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Unpacking insurance premiums - What's inside the black box?

Discussion in 'Businesses and Service Providers' started by dspark, Jun 24, 2008.

  1. After lurking on here for a number of months, I thought it was finally time I actually contributed to the body of knowledge in these forums!

    The analysis I’m about to provide comes with a number of caveats. The most important is that this analysis should not be used to get the cheapest premium from your insurer by giving them false information - if you're going to take out insurance, don't lie to your insurance company - you risk having your insurance cancelled (and/or perhaps worse)!

    Insurance companies price risk. The use information you provide to estimate how much of a risk you present, and based on the payout in the case of an accident/theft (ie the value of your bike if you have comprehensive insurance and they are pricing the expected cost of a theft) they charge you a premium.

    Vehicle insurance is one of the many examples of what economists call 'information asymmetry'. The insurance company has less information about your characteristics than you do - but instead of collecting every piece of information about you, they choose a few select pieces which can help estimate your risk profile.

    Things like age, gender, previous accident history are pretty good ways of identifying your risk profile - (ie if you're risk averse or perhaps just lucky/unlucky) - although, were all riding bikes right!

    Where you keep your bike, what security is fitted and where you live provide good indicators of the probability of theft of your bike.

    Other things like how often you're going to be riding, your riding experience and whether you've had training as well as whether or not you have finance on your bike are also used by your insurer to help build your risk profile.

    I have always been curious about how _exactly_ my insurer calculates my risk - for two reasons. Firstly, insurance companies know what they're doing. If they think riders under 20 are twice as likely to crash or have their bikes stolen, that is interesting! Secondly, things like how often I ride, what security is fitted to my bike and where its kept (ie carport, garage, street, etc) are things i _can_ change, and so with enough information about how these affect my insurance premiums, I can perform some (crude) cost/benefit analysis.

    The problem is insurance companies aren't going to just break it down item by item (for obvious reasons).

    So I decided to conduct a little experiment. Using the online quote system of one of Australia's insurers, I ran a number of experiments to determine which characteristics affect premiums the most, and how much.

    Without going into details of the method (its not very interesting) it involves varying one characteristic at a time, and getting a new quote. I then used regression analysis to estimate the effects of each characteristic.

    Before we continue, another caveat.

    These estimates apply only to the particular insurer I examined (I would be very surprised if each insurer _didnt_ have their own risk model). They also are only applicable for the one particular sports bike I selected (im not sure if the type of bike – ie cruiser, sports, tourer etc or the value of the bike is the important factor).

    A quick note about how to interpret the numbers below – they are elasticities, or percentages – compared with the base case. So if I say being blond increased premiums by 20%, this is compared to the base case of black hair.

    Now to the good stuff!!

    So, I hear you asking, what caused the (almost) biggest increase in premium? As you would probably expect – being under 20 years old!

    Effect of age on premiums (compared to base of being 25 years old) :-
    18 or 19 = 50% increase
    20 = 35% increase
    21 = 25% increase
    22 = 20% increase
    23 = 15% increase
    24 = 5% increase
    25 = BASE CASE
    26 = 6% decrease
    27 = 9% decrease
    28 = 14% decrease
    29 = 19% decrease

    Being male increased the premium by 5%

    Parking in the driveway increased the premium by 15% compared with parking in a garage. Parking in a carport increased the premium by 5% compared with parking in a garage. I was refused insurance if I parked my (expensive) bike on the street!

    Daily use increased the premium by 24% compared with weekend only use. Limited use increased the premium by 5% compared with weekend only use.

    If I had undertaken any training courses, my premium was reduced by 5%.

    Having an immobilizer or other security device fitted (didn’t matter what) decreased the premium by 1%.

    No claim bonus made a very large difference. A 65% no claim bonus reduced the premium by 105% compared with a 0% no claim bonus!

    Now for some more surprising/interesting results.

    Modifications designed to increase safety reduced the premium by 6% compared with an unmodified bike, where as non-safety modifications worth $500 increased the premium by 2% and modifications worth $2000 increased the premium by 8%.

    Financing the bike with a personal loan increased the premium by 16% compared with purchasing outright. Hire/purchase arrangement increased the premium by 14% and a lease arrangement by 4%.

    Years of driving experience made no difference! Ie this particular insurance company didn’t appear to care how long the policy holder had been riding (for this particular bike at least).

    Interesting stuff! An insight into insurance premiums! Happy to answer questions. Anyone have any thoughts why a personal loan would increase your premium or why years of driving experience don’t matter on a sports-bike?

    The above figures are estimates only (and rounded to whole numbers) - they may suffer from specification error. Use at your own risk: caveat emptor!
  2. Thanks for that, although I suspect you have way too much time on your hands :LOL:
  3. +1, way too much time on your hands there mate.

    So, basically your analysis discovered Insurance Premiums are based on a number of risk factors....... :shock:.
    Maybe that's why Insurance is cheaper for older people, low value bikes, safer suburbs, less usage & having security ?

    What did you think it was based on? The value of your bike divided by the number of spanners in a sidchrome tool kit?

    Not sure what you trying to achieve here, apart from your own understanding.

    PS: I'll save you some time on your next investigation - sit down for this.....The world is actually Round.. :shock: :shock: :LOL:
  4. You are correct, different companies use different risk calculation methods.

    For example, one high-profile company I know has the following
    characteristics (this is not a complete list but just an example):

    Anti-theft technology fitted: -5%
    Only covered for riders named on the policy: -5%
    Previously had a motorcycle rating 1 with this company: -5%

    High claim history (high number of fire/theft/crash in 5 years): +$excess
    Poor driving history (lost licence etc in last 5 years): +$excess
    Traffic fines: no effect (unless licence suspended/cancelled).

    Finance vs cash buy: same price

    Another company I know will not insure you if you have
    had more than 3 traffic fines in 5 years.

    AS was said,
    Feel free to shop around for yourself, EVERY person and bike is a different result, there is NO company which is the best for everyone.

    DON'T lie to your insurance company, at the LEAST you will not be
    covered and you'll have to pay for repairs etc, you MIGHT go to jail
    for fraud I suppose!
  5. Yeah fair call :p

    Smithy, you seemed to have missed the point altogether.

    Obviously insurance premiums are based on risk - I think its safe to say that is common knowledge. What my analysis has identified is the magnitude of each risk factor's effect on the premium - something not immediately obvious.

    In the future, if you're confused, perhaps read the whole post (or perhaps read it twice? make notes?) before responding...

  6. I guess all these factors contribute to the fact that I get full-comp cover on a ten-year-old Hornet, at market value, for under $200 a year :LOL:???
  7. My point was, or is for that matter, that your analysis satisfied your own curiosity, no one elses. So what was the point for posting it in a public fourm? ... was it just to tell everyone else, that you learnt something?

    I think most people would agree, that Insurance premiums are fairly easy to desphyre, and could easily understand what contributes to the overall cost. Insurance has been around for over a 100 years, so I think most people have a good idea on how it all works by now.

    BTW, Insurance analysis & discussion has been done to death on NR, so nothing new was learnt (or shared) from this post.

    .... But good for you :applause:
  8. If insurance has been done to death on this forum (yes it has) then why
    do people persist in asking questions about it? Because they don't read prior
    posts? Because they're dumb? Because the prior posts don't answer their
    questions? I don't know. MAYBE this one post will answer someone's
    question... at least it was a smarter post than the usual:
    "I just bought me a bike, what's the best insurance company ?
    I have included NO information to help you
    answer this question"

    :LOL: :LOL:
  9. Bit harsh i think smithy.. There could be other people out there wondering what factors affect insurance. If youve been through the process a few times you start to get an idea, but if not then this is a good base. Also shows you can potentially save a couple of hundred a year in some cases by having a garage, security mods, course etc. You can also look foward to birthdays cos your insurance gets cheaper when you're young! :wink:
  10. I'm about to get Insurance and I thought it was interesting to know. Things like how little difference an anti-theft device might make, etc. Why jump down the guys throat? If everything has been discussed on Netrider before then why not shut down the forum and just have a search for the archives?
  11. Sheesh Dspark.

    You could have called me and i would have told you all that stuff and save you an hour behind the PC.

    The best bit in that post is the information regarding lying to your insurer. One example was a gentleman who had no licence, who lied his way into getting his CBR100RR insured. No problem, the company asked all the questions they had to, and all the disclaimers and warnings. He just told porky pies. After two years, and almost $3000 in payments he binned the bike...

    ...Then comes the investigation. In the first fifteen minutes of questions it they find out he's unlicenced and wholla, the man is uninsured. Sorry, no payout there mate. He'd spent a fortune for absolutely bugger all.

    What would have been more interesting was if you actually had a look at the different kinds of bikes, and how they affect the cost of your premium.
  12. You're probably right - but could you have told me the exact sizes of the changes, or just the general direction? Plus it was for a specific bike im interested in...

    Hah - no sympathy for that guy!

    You're right - this would be very interesting. Unfortunately I lack the time (or inclination!)

  13. Smithy, you work for this particular insurance company, dont you?
  14. What's inside the black box?

    I'll tells ya... a black black heart!
  15. Thats a bit rough. If you have a genuine claim with an insurer then you would get paid out. If its not genuine, then 90% of the time you would get paid out because the process of proving something is fraudulent rather than just knowing its fraudulent would be a very difficult thing.

    And to show they aren't all evil. Check out all the flood claims NRMA have paid out for on the east coast, when flood is not covered in their policy. A disaster happened and affected thousands, so they agreed to help them out rather than just say, "hey you have paid us for years, but when you really need us then get stuffed."
  16. Good post dspark.

    Just coz Smithy didn't see the value of it, doesn't mean it's of no value... but that's the internet for ya. :)
  17. Excellent post Dspark, thanks for that.
  18. Yeah I've often wondered about that. At least one online insurance site (RACV to be specific) seems to only look at the capacity. When I was looking at bikes I remember trying a few quotes just to see what the cost of comprehensive would be like - and was getting higher quotes a SZR660 than for a YZF600. Likewise a GSX750F was cheaper to insure than a TRX850 :?. Of course chuck an "R" in the name anywhere and the premium jumps pretty dramatically.
  19. Yeah, it was a bit rough. But they are companies and they aim to make a profit. Never once have they sent me flowers.
  20. Fair point. Personally i would enjoy a nice hug and a thankyou everytime i paid my premium. :grin: