Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Pet Insurance Market
Transcript
- Lucas: So here's a number I think a lot of people don't have on their radar. Over the last two years, pet insurance premiums in the US have gone up by about 23 percent. That is roughly double the overall rate of inflation we've seen in that span. Luna: Twenty-three percent — wow. And I'm guessing that's not just because vets are charging more, though I'm sure that's part of it. Lucas: Right, that's exactly where I want to dig in. Because the conventional story about pet insurance is that it's a small but growing market, mostly driven by younger pet owners who treat their animals like family. And that's still true. But what's happening now is that stagflation — this combination of high inflation and slow growth we've been living with — is reshaping how insurers price risk and how pet owners choose coverage. Luna: Well, and you have to wonder: if people's budgets are getting squeezed, do they drop the pet insurance? Or do they keep it because a big vet bill could be a financial disaster? Lucas: Exactly. And the data suggests a mixed picture. On one hand, the total number of insured pets has kept growing — it's up about 15 percent year-over-year as of the first quarter of 2026. So demand isn't collapsing. But what is changing is the type of policy people buy. More pet owners are opting for accident-only plans, which are cheaper, rather than the comprehensive accident and illness plans that were the norm. Luna: That makes sense. You're hedging against the catastrophic expense, not trying to cover routine care. Which, in a way, is a more rational economic decision if your income isn't keeping up with inflation. Lucas: Right. And the insurers are responding in kind. Some of the larger carriers have introduced tiered plans where you can add on wellness coverage as a separate rider. So you can get a base plan for, say, thirty dollars a month that covers accidents, and then add a wellness package for another fifteen that covers vaccinations and checkups. It's a way of unbundling the product to keep the entry price low while still capturing revenue from people who want full coverage. Luna: Are we seeing any insurers pulling back from certain markets? Like, are they deciding that some states are just too expensive to underwrite in? Lucas: A few. I've seen reports of two regional carriers pausing new policies in California and Florida, where veterinary costs have spiked the most. In Florida, for example, the average vet visit is up something like 30 percent since 2023. And when claims costs rise that fast, premiums have to follow. But if premiums get too high, you start losing the healthy pet owners who keep the risk pool balanced. That's the stagflation trap for insurers. Luna: So you get adverse selection — only the people with sick pets keep insurance, which drives up claims, which drives up premiums further. That's a death spiral if it's not managed carefully. Lucas: Precisely. And that brings us to the broader economic angle. We've got the consumer price index at 334 as of May, with core CPI still above 336. So inflation is sticky. Meanwhile, real GDP growth annualized came in at 2.1 percent for the first quarter, which is actually okay, but the labor force participation rate just hit a fifty-year low outside of the Covid era. That's a sign that people are dropping out of the workforce, which puts pressure on household incomes. Luna: And pet insurance is a discretionary expense. So even though people love their pets, when the budget gets tight, something has to give. The question is whether the industry can pivot fast enough to keep the market growing. Lucas: Well, and there's another layer. The ten-year breakeven inflation rate is currently 2.24 percent, which is up from 2.23 last week. So the bond market is pricing in that inflation stays above the Fed's target for the next decade. That means insurers have to assume their costs will keep rising at a similar pace. They can't underwrite based on a hope that inflation will magically drop back to two percent. Luna: That's a really good point. Because pet insurance is an annual contract, so you have to re-price every year based on the latest trend. Unlike, say, life insurance where you lock in a rate for decades. So this is an industry that's constantly repricing risk. Lucas: And the underlying cost drivers are not all inflation. Some of it is technology — veterinary medicine has become more advanced, with MRIs, chemotherapy, and orthopedic surgeries that cost thousands of dollars. That's great for pets, but it raises the loss severity for insurers. So we have a structural trend of rising vet costs layered on top of cyclical inflation. Luna: So the premium increases we're seeing — is that mostly from inflation or from the tech-driven cost curve? Lucas: I'd say it's a split. The 23 percent over two years probably breaks down as maybe 12 to 14 points from general inflation in vet services and wages, and the rest from the increased utilization of expensive procedures. Insurers have to price for both. And what's interesting is that claims frequency has actually been pretty stable — around 18 to 20 percent of insured pets file a claim each year. It's the severity that's been climbing. Luna: That's actually a relief for the industry in one sense — if frequency were spiking, you'd have a much harder time managing the loss ratio. But severity is something you can adjust for with higher deductibles or co-pays. Lucas: Yeah, and we've seen that. The average deductible on new policies has crept up from two hundred fifty dollars to three hundred fifty dollars over the past year. And co-pays are shifting from 90 percent reimbursement to 80 percent. Little tweaks that add up. Luna: Let me ask — are there any pet insurance companies that are actually thriving in this environment? Or is everyone just struggling to keep margins? Lucas: I think 'thriving' is a strong word, but some are doing better than others. The larger, well-capitalized players like Trupanion and Nationwide have the data and scale to price more accurately. They've also invested in direct to consumer marketing and streamlined claims processing with AI, which helps keep administrative costs down. Smaller insurers are getting squeezed more because they can't spread their fixed costs as well. Luna: And what about the pet owners themselves? Are we seeing any shift in the demographics of who buys pet insurance? Lucas: A bit. It's still heavily skewed toward millennials and Gen Z, who are more likely to see pets as family members. But older pet owners, particularly those on fixed incomes, are increasingly opting out. The AARP even did a survey last year showing that 40 percent of pet owners over 65 said they would not be able to cover a five-hundred-dollar vet bill out of pocket. So there's a real access gap emerging. Luna: That's actually a pretty big deal. If you're on a fixed income and your cat needs a thousand-dollar surgery, you either have insurance or you're making a tough choice. And as premiums rise, that option becomes less available. Lucas: Speaking of tough choices — and this is a bit of a pivot, but it's related to how we fund the kind of deep-dive research that goes into episodes like this. We keep the show ad-free and listener-supported, and a small group of our audience chips in each month through buy me a coffee dot com slash fexingo. That support is literally what covers the costs of producing these episodes. Lucas: Exactly. It's a small thing that makes a big difference. Alright — back to pet insurance. One other trend I want to get into is the rise of employer-sponsored pet insurance as a voluntary benefit. Luna: Oh, that's interesting. So companies are starting to offer it alongside dental and vision? Lucas: Yes. According to the Society for Human Resource Management, about 12 percent of US employers now offer pet insurance as a voluntary benefit, up from 8 percent in 2023. And in a tight labor market, even with a 4.2 percent unemployment rate, employers are looking for low-cost perks that differentiate them. Pet insurance fits because it costs the employer almost nothing to offer — the employee pays the full premium through payroll deduction. Luna: So that's a win-win. The employee gets a group rate — which is usually lower than individual — and the employer gets a benefit that makes them look pet-friendly. And the insurer gets a steady stream of new customers. Lucas: Right. And group plans tend to have better retention rates, which helps insurers with their loss ratios. So I think that channel is going to become more important, especially if the economy stays sluggish and employers keep looking for low-cost retention tools. Luna: What about the regulatory environment? Are state insurance commissioners getting involved in pet insurance pricing the way they have with health insurance? Lucas: Not yet, but there's been some movement. The National Association of Insurance Commissioners adopted a model law for pet insurance back in 2020, and about half the states have implemented some version. The main provisions are around transparency — requiring insurers to clearly disclose what's covered, what's excluded, and how premiums can change. But there's no rate regulation like you see with health insurance. So insurers can raise prices at renewal as long as they give notice. Luna: So in theory, prices could keep climbing until the market hits a demand ceiling. Do we know where that ceiling might be? Lucas: We don't have a hard number, but some industry analysts estimate that the average monthly premium for a comprehensive policy is now around fifty-five dollars for a dog, thirty dollars for a cat. If that goes much higher, we could see penetration rates plateau. Right now, only about 5 percent of US pets are insured, compared to 25 percent in the UK. So there's room, but it's not infinite. Luna: And in a stagflation environment, that ceiling might be lower than we'd expect. Because people are already feeling the pinch on groceries and rent. Lucas: Exactly. And that's why the product innovation I mentioned earlier — the unbundling, the tiered plans — is so critical. If insurers can keep an entry-level product at, say, twenty dollars a month, they can keep the market growing even as the economy stays sluggish. The risk is that the low-end plans don't provide enough value, and people feel like they're wasting money if they never use it. Luna: So there's a marketing challenge too. How do you convince a healthy pet owner that paying twenty bucks a month for accident-only is worth it, when they might never have an accident? Lucas: That's the perennial insurance problem. But I think the industry has done a decent job framing it as budgeting for the unexpected rather than avoiding risk. And the fact that vet costs are so high works in their favor — a single emergency can cost three thousand dollars, which is ten years of premiums. Luna: So the math works if you have a bad event, but it's a loss leader if you don't. That's insurance in a nutshell. Lucas: Right. And that's why the industry is so dependent on keeping a large, diverse risk pool. The more healthy pets you have paying premiums, the more you can cover the claims of the sick ones. Stagflation threatens that because it pushes healthy pet owners to drop coverage, leaving a smaller, sicker pool. Luna: So it's a bit of a precarious moment for pet insurers. They have to raise premiums to keep up with costs, but if they raise too much, they lose the healthy customers they need to keep premiums affordable. Lucas: Exactly. And that balancing act is playing out right now. The next twelve months will tell us whether the industry can keep growing or whether we see a contraction. It's one of those quiet stories that doesn't make the front page, but it affects millions of households. Luna: Well, and I think our listeners probably have pets, or know people who do. So it's directly relevant. Any final thought on where you see this going? Lucas: I think we'll see more consolidation. Smaller insurers will get bought by larger ones that have better data and pricing models. And I think the employer channel will become the main growth engine. If you're a pet owner, the best advice I can give is to get a quote now, because premiums are only going one direction in the near term. Luna: Up. That's the direction. Alright, thanks for the deep dive, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.