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Should your zip code determine how much you should pay for Michigan car insurance?

December 2, 2015 by Steven M. Gursten

Rep. Brian Banks doesn’t think so, and introduced HB 4907, which would prohibit auto insurers from basing price on consumers’ zip codes zip codes insurance rates

Should the price that Michigan consumers pay for No Fault auto insurance coverage be determined by the “zip code” in which they live?

“No,” you say?

“Unfair,” you claim?

Well, our attorneys agree. And if you feel the same way we do, then you will want to hear one Detroit lawmaker’s solution for one of the causes of high auto insurance prices in Detroit.

The problem doesn’t just apply to Detroit residents, although they are the ones most hurt by credit scoring and pricing auto insurance based upon zip codes.  The problem applies throughout Michigan, where people who live in generally more poor areas such as Battle Creek or Flint, get punished and are forced to pay more than people who live in Birmingham or Bloomfield with the same exact driving records.

In House Bill 4907, which was introduced on September 29, 2015, Rep. Brian Banks (D-Detroit) proposed the following amendment to the Insurance Code to stop auto insurers from basing auto insurance prices on where consumers live:

“An insurer shall not establish or maintain rates or rating classifications for automobile insurance based on the zip code in which the insured resides or works.”

In a Facebook post, Rep. Banks explained why he had introduced HB 4907:

“Currently, among the many factors that insurance companies use, zip codes are part of determining auto rates. … [House Bill 4907] would prohibit insurance companies from using a customer’s zip code when determining their auto insurance rates. I do not believe the neighborhood someone calls home has any impact on their ability to safely drive a car!”

Under existing Michigan law, the “neighborhood someone calls home” can be used by auto insurance companies in setting the price for their product: “[A]utomobile insurance risks may be grouped by territory.” (MCL 500.2111(5))

Significantly, Rep. Banks is not alone in his misgivings about using consumers’ zip codes to determine their auto insurance prices. Not only did he have 26 co-sponsors on the bill. But no less than the insurance-industry-oriented “Insurance Journal” has questioned the soundness of using zip codes as part of the insurance rate-setting process.

In its article “A Fresh Look at Rating Territories for Auto and Homeowners Insurance” by Jeffrey L. Kucera, the Insurance Journal reported:

  • “The accuracy with which an individual risk is assigned to a rating territory is often not as great as companies believe. … Zip codes are [a] common way insurance companies define territories because they are convenient, perceived to be a better basis than larger geographic designations, and well-understood by the public. However, it is not always the case that they will do a better job. Zip codes were never designed with insurance company territories in mind, but for more efficient mail delivery. Zip codes often transcend county, city and/or township boundaries. Thus a zip code may be considered part of two different territories, and create miscoding of applications.”
  • “In other cases, a zip code may contain a number of cities within its boundary. This works fine if all the cities within the zip code display the same basic demographics and loss experience. However, if they do not, and the insurer uses different territories, the likelihood of territorial mis-assignments increases.”
  • “The U.S. Postal Service routinely changes, reassigns and eliminates zip codes. Hundreds of five-digit zip codes change every year. Remarkably, over 20 percent of zip codes can change on an annual basis. It is very difficult for any individual insurance company to keep up with all these changes, and it is virtually impossible for an individual agent to do so.”
  • “Considering all the possible ways to incorrectly assign a rating territory, one should not be surprised that the error ratio is much greater than was previously believed. According to Howard Botts, executive vice president for Proxix Solutions, the error rate for the assignment of customer policies for a large number of companies was consistently in excess of 20 percent. ‘The highest [error] rates occur in companies that use postal geography, zip codes, to assign policies to territories,’ he added.”

I applaud Rep. Banks’ bill.  As an auto attorney, I support nearly anything that we can do (but NOT D-Insurance, click here to read why) to lower the price of auto No Fault insurance for people in this state. I’ve seen firsthand how devastating it is when people are seriously injured and do not have auto No Fault insurance, and the more we can do to lower the prices so more people can be safely insured and protected, the better. Here are some of my own suggestions on how we can lower the price of auto insurance in cities like Detroit.

HB 4907 has been referred to the House Insurance Committee for consideration. The proposed bill will be of great help to people who live in some of the poorer zip codes in Michigan  by making auto insurance more affordable.

Related info:

The poor pay more for car insurance than bad drivers

Uninsured drivers in Detroit: How this has become a civil rights issue

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