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Total premium income for pet insurance increased by 17% during 2007 to reach a record high of £440 million, according to market analyst Datamonitor.

The group expects the market to continue growing between now and 2012, with the annual level of premiums written rising by 58% to reach nearly £700 million.

The group said the key driver behind the growth in premiums so far was the steady increase in the number of people taking out cover for their pets, with 26% of cats and dogs insured by the end of 2007.

Pet cover has evolved to become a mainstream product in recent years, available through a range of channels, including direct from insurers, as well as through brokers, supermarkets and vets.

The group said this greater availability and higher profile has helped to raise consumers' awareness of the product.

But premium income has also increased as a result of pet insurers hiking the cost of the cover in the face of rising claims bills due to the increasingly sophisticated treatments now available for animals.

Author of the report Andrew Haslip said: "Increased consumer uptake of the product along with premium rate increases to cover high claims inflation have combined to make this one of the fastest growing insurance markets in the UK."

Going forward Datamonitor is forecasting growth of 8.7% a year in premium income during the coming five years, driven by a steady increase in the number of policyholders with the product.