You've been good, saved your money, and now you're about to be rewarded with the sportbike of your dreams. You've found the right bike at the right price and are ready to consummate the deal--in more ways than you could know. Before you head to the dealership, the helpful salesman reminds you to have your insurance in order.
So you make the call to your local agent; he's always been good to you in the past. Then he comes back with, "Well, for that bike, with your driving record, it's going to be...are you sitting down?" and he reads you a number that makes your head swim. What the...?
Remember that it's nothing personal, honest. Insurance, at the heart of it, is a game of numbers. The goal is to earn more in premiums than is paid out to fix bikes and bodies--this is a basic business proposition, and it's pretty hard to fault insurance companies for trying to make a profit. What's more, the current situation in motorcycling has a combination of specialty insurers--companies that provide mainly motorcycle or vehicle insurance--competing with mega-companies that offer fire, theft and life insurance, for example. Motorcycling continues to grow, so underwriters see the potential profits and jump in. For the existing firms, more players means price competition and, often, better deals for consumers. This competition is a good thing.
Marcy Gray is a product manager for Progressive Insurance. She knows the numbers inside and out. "Rates are based on a lot of data," she says. "These are data we get from our own claims. When it comes to determining risk on a particular combination of rider and bike, we look at the combination of the loss frequency and the loss severity cost. In other words, it's how often we have a claim on that particular bike, and how much it costs us to settle the claim. Those numbers come down to something we call the average loss cost." That makes it pure statistics. Take the average loss cost for a particular bike ridden by a rider of a particular age, experience and driving record, and apply those costs to all consumers in the same group. If a dozen 20-year-olds on R1s toss it down the road, you, as another 20-year-old with an R1, will get to pay for the repairs through your premium.
In fact, there's another layer too. Progressive, like all insurance companies, has to pay its overhead--the profit to local agents, keeping the lights on in the call center, salaries for adjusters and so on. All of these costs are added to the average loss cost to come up with the premiums charged. Insurance companies don't like to lose money, though a couple have admitted that they're willing to take lesser profits to obtain market share. Again, it's a business.
Let's take another look at how insurance companies determine risk factors for consumers. As mentioned, it comes down to known claims. Simply put, a bike that's crashed frequently and costs a lot to repair will generate a higher risk factor and a more costly premium. Precisely how insurance companies cobble together this matrix of risk often creates great disparity in rates. For example, Progressive looks at the data very closely. "We carefully monitor the claims to see how each model is doing," says Gray. Moreover, a large company like Progressive has the data resolution, if you will, to see the difference between, say, an SV650 and an SV650S. If one has a higher loss rate than the other, it will charge accordingly.
Not all insurance companies do this. Our local State Farm agent said, "We basically look at the engine size." In this case, unless a particular model is highlighted as having a high loss rate--sometimes referred to as black-flagging--one 600cc bike is essentially the same as another. It's for this reason one carrier might charge $1000 a year for a 600 supersport while another might ask double or triple that amount.
An insurance company taking a broader-brush approach can be good for consumers because higher-risk bikes may come in under the radar and get classified along with lower-risk models. On the other hand, if claims in that group grow and the insurance company begins to lose money in the segment, you can bet all the bikes in the category will see a rate increase, even if, statistically, some of them are low-risk.
What about new models, how do insurance companies decide? Again, Gray spoke up. "It's a tough question, but we take a look at the new model and try to compare it to existing models. We look at things like who rides it, what is the weight/horsepower ratio, and try to figure out where it will fit." But this will be anything but a static number. "We keep looking for good data, although it may take one to two years to build up enough information to know if we got the initial risk assessment right," continues Gray. "We like to see at least 1000 claims before we feel that it's good data."