
[0123] If the homeowner wishes to switch to a second insurance
company for similar coverage, the monetary switching cost would
be $100 for incidental expenses (e.g. postage, phone calls, driving,
etc.) less any savings in premium. The non-monetary switching cost
would be 20 hours of personal time spent on, for example, researching
alternative rates from other insurance companies, filing out forms,
and making a decision.
[0124] The first insurance company offers to sell pet health insurance
riders their homeowner insurance customers including said homeowner.
The rider will be available only if the customers have a homeowner's
policy in force with said first insurance company. The rider will
only be in force if said customers remain as customers of said first
insurance company.
[0125] The rider is offered in a mailing. The mailing is produced
by computer controlled mailing system using computer stored data
on said homeowner insurance customers. The mailing directs customers
interested in the rider to either sign up on a web site, call an
automated answering system or fill in and mail an application form
to said first insurance company. The application form comprises
computer readable printing, such as a bar code, so that the application
forms can be automatically processed at least in part by a machine.
[0126] The insurance company offers a one-time discount of $50
for the homeowner's insurance premium for those that purchase the
pet health insurance rider. The discount will be paid for by the
anticipated reduced lapse rate for homeowners that purchase the
rider.
[0127] Upon receipt of said offers to sell said riders, one or
more of said homeowner insurance customers, including said homeowner,
who had planned on lapsing said homeowner policies decide against
said lapsing in anticipation of one day owning a pet and purchasing
said rider. As a consequence, said first insurance company notices
that their lapse rate has decreased upon making said offer to sell
said riders, even before any of said riders are actually sold.
[0128] Said homeowner subsequently does acquire a dog and purchases
said rider to said first insurance policy to cover the future major
medical costs of the dog. The rider has a deductible of $1,000 per
year and a lifetime cap of $15,000 for the dog. The policy pays
100% of the medical costs incurred by the dog that are in excess
of the deductible in any given year. The rider is guaranteed to
remain in force as long as the premiums for the rider are paid,
even if the dog develops a chronic health problem that would make
it otherwise uninsurable.
[0129] Prior to issuing health coverage under the rider, the dog
is underwritten. The underwriting process comprises filling out
a questionnaire. The questionnaire asks questions about the species,
breed, and age of the pet. It also asks about specific preexisting
conditions. The rider informs potential insureds that said rider
will not be in force if the answers to the questionnaire are not
truthful.
[0130] A web page is provided with the questionnaire. Potential
insureds can fill out the questionnaire on line. The answers are
used by a computer hosting the web site (or other suitable computer)
to determine eligibility and premium for the potential insured.
The web page may provide sequential questions whose answers determine
on or more subsequent questions to be answered.
[0131] The potential insured may provide through the web site payment
of a premium by automatic means, such as providing a credit card
number. A rider then is purchased an in force.
[0132] The homeowner pays a level premium for the rider of $144
per year. The expected period of the level premium is 12 years.
This premium includes a $10 per year discount (reflected in the
$144 premium) for vaccinating the dog at a rate of no more than
once every three years provided said rate is in compliance with
laws governing the dog.
[0133] The rider is contingent upon the homeowner maintaining the
first insurance policy in force or by replacing it with an allowed
alternative policy offered by the same insurance company or other
allowed insurance company. A description of allowed alternative
insurance policies and allowed insurance companies is provided in
the written contract of the rider. A list is also available on a
web site. The list posted on the web is periodically updated. Updated
lists are also mailed to insureds who have purchased riders.
[0134] As soon as the rider is in force, the monetary cost of switching
insurance companies for the homeowner's coverage has increased.
This increase is due, in part, to the probability that the dog has
developed a chronic medical condition while the rider was in force
that would make the dog uninsurable should the rider lapse.
[0135] 8 years after the rider was first in force, the homeowner
has paid $1152 in premiums for the rider but has not exceeded the
deductible in any given year.
[0136] During year 8 of the rider, however, the dog develops a
chronic health problem. The anticipated health care costs of the
dog are now $4,000 per year. The life expectancy of the dog is three
years with health care treatment. The dog would have to be euthanized
if it did not get health care treatment. If the rider should lapse,
the dog would be uninsurable due to anticipated cost of treating
the chronic health problem.
[0137] The dog is beloved by the owner and the owner elects to
continue medical treatment to extend the life of the dog rather
than euthanize it. The owner can afford to pay the $1,000 per year
deductible and the $144 per year premium to keep the ride in force.
The owner cannot afford to pay the $4,000 per year total medical
expenses should the rider lapse.
[0138] Said first insurance company pays the $3,000 per year in
medical expenses that exceed the deductible in compliance with the
terms of the rider.
[0139] Also in year 8 of the rider, the homeowner decides to move
to a new house and must decide whether or not to maintain homeowner's
insurance with said first insurance company.
[0140] If the homeowner insures the new house with an allowed insurance
policy or allowed insurance company per the terms of the rider,
then the rider remains in force and the pet health insurance remains
in force.
[0141] If the homeowner insures the house with a non-allowed insurance
policy, such as that provided by a second insurance company that
is not on the list of approved insurance companies as specified
in the rider contract, then the rider would lapse and the major
medical coverage for the dog would terminate.
[0142] The monetary switching costs for changing insurance companies
at this time have increased to at least $8,568. These costs include
the anticipated benefits payments of $3,000 per year for the three
year life expectancy of the dog under the rider less the $144 per
year premium payment required to kept the rider in force. The homeowner
cannot get similar pet health insurance coverage from another insurance
company since the dog now has a chronic condition and is uninsurable.
[0143] The non-monetary switching costs have increased by the emotional
distress that the homeowner would experience by having to make the
difficult decision of whether or not to euthanize their dog due
to the unaffordable expense of treating its chronic condition.
[0144] The homeowner elects to maintain coverage from their existing
homeowner insurance provider and thus maintains the rider in force.
[0145] The homeowner subsequently submits a claim to the first
insurance company for the costs of treating their dog. The insurance
company obtains verification from the veterinarian providing the
health care services for the nature, timing and cost of providing
the services. The insurance company then pays the benefit appropriate
to the claim.
Example 2
[0146] An insurance company offers the pet health insurance rider
of Example 1 to their homeowner insurance customers. The rider is
offered in a mailing. The mailing is produced by computer controlled
mailing system using homeowner insurance customer data. The mailing
directs customers interested in the policy to either sign up on
a web site, call an automated answering system or fill in and mail
an application form to the insurance company. The application form
comprises computer readable printing, such as a bar code, so that
the application forms can be automatically processed at least in
part by a machine.
[0147] The insurance company offers a one-time discount of $50
for the homeowner's insurance premium for those that purchase the
pet health insurance rider. The discount will be paid for by the
anticipated reduced lapse rate for homeowners that purchase the
rider.
[0148] The insurance company sells 100,000 riders to their customers.
They find that the lapse rate for those that purchase the rider
decreases from 5% per year to 2% per year. The average sales cost
to replace lapsed policies is $900 per lapsed policy. Hence the
insurance company reduces its average cost per all policies owned
by those that purchase riders by $27 per year. This provides a payback
on said initial $50 discount of less than two years.
Insurance Regulation
[0149] One of skill in the art will recognize that insurance is
a regulated industry. One practicing the methods described and claimed
herein will want to maintain compliance with all applicable local,
state and federal regulations, to ensure that the insurance policy
is properly presented to the insured, premiums are properly approved,
underwriting properly occurs, all necessary regulatory approvals
are in place, etc.
[0150] While particular embodiments of the present invention have
been illustrated and described, it would be obvious to those skilled
in the art that various other changes and modifications can be made
without departing from the spirit and scope of the invention. Any
of the aspects of the invention of the present invention found to
offer advantages over the state of the art may be used separately
or in any suitable combination to achieve some or all of the benefits
of the invention disclosed herein.
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