As luxury pet hotels spring up across the land and talking dogs on TV advertise everything from tacos to used cars, it's obvious that America's love of animals has reached a fever pitch.

It may come as no surprise then, that U.S. consumers will spend an estimated $38.4 billion on their pets in 2006, according to the American Pet Products Manufacturers Association. But while designer collars and doggie day-care are all the rage, the majority of pet-related spending is for health care, an area that is becoming broader and more expensive as the health equipment and technology traditionally used for humans is extended to animals.

For example, just a few years ago a diagnosis of cancer was a death sentence for a dog or cat. Now, radiation and chemotherapy are available and routinely prescribed. A veterinary hospital in Pennsylvania even specializes in cat kidney transplants, for which there is a waiting list, even though the procedure costs more than $7,000.

Yet even as pet mortality has improved–thanks to better health care and leash laws–their odds of contracting a serious illness in their elder years have increased. Today's pet owners are likely to face the heartbreaking financial choice between expensive pet care, prolonged untreated illness and euthanizing their best friends (a financial quandary known as economic euthanasia). As more pet owners experience the reality of this type of decision, they will be more interested in the potential benefits of pet insurance.

In 2005, $8.5 billion was spent on veterinary care in the U.S., and that figure is estimated to hit $9.4 billion in 2006. More than 60 percent of U.S. households own a pet, with half of those households owning more than one pet. According to the Humane Society of the United States, there are 142 million pet dogs and cats in the US. Dogs and cats are considered part of the family by more than 90 percent of owners. All of this adds up to a potentially significant market in this country.

But that market opportunity is relatively unrealized so far. The APPMA reports that only 3 percent of dogs and 1 percent of cats are covered by pet insurance. Still, pet insurance in the U.S. is growing at about 30 percent per year; less than 1 percent of cats and dogs were covered as recently as 2000.

Pet insurance may only seem like a passing fancy, but the development of a pet insurance market in Europe proves otherwise. In the U.K., 25 percent of dogs and 5 percent of cats have health insurance. In Sweden, nearly 50 percent of pet owners have insurance for their pets. Allianz, owner of PetPlan, has about 800,000 pet insurance policies in the U.K.

One market research firm predicts that pet insurance gross written premiums–$160 million in 2005–will increase 23 percent, to almost $200 million in 2006 and to more than $650 million in annual sales by 2007.

Who is covered? Primarily dogs; next is cats, followed by companion horses, then other pets including mammals, birds, reptiles and exotic species.

Some marketing organizations see shortcomings in the currently available pet health insurance products and are designing their own product packages, searching for insurance companies to underwrite the business. Since there are only a handful of pet insurers in the U.S., marketing organizations sometimes go to the U.K. and elsewhere to find carriers.

Strategic alliances are often formed with companies, organizations and associations, such as Petco and other pet stores; the American Society for Prevention of Cruelty to Animals; the American Kennel Club; and Petfinder.com, the premier online database of adoptable pets from shelters and rescue groups nationwide.

Product packages often include complementary products, such as lost pet recovery services, adoptable pet databases, free newsletters, electronic claims filing, and ask-the-vet help lines and Web sites.

Pet life insurance is increasingly available, an important consideration for those expecting to use pet cemeteries upon loss of their pet. Life insurance costs and/or benefits may depend on whether coverage includes injury or both illness and injury. Pet life insurance for show dogs may provide death benefits as high as $10,000.

Some pet insurers now offer group coverage as a voluntary employee benefit to about 5 percent of companies, with Google, Hilton Hotels and Mercedes-Benz USA expected to add pet health insurance as a benefit this year. Employees of many companies, such as Ford Motor Company, Household Finance and Staples, are offered discounted pet insurance. Discounts may also be provided to members of certain associations, such as AAA, credit unions and alumni associations.

At least one organization offers pet liability coverage to its pet health insurance clients–an important consideration as some home insurers limit or exclude pet liability for certain pets in their homeowners insurance policies.

Many organizations provide lost-and-found registration and include benefits for advertising expenses for lost pets within their product packages.

Pet travel insurance covers unexpected expenses related to pets while the owners travel with or without them.

The first and largest pet health insurer is Veterinary Pet Insurance, with more than 300,000 policies in force and an estimated 83 percent market share. This insurer has a strategic partnership with HSBC Bank, offering pet insurance to their credit card customers. It also markets pet insurance as an employee benefit and offers discounts to members of various organizations and associations. It maintains strong relationships with the veterinary community, offering seminars and free brochures for display in veterinary clinics.

VPI underwrites California policies with those in other states underwritten by National Casualty Co.

Pethealth Inc. is a Canadian-based company marketing PetCare brand coverage in the US through Petco stores. As the second largest North American pet insurer, it sold almost 14,000 new pet insurance policies in the first quarter of 2006. The U.S. insurance is underwritten by Lincoln General Insurance Company and Praetorian Insurance Company.

ShelterCare is an introductory product, offering the first month of coverage for adopted shelter pets for $1. Coverage may be extended through one of the company's QuickCare products. Partly as a result of its past strategic alliance with Petfinder.com, ShelterCare has covered more than 950,000 pets adopted from shelters since 2001.

The Hartville Group, specializing in niche insurance, acquired AIG's pet insurance policies. Its pet insurance marketing subsidiary provides the Healthy Bark & Purr brand and the Petshealth Care Plan. Its 2005 policy count was over 22,000.

PetPartners is a British-based company offering pet medical insurance through the AKC and Cat Fanciers' Association (CFA).

Pet Protect is another smaller company with a few thousand policies, offering simplified plans and benefits.

Pets Best, a division of General Fire & Casualty Company, is a newer organization with the goal of offering higher limits, more generous benefits and a wider choice of options than currently available in the market. Started by the original founder of pet health insurance in the U.S., who is also a pet owner and veterinarian, the creation of this organization demonstrates that there is an untapped market for quality pet insurance coverage in the U.S.

What is pet health insurance?

Pet health insurance generally reimburses a percentage of covered veterinary expenses above the deductible up to per-incident, per-illness and/or per-policy limits described in the policy. Most companies offer two to four levels of benefits with varying deductibles, policy limits and exclusions.

Many pet insurance provisions are similar to human health insurance:

o Accident and illness coverage is usually provided.

o Some programs cover pre-existing conditions that have been cured and nonsymptomatic within a certain period of time. Some illnesses affecting multiple systems of the body render a pet uninsurable.

o Most plans have deductibles and co-pays. The deductibles may be per incident or per visit.

o Reimbursement may be based on reasonable and customary charges, possibly varying by region, or based on actual veterinary charges.

o There are limits per illness or injury and overall policy limits.

o The waiting period for coverage of illness is commonly 30 days with no more than a day for injury.

o Wellness or/ preventive care, such as regular exams, vaccinations, dental cleaning and spay/neuter, is specifically excluded by some insurers and offered as a rider by other insurers.

o Benefits, deductibles and co-pays can vary with a pet's age.

o Many policies include a variety of riders, including pet life insurance and travel insurance.

o Some policies include free look periods of up to 30 days.

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