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2.8 Risk Management

Tara Harmon, APR

The Cincinnati Insurance Companies, Fairfield, OH, USA

BASICS

2.8.1 Summary

With pet ownership comes risk that the pet may require substantial healthcare services and at considerable expense. Each pet owner manages this risk differently. Pet health insurance is one of the most common ways in which pet owners mitigate pet health risk.

2.8.2 Terms Defined

Deductible: The amount of financial loss an individual agrees to pay before insurance coverage applies.

Fixed Cost: A consistent and predetermined cost.

Insurance Policy: A legal contract between an individual and an insurance company. The insurance company agrees to pay for claims in exchange for payment of premium.

Premium: Amount paid to an insurance company in exchange for insurance coverage.

Risk‐Averse: Less likely to take risks.

Variable Cost: A fluctuating cost.

MAIN CONCEPTS

2.8.3 How Risk Management is Defined

Risk is the possibility of a negative consequence such as damage, injury, or loss. Risk management describes how risk is managed. Every pet owner faces financial risk due to unforeseen pet healthcare expenses. A pet that becomes ill may require repeat veterinary visits, expensive medications, and even surgery.

2.8.4 Risk Management Methods

The ways in which individuals manage risk typically fall into one of four categories: avoidance, mitigation, transfer, and acceptance.

Risk avoidance is the elimination of an exposure that has the potential to result in a negative outcome. An animal lover may decide not to acquire a pet to avert the financial strain of an unforeseen veterinary bill. Whether the decision not to own a pet is driven by the lack of financial means or simply to avoid unforeseen pet healthcare bills, this is considered avoidance.

Risk mitigation is an activity that may lessen the chance of a negative outcome associated with a particular risk. A pet owner may decide to feed their pet a more nutritious food, ensure regular exercise, and attend regular veterinary check‐ups. While these actions typically lower the chances of a pet becoming ill, they do not guarantee that a pet will remain healthy. Risk mitigation is the most common risk management tool that pet owners utilize on a regular basis.

Risk transfer is when one party transfers risk to another party. The most common example of this is insurance. An individual pays a premium to transfer their risk to an insurance company. Pet owners can transfer the unforeseen risk of a sick pet generating a large veterinary bill by purchasing an insurance policy for their pet (see 10.16 Pet Health Insurance). There are differing levels of risk transfer demonstrated through policy level and deductible selected. Different levels of pet health insurance can be purchased, which represents the total amount of financial coverage for pet medical bills for one year. A deductible is also chosen, which is the amount of financial risk retained by the individual purchasing the policy. An individual who purchases a larger policy limit or a lower deductible is more risk‐averse while someone purchasing a lower policy limit or higher deductible is more risk‐tolerant.

Risk acceptance is the lack of action to manage a potentially negative outcome. Being unmindful of a pet's diet or regularly skipping annual healthcare visits may indicate the acceptance of pet healthcare risk. The owner may believe the chance of illness is low, so they are willing to chance high veterinary bills and out‐of‐pocket expenses. Or they may have already decided to euthanize a pet that becomes ill instead of spending money on care and medication. Risk acceptance is presumably the goal of those who own pets but decide not to take them to the veterinary hospital for care. Even in advanced economies, a significant proportion of pet owners may elect to forego veterinary care for their pets – their way of avoiding the expenditures associated with such care. Some of this may be attributable to the lack of resources of certain individuals, but in other situations a conscious decision is being made not to prioritize spending on pet care.

2.8.5 Why Some People are More Risk‐Averse than Others

Studies show that the vast majority of people are averse to risk. When given a choice between avoiding negative risk or choosing positive risk, most individuals choose to avoid negative risk. This is explained through the Prospect Theory which was developed by behavioral economists Amos Tversky and Daniel Kahneman. This theory explains that most people perceive the pain of loss as more severe than the benefit of an equally uncertain gain.

This theory supports why most individuals decide to purchase insurance. For example, pet health insurance has been a more commonly purchased insurance product in Scandinavia, Germany, the United Kingdom, and Australia. The United States trails significantly, but is expected to increase due to heightened pet healthcare costs and increased awareness [1].

2.8.6 The True Risk for Pet Owners

Most pet owners do not understand or plan for the true financial risk that comes along with being a pet owner. The average pet owner may budget for fixed costs such as food, grooming, and training but not for variable costs such as medical bills or prescriptions. In fact, the average pet owner plans on spending a few thousand dollars over the lifespan of a dog or cat while in reality they may spend over $20 000 [1].

Some pets are more expensive to own than others. Age, breed, and lifestyle affect the expense of an animal over its lifetime. Adopting an older pet tends to be most costly per year due to increased chances of physical and mental deterioration that come with age. Some breeds are more likely to inherit certain diseases or become affected by certain healthcare problems. Also, a sedentary animal is proven to have more medical issues tied to obesity than those that are exercised regularly.

The best way to be fully prepared for the true financial risk of pet ownership is to transfer the risk to an insurance company by purchasing pet health insurance (see 10.16 Pet Health Insurance). The cost of pet health insurance is minimal in comparison to the potential cost of unexpected medical bills.

EXAMPLES

Mr and Mrs Schmidt adopt a 3‐week‐old beagle, Daisy, from the local shelter. Because they are retired and on a fixed income, they decide to purchase a pet health insurance policy for the new addition to their family. Three years later while the Schmidts are running errands, Daisy eats a chicken bone out of the kitchen trash. The surgery to remove the bone costs thousands of dollars, but because they purchased pet health insurance, they only have to pay the deductible and co‐pay. Mr and Mrs Schmidt are risk‐averse and transferred the risk of a high pet healthcare expense to the insurance company Daisy is insured through.

The Harvey family purchase a golden retriever from a neighbor who just put a litter up for sale. They decide to neuter the puppy to prevent potential health and behavioral issues that some unneutered pets face. While neutering the new puppy does not guarantee that it will avoid all health issues, it lowers the chances of loss for at least some of them. This is an example of risk mitigation.

TAKE‐AWAYS

With pet ownership comes risk of a pet that could generate considerable healthcare bills.

Pet owners manage this financial risk in different ways.

The ways in which individuals manage risk typically fall into one of four categories: avoidance, mitigation, transfer, and acceptance.

Studies show that the vast majority of people are averse to risk.

Most people transfer risk through purchase of an insurance policy.

MISCELLANEOUS

2.8.7 Cautions

Each individual has their own risk tolerance which may not align exactly with one of the four categories outlined above.

Reference

1 1 Money's best friend: Growth in the number of insured pets will boost industry demand. IIBISWorld Industry Report OD4612 Pet Insurance in the US. May 2018. https://trupanion.com/‐/media/trupanion/files/linked‐‐pdfs/2018‐‐pet‐‐insurance‐‐industry‐‐report.pdf?la=en‐ca&hash=48CC05DADE2E02029BAAC5C99A1869099760BCC7