Monday 6 January 2014

Self-insurance usually beats paying for bike insurance

Summary: Unless you're at a much higher risk than average, paying for insurance for your bike or property damage is typically a worse option for urban cyclists than simply saving the money each year and self-insuring. From July 2009 to Jan 2014, I have set aside over $520 which I have never needed to use. This will continue to grow each year by the amount I would otherwise be paying as an annual premium. However, you should separately consider your risks of injuring pedestrians or other cyclists and your coverage options.

cc licensed ( BY ) flickr photo shared by jon jordan

1. What's the purpose of insurance?
- Insurance provides compensation for potential major losses in exchange for regular, smaller payments. Generally, it makes financial sense to pay others for insurance only for very large potential costs that you can't cover from your savings (e.g. your house burning down) or if you are at a significantly higher risk than average but your premiums are not proportionally higher.

2. Regarding their bikes and property damage, urban cyclists do not need to face large potential costs or be at higher risk than the average cyclist
Urban cyclist's bikes should typically be worth less than $1,000 in order to minimise the risk of theft. See: How to prevent your bike being stolen. In most cases, urban cyclist's bikes will be worth $300 - $700. Clearly this is not a massive amount that couldn't be covered by individual savings.

Urban cyclists can also use defensive riding techniques to make the risk of themselves causing very expensive (more than $2,000) property damage negligible.  See: > The "safety and health" category of this blog; > The most important tips on how to ride safely; > Actual cycling accident history proves how safe it can be

- So urban cyclists can ride in a way that makes the risk of large losses (from bikes and property damage) very low and certainly makes their risk level lower than average. Indeed, a considerable proportion of bike insurance is paid out to sport/recreational cyclists typically using expensive bikes at high speeds for sports or training purposes.

3. Regarding causing injury to others, urban cyclists are covered for motor vehicle accidents and can ride defensively to make the risks to pedestrians and other cyclists negligible. However, carefully consider personal injury liability insurance.
- For personal injury claims involving accidents with motor vehicles, the costs are generally covered by government-mandated insurance charged to motor vehicle registration (known as TAC in Victoria). This includes cars, buses, trams and trains where the accident was caused by the driving of the motor vehicle. See: > TAC - Who can claim; > TAC - What to do if you've had an accident

- However, accidents between cyclists and pedestrians or other cyclists (where no motor vehicle is involved) are generally not covered by compulsory motor insurance schemes like TAC. In Australia, temporary injuries may be covered significantly by free public health care or the individual's private health insurance. However, longer-term or permanent injuries may result in significant uncovered medical costs. Thus urban cyclists should be particularly careful to avoid any accidents with pedestrians and other cyclists - something they can do by riding defensively, at safe speeds, providing plenty of space, having adequate skills and giving way even if legally they have right of way.

- As someone who has been car-free for 6 years and rides every day in Melbourne I feel it is perfectly feasible to ride for the rest of my life and never injure a pedestrian or cyclist at all, let alone seriously injure one and incur massive, unfunded medical liabilities. In 5 years of riding almost every day, I have not been responsible for any accidents, damage, or injury to others; nor have I bumped into a single pedestrian. I've never needed insurance or been responsible for any costs to anyone else. So for urban cyclists who ride very safely, the risks of massive personal injury liabilities are negligible and do not generally warrant paying for expensive insurance. An added benefit of not insuring is that you will have an extra incentive to always ride safely and defensively around others.

- However, if you ride in circumstances (weather, skills, riding speeds, etc) where you feel the risk of incurring a massive personal injury liability isn't negligible, you should consider personal injury liability insurance. And particularly if you break the road rules sometimes (e.g. run red lights), ride aggressively or take risks. Often the cheapest way to obtain it is as general personal liability cover that comes with other insurance types. In Australia, Home and Contents insurance often includes this option but make sure you confirm what situations are covered and any that aren't (e.g. competitive cycling, cycling overseas). Travel insurance typically covers personal liability for non-competitive cycling. If you want additional cycling cover, you can also bundle Home and Contents insurance with cycling-specific insurance as well (see links below).

- To purchase personal liability insurance separately the best value-for-money is typically via your local cycling organisation, often as part of annual membership fees. Bicycle Victoria membership includes this cover (with a $1,000 excess) and costs $115/year. There are some companies that provide insurance targeted at third party liability (injury and property) and these costs are also very affordable. E.g. Velosure's Cyclist Liability Cover costs around $60/year.

- If you are going to purchase personal liability insurance you may as well be covered for all circumstances not just cycling, so check that the cycling providers are not limiting cover to only cycling.

4. Purchasing insurance vs self-insurance
- So excluding personal liability cover, for all other cycling insurance needs, it's time to consider the best option for most cyclists: self-insuring. As most cyclists will never get back in payouts as much as they pay in total premiums for cycling insurance they should self-insure instead.

- Self-insurance simply means that you set aside in savings a similar amount to that which you'd pay in premiums and if you ever do need to cover a loss, then utilise this pool of funds. If you end up not needing some or all of the funds, you get to do something else with the money you've saved.

- The standard measure of the value of insurance is a simple calculation of the proportion of annual premiums that are paid out in claims. E.g. My private health insurance provider - NIB - claims in 2013 it paid out 87 cents for every $1 collected in premiums. I'd estimate that defensive, experienced urban cyclists would (over 20 years) recover less than 10 cents for every $1 paid in premiums. I'd challenge any cycling insurance provider to submit actual figures that contradict this (e.g. payout ratios for cyclists with utility bikes could be readily provided as a start).

5. My personal calculations of insurance savings (2009 to 2014)
- I have cycled regularly for transport since July 2009 and self-insured during that time. The cheapest cycling insurance in Melbourne is via Bicycle Victoria membership and costs $115/year. 5 years * $115 = $575.

Note: This is at the bottom end of insurance costs. Comprehensive cycling insurance (theft, damage, injury, income replacement, third party costs - in any location) will cost hundreds of dollars per year, mostly based on the value of your bike(s).

- In that period I have caused no damage and had no accidents where my insurance would have covered my costs or I would have had to pay less if I had insurance. (See: Actual cycling accident history proves how safe it can be) So having insurance would have saved me $0. The total saving is therefore already $517 and this doesn't include compound interest.

Note: Review the actual details of Bicycle Victoria insurance and you will find there is a $1,000 excess for injury to others or damage to their property. There are also excess periods for personal loss claims like income replacement (14 days). So the actual probability of payouts is quite low. More generous insurance with less excess costs or restrictions would be far more costly.

6. If you do have an accident where you were at fault but are uninsured you should voluntarily pay for all legitimate medical costs and property damage even if not legally forced to do so
- The fact that cyclists can use the roads but aren't forced to take out insurance that covers injury and damage to others seems unfair to motorists and pedestrians. Occasionally, there are incidents where pedestrians are injured (in rare cases even killed) by cyclists but the cyclist is often uninsured and it may prove difficult, risky or time-consuming to sue the cyclist for damages. Personally, I ride very defensively and there is almost no chance of my doing serious injury to a person and being at fault. However, if I was at fault in an incident, I would voluntarily pay for all legitimate costs and damage.

- When at fault, responsible cyclists should cover such costs even if it takes a very long time to pay off. Unfortunately, the type of person who is at fault in causing major injury to a pedestrian is likely to be irresponsible and not particularly ethical. Their families and peers should pressure them to do the right thing. These few irresponsible, selfish cyclists create impetus for unnecessary restrictions and costs for all cyclists - through campaigns to register all cyclists and charge them a fee.
> SMH: Pedestrian Emily Greenwood run down by cyclist
Just as her foot hit the bitumen, a cyclist ran a red light and collided with her, leaving Ms Greenwood unconscious, fracturing her collarbone and knocking out several front teeth. The 24-year-old nurse woke up hours later in hospital with stitches in her lip and swelling all over her body, along with the pain of an estimated $15,000 medical bill, mostly in dental fees. A police spokeswoman said the offender, a 34-year-old student, was expected to be charged with negligent driving. Should he be found guilty he could face a fine of $67 as well as court costs. While she is seeking legal advice, Ms Greenwood does not hold out much hope of compensation. "I am struggling with mounting medical bills as it is," she said. Like the vast majority of NSW cyclists, according to data from Bicycle NSW, the offender did not have third party or public liability insurance.
SMH: Pedestrian Emily Greenwood run down by cyclist

Further Info:
TAC - Who can claim

TAC - What to do if you've had an accident

RACV - What to do after an accident

Bicycle insurance - what you need to consider

Bicycle Network membership and insurance

AAMI Home and Contents insurance

Velosure Cyclist Liability Cover

Cyclecover - Bicycle + Home & Contents Insurance

Tour de insurance