By Peter Smith, Boston MA
For many auto insurance companies, zip code is an important factor in determining your auto insurance rates. The main reason for this is that insurance companies seek to reduce risk of loss in order to prevent financial losses and promote profitability. Insurers analyze different types of risk factors to see which ones offer the least chance of a loss. In their research, insurers have found that losses are more frequent in some zip codes than in others. Accordingly, they have priced their products in a way that allows them to be profitable in all zip codes, which means that an adjustment has to be made in those zip codes that experience a higher ratio of losses.
One significant loss factor that insurers recognize is the potential for loss by theft. Since this occurs more in some zip codes than in others, insurance companies have identified which zip codes are problem areas and adjusted premiums accordingly. The process is selective in that insurers are trying to reduce the financial burden of theft losses. Once they know the capacity for theft claims in a given area, premiums can be adjusted to ensure that they will not lose money by insuring vehicles for theft in that zip code. Theft losses are significant as they rarely involve only a partial loss such as small accidents. Theft claims often involve total loss payments, which can be quite large. There is also a large potential for auto theft insurance fraud, which costs insurers in terms of loss payments and investigation.
Zip codes that have a lot of traffic are areas that are more likely to experience collision claims. This is simply a matter of odds, wherein there are more vehicles per square mile than in other potential zip codes. Odds are, more collisions will occur with areas of heavy traffic than in other less busy areas, and some roadways within certain metropolitan zip codes have a profound reputation for high traffic volumes, particularly during morning and evening rush hour traffic. If follows logically that these areas will experience more accidents than other areas prompting insurers to protect themselves against the risk of loss by charging more premiums in these areas to be able to offset the higher number of claim payments.
Sometimes a zip code will simply have more accidents than other zip codes. Traffic volume and crime rates could be similar to other areas but if claim frequency is higher in one zip code than another, insurers will pinpoint this and adjust premiums in an effort to predict future losses. This is often due to factors that are simply outside of the scope of an insurer’s ability to analyze why there is an increase in accidents in a certain area. Actuarial efforts are not always effective at making predictions solely based on traffic volume or roadway design. In cases where there is an increase in claim activity, insurers will often increase premiums.
Weather is a significant factor in some areas but not in others. Zip codes attached to areas that have high volumes of storm related damage, or storm related most insurers, as trouble areas would target accidents. Hail damage costs the insurance industry millions of dollars every year, and those who live in areas with a high volume of hail damage claims are likely to pay more for their car insurance because of this. A similar situation occurs in areas prone to winter storms that cause roadways to be slippery and dangerous. For obvious reasons there are more accidents in these areas in the winter months. Insurers have therefore established higher premiums in these areas to reduce losses.
